Wall Street firms fined $8.25 million for e-mail violations

Five Wall Street brokerages, including Morgan Stanley, Goldman Sachs & Co. and Salomon Smith Barney Holdings Inc., agreed to pay a total of $8.25 million in fines for improperly storing e-mail communications during a three-year period, securities regulators said today.

The U.S. Securities and Exchange Commission, the New York Stock Exchange and the National Association of Securities Dealers Inc. (the parent organization of Nasdaq Stock Market Inc.) said they each conducted separate investigations of the firms in determining their failure to properly preserve e-mail from 1999 to "at least" 2001.

Under Section 17(a) of the SEC's Exchange Act, NYSE Rule 440 and NASD Rule 3110, the firms are required to retain e-mail traffic, but "failed to preserve for three years, and/or to preserve in an accessible place for two years, electronic communications (including interoffice memoranda and communications) that related to ... business as a member of an exchange, broker or dealer," the regulatory bodies said in a statement.

Without admitting to or denying the allegations, Deutsche Bank Securities Inc., U.S. Bancorp Piper Jaffray Inc. and the three companies named above agreed to pay $1.65 million each and to inform each regulator within 90 days that they have established systems and procedures to comply with the statutes.

In the statement, the regulators said each firm had "inadequate procedures and systems to retain and make accessible e-mail communications.

"While some firms relied on employees to preserve copies of the e-mail communications on the hard drives of their individual personal computers, there were no systems or procedures to ensure that employees did so," the regulators said.

When the firms had stored e-mail traffic, it was often in an unorganized way on backup tapes, disks or the hard drives of individual computers, said the regulators.

"In some instances, hard drives of computers preserving electronic mail communications were erased when individuals left the employment of the firm," regulators said.

One source familiar with the problems within the firms said the failure to comply in at least four of the brokerages was the result of not being able to retrieve the data -- not because it hadn't been stored or had been destroyed.

Margaret Draper, a spokeswoman for the Securities Industry Association, an industry group with offices in New York and Washington, said there has also been considerable confusion about the language in the rules.

"Some of the phrases in the rules, such as business as such -- the industry needs more guidance as to how regulators define that," she said.

Even so, Antonia Chion, a spokeswoman for the SEC, said, "their order was clear in defining that they needed to retain e-mail that relates to their business."

Kate Baum, a spokeswoman for Goldman Sachs, said the company doesn't have much to say about the fines, other than "we will comply with any and all guidelines they give us on this."

Salomon Smith Barney said that once the issue surrounding e-mail retention was raised in the media last spring, the company immediately started extending the period for which it was retaining e-mails to comply with the guidelines.

"This settlement resolves a complex regulatory issue that has been the subject of much discussion over recent years. We're pleased to have the matter resolved," said Arda Nazerian, a spokesman for the firm.

David Furlonger, a financial services analyst at Gartner Inc. in Stamford, Conn., said the sheer number of new regulations that have come out in the past year, including the Gramm-Leach-Bliley Act, the Patriot Act and the Sarbanes-Oxley Act, have made it more difficult to track what regulators want.

"Technology to store e-mail has been around for ages, so I don't think it's a technology issue," Furlonger said. "With respect to them not knowing what the rules are, I think there's definitely an issue with the [communications] between them and supervisors at the regulatory agencies that needs to be worked out."

Copyright © 2002 IDG Communications, Inc.

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