The U.S. Financial Industry Regulatory Authority today announced a settlement with Morgan Stanley & Co. over allegations that it failed to provide emails to regulators and clients involved in arbitration proceedings, claiming that they were destroyed along with the World Trade Center in 2001.

The settlement resolves charges that the firm’s former affiliate, Morgan Stanley DW, Inc., failed to provide emails to claimants in arbitration proceedings as well as to regulators – while representing that the destruction of the firm’s email servers in the Sept. 11, 2001 attacks resulted in the loss of all pre-9/11 email. In fact, FINRA said, the firm had millions of pre-9/11 emails that had been restored to the firm’s active email system using back-up tapes that had been stored in another location. The settlement also resolves additional charges relating to the firm’s failure to provide required supervisory materials to numerous arbitration claimants.

FINRA says that the settlement announced today is the first of its kind – in that it provides for distribution of US$9.5 million to two groups of customers who had arbitration claims against the firm. It estimates that several thousand customers may be eligible to receive payments. FINRA also imposed a US$3 million fine on the firm for its failure to provide pre-9/11 emails and updates to a supervisory manual.

In settling the allegations, Morgan Stanley neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

“The integrity of our process demands that brokerage firms comply with their obligations to search diligently for, and provide in a timely way, information and documents required in arbitration proceedings and regulatory investigations,” said Susan Merrill, FINRA executive vice president and chief of enforcement. “The action announced today underscores FINRA’s commitment to ensuring that firms live up to those obligations. We are particularly pleased that this unique settlement directs the bulk of the monetary sanction to the customers in arbitrations, to remedy MSDW’s discovery failures.”