In re Morgan Stanley Technology Fund Securities

• Decision Date: 02 February 2009
• Docket Number: No. 02 Civ. 6153(BSJ).,No. 02 Civ. 8579(BSJ).,02 Civ. 6153(BSJ).,02 Civ. 8579(BSJ).
• Parties: In re MORGAN STANLEY TECHNOLOGY FUND SECURITIES LITIGATION. In re Morgan Stanley Information Fund Securities Litigation.
• Court: U.S. District Court — Southern District of New York

643 F.Supp.2d 366

In re MORGAN STANLEY TECHNOLOGY FUND SECURITIES LITIGATION.

In re Morgan Stanley Information Fund Securities Litigation.

No. 02 Civ. 6153(BSJ).

No. 02 Civ. 8579(BSJ).

United States District Court, S.D. New York.

February 2, 2009.

COPYRIGHT MATERIAL OMITTED

Carmen Ka Man Cheung, Richard A. Rosen, Walter Rieman, Paul, Weiss, Rifkind, Wharton & Garrison LLP (NY), New York, NY, for defendants.

OPINION AND ORDER

BARBARA S. JONES, District Judge.

This is a federal securities class action asserted by two groups of Lead Plaintiffs, each of whom respectively purchased shares of the Morgan Stanley Technology Fund (the "Technology Fund") and the Morgan Stanley Information Fund (the "Information Fund") (collectively, the "Funds"). The Defendant entities are Morgan Stanley, Morgan Stanley & Co. Incorporated ("MS & Co."), Morgan Stanley DW Inc. ("MSDWI"), the Information Fund, the Technology Fund, Morgan Stanley Investment Advisors Inc. ("MSIA"), Morgan Stanley Investment Management Inc. ("MSIM"), and Morgan Stanley Distributors Inc. (the "Distributor") (collectively, "Defendants"). Defendants move to dismiss Plaintiffs' Second Amended Consolidated Complaints in In re Morgan Stanley Technology Fund Securities Litigation, 02 Civ. 6153 (S.D.N.Y.), and In re Morgan Stanley Information Fund Securities Litigation, 02 Civ. 8579 (S.D.N.Y.). For the reasons that follow, the Court GRANTS the motion and dismisses the Complaints in their entirety.

BACKGROUND¹

I. The Parties

A. Plaintiffs

Lead Plaintiffs James Barenboim, John C. Armstrong, and Nina H. Armstrong ("Technology Fund Lead Plaintiffs") purchased shares of the Technology Fund during the Technology Fund Class Period of September 25, 2000 up to and including July 31, 2002. (Technology Fund Compl. ("TF Compl.") ¶¶ 1, 19-23.) Lead Plaintiffs Michael J. McDermott, Stephen B. Dornak, Dietmar H. Kubb, Lisette Vaessen, Emil H. Vaessen, and James M. Lindsay ("Information Fund Lead Plaintiffs") purchased shares of the Information Fund during the Information Fund Class Period of October 25, 1999 up to and including October 25, 2002. (Information Fund Compl. ("IF Compl.") ¶¶ 1, 19-26.)

Both Second Consolidated Amended Complaints (the "Complaints"), which are nearly indistinguishable,² allege that Plaintiffs lost, in the aggregate, millions of dollars on their purchases of Technology Fund and Information Fund shares.

B. Defendants³

Funds

The Technology Fund and the Information Fund are each organized as registered open-ended mutual funds within the Morgan Stanley family of mutual funds. (TF Compl. ¶ 29; IF Compl. ¶ 32.) Each is owned by its shareholders. The Funds' stated objective for their shareholders is to provide long-term capital appreciation. (TF Compl. ¶ 29; IF Compl. ¶ 32.) According to the Technology Fund's registration statement, prospectus, and Statements of Additional Information ("SOAIs") (collectively, the "Funds' Prospectus Materials"), the Technology Fund invests at any given time primarily in common stocks of companies engaged in technology and technology-related industries. (TF Compl. ¶ 29.) According to the Information Fund's Prospectus Materials, the Information Fund invests at any given time primarily in common stocks of companies involved in the communications and information industry. (IF Compl. ¶ 32.)

Distributor

Defendant Distributor is the Funds' principal underwriter. (TF Compl. ¶ 33; IF Compl. ¶ 36.) Distributor is a wholly-owned subsidiary of Morgan Stanley, and is a registered broker-dealer that facilitates the sale and redemption of Fund shares. (TF Compl. SI 34; IF Compl. SI 37.)

Investment Advisors

Defendants Morgan Stanley Dean Witter Advisors Inc. ("MSIA") and Morgan Stanley Investment Management Inc. ("MSIM"), also wholly-owned subsidiaries of Morgan Stanley, are registered investment advisors that manage and advise the Funds. (TF Compl. ¶ 31; IF Compl. ¶ 34.) The Funds annually contract with MSIA to perform investment management services. (TF Compl. ¶ 32; IF Compl. ¶ 35.) MSIA, in turn, contracts with MSIM to invest the Fund's assets, including the placing of orders for the purchase and sale of Fund portfolio securities during part of the Class Period.⁴ (TF Compl. SI 32; IF Compl. SI 35.) In this regard, MSIM acts as a sub-advisor to its contract with MSIA.

Morgan Stanley DW Inc. ("MSDWI") and Morgan Stanley & Co. Incorporated ("MS & Co.")

MSDWI, a wholly-owned subsidiary of Morgan Stanley, was a registered broker-dealer with a sales force of individual registered representatives who sold, among other investment products, Morgan Stanley proprietary mutual funds. MS & Co., also a wholly-owned subsidiary of Morgan Stanley, is a full-service broker-dealer, with asset management and financial advisory subsidiaries, and businesses including retail and institutional brokerage, proprietary trading, market making, research, and investment banking and corporate finance services. (TF Compl. ¶ 7.) In April of 2007, MS & Co. and MSDWI merged. See Press Release, "Morgan Stanley Completes Merger of U.S. Broker-Dealers" (Apr. 3, 2007), available at http://www. morganstanley.com/about/press/articles/4700.html. Both Defendants MSDWI and MS&Co. are members of the New York Stock Exchange, the NASD, and all other principal exchanges, and are Morgan Stanley's principal operating subsidiaries. (TF Compl. 116, 27-28; IF Compl. 116, 30-31.)

Morgan Stanley

Morgan Stanley, formerly known as Morgan Stanley Dean Witter & Co., is the publicly-traded parent company of all the other Defendant entities in this action, except for the Funds.

II. The Allegations

The Technology Fund and Information Fund actions were brought as class actions pursuant to Rule 23(a) and (b)(3) of the Federal Rules of Civil Procedure, on behalf of two classes (the "Classes"), consisting of all persons and entities that purchased shares of the Technology Fund or Information Fund, respectively, during the relevant Class Periods. Defendants and any other affiliates of Morgan Stanley, and the senior executive officers and directors of Morgan Stanley and/or its affiliates, are excluded from the Classes. (TF Compl. ¶¶ 1, 45; IF Compl. ¶¶ 1, 48.)

As stated in the Complaints, throughout the Class Periods, Morgan Stanley, MS&Co., and MSDWI publicly stated that it maintained a so-called "Chinese Wall" between its investment banking and research departments, a separation that was meant to ensure that the research and recommendations of its analysts were not influenced by Morgan Stanley and its affiliates' interest in attracting and retaining investment banking clients. (TF Compl. ¶ 63; IF Compl. ¶ 64.) Yet, even before the Class Period, the "Chinese Wall" crumbled and MS & Co.⁵ acted in conjunction with and for the benefit of its investment banking departments. (TF Comp. ¶ 64; IF Compl. ¶ 65.) The alleged conflicts of interest were that Defendants individually and collectively had one or more of the following roles with respect to companies whose shares were included among the securities in the Funds' portfolios during the Class Periods: (1) they were underwriters for the securities of certain of the companies in the Funds' portfolios; (2) they were the investment bankers and corporate finance specialists for certain of the companies whose securities were in the Funds' portfolios; (3) they prepared and publicly disseminated research reports and recommendations on many of the companies whose shares were in the Funds' portfolios; and (4) they were seeking to obtain additional or first-time underwriting, investment banking, and corporate finance business from the companies whose shares were in the Funds' portfolios. (TF Compl. 18; IF Compl. 18.) Further, the Complaints allege that a material part of the total compensation paid to research analysts by MS & Co. was based on their securing investment banking business for the firm. (TF Compl. ¶¶ 64, 66-93; IF Compl. ¶¶ 65, 67-94.) Consequently, MS & Co. promoted the shares of companies that were either Morgan Stanley clients or potential clients, resulting in the artificial inflation of the price of those companies' shares. (TF Compl. ¶¶ 8-9, 62-65; IF Compl. ¶¶ 8-9, 63-66.)

The Complaints also contend that the Funds' portfolios were loaded with Morgan Stanley-sponsored stocks-at least eighty-five percent of the companies whose securities were part of the Technology Fund's portfolio were covered by Morgan Stanley research reports (TF Compl. ¶ 151(9)), and at least seventy-five percent of the companies whose securities were part of the Information Fund's portfolio were covered by Morgan Stanley research reports (IF Compl. ¶ 151(9)). In addition, the Complaints aver that Morgan Stanley performed investment banking services resulting in consummated transactions for more than thirty percent of the companies whose securities were in each Fund. (TF Compl. SI 103; IF Compl. SI 108.)

Separate and apart from the conflicts of interests asserted, the Complaints allege that Morgan Stanley engaged in "laddering," which involved rewarding customers with "hot" initial public offering ("IPO") shares when they agreed to purchase additional shares in the aftermarket at higher prices, thus inflating the aftermarket prices of Morgan Stanley's and other co-conspirator's IPO offerings, as well as research tie-ins that artificially inflated the aftermarket share price of IPO stock for which the broker was an underwriter of either the IPO or the secondary offering. (TF Compl. ¶ 125-41; IF Compl. ¶¶ 127-41.) These IPO practices were purportedly not disclosed in the Funds' Prospectus Materials.

Consequently, the Complaints allege that the Funds' Prospectus Materials omitted or misstated the following material information, inter alia:

(1) that a material part of the total compensation paid to MS & Co. research analysts was based upon their securing/participation in investment banking business for the companies, and not upon the accuracy of their...