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Morgan Stanley stock investors were on public notice about possible analyst conflicts at the investment bank and have no right to sue over a drop in the stock price, a federal judge has ruled. In dismissing Shah v. Morgan Stanley, 03 Civ. 8761, Southern District Judge Richard J. Holwell wrote that numerous publications had detailed alleged conflicts by stock analysts and that purchasers of the bank’s stock cannot claim damages for a problem of which they should have been aware. While the case is one of several in New York that have alleged conflicts in the investment banking business in general and at Morgan Stanley in particular, it stands apart because plaintiff, Sandip Shah, alleged that conflicts hurt the value of his shares in the bank itself. Shah had filed a putative class action under �10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, charging that the bank’s analysts suffered under a conflict and were issuing favorable ratings on companies whose investment banking business they hoped to attract or keep. These “undisclosed improper business practices,” Shah charged, “artificially inflated the prices of Morgan Stanley stock” between July 1, 1999, and April, 10 2002. While he alleged that Morgan Stanley made a number of false and misleading statements to hide its practices from investors, Shah did not charge that any particular analyst report was false. But Holwell noted that the concealment by Morgan Stanley and the public statements it made “were not the only information available to the public” during the class period. Before then, he said, “numerous newspaper articles reported on the conflicts of interest that analysts faced in the securities industry.” In addition to those articles, he said, multiple newspaper articles before and during the class period reported specifically on the conflicts confronting Morgan Stanley’s analysts, including top analyst Mary Meeker, as “they assisted Morgan Stanley in soliciting investment banking business.” For example, almost a year before the class period ended, he said, Fortune magazine published an article headlined “Can we ever trust Wall Street again?” with subheadings “Where Mary went wrong” and “Inside the IPO racket.” Holwell flatly rejected Shah’s claim that he was not on inquiry notice of the alleged fraud until New York Attorney General Eliot Spitzer announced in 2002 an investigation of Morgan Stanley and its practices. The judge agreed with the defendants that Shah’s claims were time-barred under the two-year limitations provision of the Sarbanes-Oxley Act because he was on inquiry notice of “the alleged fraud no later than May 14, 2001, the date of Fortune magazine’s feature article about Morgan Stanley and Meeker.” In fact, Holwell said, “this action presents a more compelling case for holding that plaintiff had inquiry notice than other actions in this district with the same holding.” He continued, “As a general matter, investors in XYZ company might be unaware (or less aware) of media articles describing business practices at a securities firm that issues analyst reports covering that company because the investors are focused on finding information about their company, not about the securities firm. However, shareholders in a securities firm are focused on the firm itself and, thus, are expected to be aware of media articles regarding the firm’s business practices.” Peter Doyle of Kirkland & Ellis represented Morgan Stanley. Ira Press of Kirby, McInerney & Squire represented Shah.

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