10600359 SUMMONS - Typepad

SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK

SECURITY POLICE AND FIRE PROFESSIONALS OF AMERICA RETIREMENT FUND, ARTHUR MURPHY, JR., on behalf of the JEAN E. MURPHY REVOCABLE TRUST, and CENTRAL LABORERS’ PENSION FUND, derivatively on behalf of MORGAN STANLEY,

Pluintgs

V.

JOHN J. MACK, JAMES P. GORMAN, ROY J. BOSTOCK, ERSKINE B. BOWLES, HOWARD J. DAVIES, JAMES H. HANCE, JR., NOBUYUKI HIRANO, C. ROBERT KIDDER, DONALD T. NICOLAISEN, CHARLES H. NOSKI, HUTHAM S. OLAYAN, CHARLES E. PHILLIPS, JR., 0. GRIFFITH SEXTON, LAURA D. TYSON, KLAUS ZUMWINKEL, WALID A. CHAMMAH, ZOE CRUZ, JERKER JOHANSSON, COLM KELLEHER, GARY G. LYNCH, THOMAS R. NIDES, ROBERT W. SCULLY, NEAL A. SHEAR, DAVID H. SIDWELL,

Defendunts

and

MORGAN STANLEY,

Nominal Defendanl

To the Above Named Defendants:

John J. Mack 91 Sunset Lane Rye, NY 10580-1623

1 0 6 0 0 3 5 9 Index No.:

SUMMONS

The basis of the venue is each of the defendants either resides in New York or conducts continuous and systematic business in New York, (CPLR 66 301 & 302)

0. Griffith Sexton 410 Coconut Palm Rd, Vero Beach, FL 32963-3709

Supreme Court Records OnLine Library - page 1 of 49

FILED: NEW YORK COUNTY CLERK 03/30/2010 INDEX NO. 600359/2010

NYSCEF DOC. NO. 1 RECEIVED NYSCEF: 03/30/2010

James P. Gorman 1120 5th Avenue New York, NY 10128

Roy J. Bostock 7 S Manursing Island Rye, NY 10580

Erskine B. Bowles 6725 Old Providence Rd Charlotte, NC 28226

Howard J. Davies 1585 Broadway New York, NY 10036

James H. Hance Jr. 424 Eastover Rd Charlotte, NC 28207

C. Robert Kidder 900 Knollwood Dr Santa Barbara, CA 93 108

Donald T. Nicolaisen 1 Indian Lane Califon, NJ 07830

Charles H. Noski 2908 Paseo Del Mar Palos Verdes Estates, CA 90274

Hutham S. Olayan 133 E 64th St New York, NY 10065

Charles E. Phillips Jr. 1585 Broadway New York, NY 10036

David H. Sidwell 8 Actors Colony Road Sag Harbor, NY 1 1963

Laura D. Tyson 20 15 Los Angeles Ave Berkeley, CA 94707

Klaus Zwnwinkel 1585 Broadway New York, NY 10036

Walid A. Chammah 21 E 79th St New York, NY 10075

Zoe Cruz 765 Park Avenue New York, NY 10021

Jerker Johansson 8 E 96th St New York, NY 101 28

Colm Kelleher 525 Park Ave New York, NY 10065

Gary G. Lynch 300 Central Park West New York, NY 10024

Thomas R. Nides 1585 Broadway New York, NY 10036

Robert W. Scully 9 E 79th St New York, NY 10075

Neal A. Shear 23 E 83rd St New York, NY 10028

Morgan Stanley 1585 Broadway New York, NY 10036


You are hereby summoned to answer the Complaint in this action and to serve a copy o f

your answer, or, if the Complaint is not served with this summons, to serve a notice of

appearance, on the plaintiffs’ attorney within 20 days after the service of this Summons,

exclusive of the day of service (or within 30 days after the service is complete if this Summons is

not personally delivered to you within the State of New York); and in case of your failure to

appear or answer, judgment will be taken against you by default for the relief demanded in the

complaint.

Plaintiffs designate New York County as the place of trial.

Dated: February 11 2010 GRANT & EISENHOFER P.A.

JAY W. EISENHOFER RICHARD SCHIFFRIN MICHAEL 5. BARRY HUNG G. TA MICHELE CAFUNO ANANDA CHAUDHURI NATALIA WILLIAMS CHRISTIAN KEENEY 485 Lexington Avenue, 29th Floor New York, NY 10017 Tel: 646-722-8500 Fax: 646-722-8501

THE WEISER LAW FIRM, P.C. ROBERT B. WEISER BRETT D. STECKER JEFFREY 5. CIARLANTO 121 N. Wayne Avenue, Suite 100 Wayne, PA 19087 Telephone: (6 10) 225-2677 Facsimile: (610) 225-2678

Counsel for PlaintiHs


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* L SUPREME COURT OF THE STATE OF NEW YORK

COUNTY OF NEW YORK

SECURITY POLICE AND FIRE PROFESSIONALS OF AMERICA RETIREMENT FUND, ARTHUR MURPHY, JR., on behalf of the JEAN E. MURPHY REVOCABLE TRUST, and CENTRAL LABORERS’ PENSION FUND, derivatively on behalf of MORGAN STANLEY,

V.

JOHN J. MACK, JAMES P. GORMAN, ROY J. BOSTOCK, ERSKINE B. BOWLES, HOWARD J. DAVIES, JAMES H. HANCE, JR., NOBUYUKI HIRANO, C. ROBERT KIDDER, DONALD T. NICOLAISEN, CHARLES H. NOSKI, HUTHAM S. OLAYAN, CHARLES E. PHILLIPS, JR,, 0. GRIFFITH SEXTON, LAURA D. TYSON, KLAUS ZUMWTNKEL, WALID A. CHAMMAH, ZOE CRUZ, JERKER JOHANSSON, COLM KELLEHER, GARY G. LYNCH, THOMAS R. NIDES, ROBERT W. SCULLY, NEAL A. SHEAR, DAVID H. SID WELL,

Defendants,

and

MORGAN STANLEY,

Nominal De fendant.

Index No.

SHAREHOLDER DERIVATIVE COMPLAINT

JURY TRIAL DEMANDED


TABLE OF CONTENTS Page

NATURE OF THE ACTION ......................................................................................................... 1

JURISDICTION AND VENUE ..................................................................................................... 4

THE PARTIES., .............................................................................................................................. 5

DEFENDANTS’ DUTIES .............................................................................................................. 9

SUBSTANTIVE ALLEGATIONS .............................................................................................. 11

I, BACKGROUND OF THE COMPANY .................................................................... 11

11. UNDER DEFENDANT MACK’S LEADERSHIP, MORGAN STANLEY’S EMPLOYEES RAMP UP THE COMPANY’S LEVERAGE AND RISK-TAKNG ........................................................................................................... 12

111. DUE TO THE EXCESSIVE LEVERAGE AND RISK-TAKING BY ITS EMPLOYEES, MORGAN STANLEY IS DRIVEN TO THE BRINK OF COLLAPSE ................................................................................................................ 15

A. Morgan Stanley Requires A $5.5 Billion Capital Injection In 2007 From A Chinese Sovereign Wealth Fund In Order To Bolster Its Balance Sheet ......... 16

B. Morgan Stanley Obtains A $9 Billion Capital Injection From A Japanese Financial Institution To Stave Off Collapse ......................................................... 17

C. Morgan Stanley Requires Another $10 Billion In Federal Taxpayer Funds And Other Extensive Federal Subsidies To Survive ............................................. 1 8

D. Morgan Stanley Benefits From The Bailout of AIG ............................................ 20

E. Morgan Stanley Has Acknowledged That The Federal Government’s Intervention Was Critical To Morgan Stanley’s Survival .................................... 22

IV. MORGAN STANLEY’S 2009 RESULTS HAVE BENEFITED FROM A SHIFTIN THE START OF THE COMPANY’S ACCOUNTING YEAR ............... 23

V. DEFENDANTS BREACHED THEIR FIDUCIARY DUTIES IN APPROVING MORGAN STANLEY’S 2006 COMPENSATION AWARD BECAUSE IT

REVERSED. ............................................................................................................... 24 WAS BASED ON SHORT-TERM GAINS THAT WERE EVENTUALLY

VI, DEFENDANTS BREACHED THEIR FIDUCIARY DUTIES IN APPROVTNG MORGAN STANLEY’S 2007 AND 2009 COMPENSATION AWARDS BY

1


I . .

FAILING TO CONSIDER THE UNDERLYING PERFORMANCE OF THE COMPANY, THE TRUE CONTRIBUTIONS OF THE EMPLOYEES AND THE CHANGED CIRCUMSTANCES OF MORGAN STANLEY.. ........................ 25

A. Defendants Have Richly Rewarded Morgan Stanley’s Employees Year After Year, While Shareholders Have Suffered Enormous Losses In Each Of Those Years ..................................................................................................................... 27

B. For 2009, Defendants Continue To Pay Employees As If Morgan Stanley Were An Investment Bank, Even Though Morgan Stanley Is Now A Commercial Bank ................................................................................................. 28

C. Morgan Stanley’s 2009 Performance Was Attributable To The Federal Government’s Intervention, Bailouts Provided By Private Institutions And An Accounting Manipulation ............................................................................... 3 1

DERIVATIVE AND DEMAND ALLEGATIONS ..................................................................... 32

CAUSES OF ACTION ................................................................................................................. 38

PRAYER FOR RELIEF ............................................................................................................... 41

JURY DEMAND .......................................................................................................................... 43

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”

8 Plaintiffs Security Police and Fire Professionals of America Retirement Fund, Arthur

Murphy, Jr., on behalf of the Jean E. Murphy Revocable Trust, and Central Laborers’ Pension

Fund (“Plaintiffs”), by and through their undersigned attorneys, hereby submit this Shareholder

Derivative Complaint (the “Complaint”) for the benefit of Nominal Defendant Morgan Stanley

(“Morgan Stanley’’ or the “Company”) against certain members of its Board of Directors (the

“Board”) and certain executive officers. Plaintiffs seek to remedy Defendants’ breaches of

fiduciary duties and unjust enrichment relating to the award of compensation by the Company

for the years 2006,2007 and 2009 (the “Relevant Period”),

NATURE OF THE ACTION

1. In this action, Plaintiffs seek to recover billions in compensation that Morgan

Stanley has paid and plans to pay to its employees for the years 2006, 2007 and 2009. As

alleged below, the members of Morgan Stanley’s Board have abdicated their responsibility to

administer the Company’s compensation plans in the best interests of the Company and its

shareholders. For 2006, Morgan Stanley awarded its employees nearly $14 billion in

compensation. For 2007, Morgan Stanley awarded its employees a record $16.6 billion in

compensation, constituting 59% of Morgan Stanley’s net revenues for that year (Morgan

Stanley’s net revenues are defined in Morgan Stanley’s financial statements as total revenue plus

interest income/less interest expense). And for 2009, Morgan Stanley’s Board has reserved

another $14.4 billion, or 62% of the Morgan Stanley’s 2009 net revenues.

2. The payments are staggering not only in absolute and percentage terms, but also

when one considers the losses suffered by Morgan Stanley’s shareholders between 2006 and

2009. While Defendants have paid and propose to pay a total of approximately $45 billion in

compensation for the years 2006,2007 and 2009, Morgan Stanley’s stock price, which traded at

nearly $90 at its high point during that period, closed out 2009 at less than $30 per share.

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3. The compensation payouts are also particularly egregious when one examines

the circumstances under which they were approved in each of the years. As set forth in this

Complaint, in each of the years in the Relevant Period, Defendants abdicated their fiduciary

duties when making their compensation decisions.

4. In 2006, Defendants approved $14 billion in employee compensation based on the

purported record revenues generated by Morgan Stanley in that year. However, Defendants

failed to take into account the suspect quality of these revenues - in particular, the fact that the

gains in revenues and earnings for 2006 had been pumped up by increased leverage and

excessive risk-taking. Unsurprisingly, the gains ultimately proved to be ephemeral, and had to

be reversed in later years when the bets placed by Morgan Stanley’s employees turned sour, in

the process nearly bringing about the collapse of the entire company.

5 . In 2007, Defendants approved a record $16.6 billion in compensation and benefits

even though the credit crisis was just starting to gather steam. Incredibly, Defendants approved

the record payout even though, in the fourth quarter of 2007, Morgan Stanley took a $9.4 billion

charge for losses suffered on large sub-prime mortgage bets previously placed by the Company’s

employees. These bets, which had allowed Morgan Stanley to report large short-term profits in

prior years, were now having the opposite effect, eating into the Company’s capital. In fact, the

hit was so significant that Morgan Stanley was required to sell a 9.9% stake to a Chinese

sovereign wealth fund, diluting existing shareholders.

6. Finally, for 2009, Defendants have approved a $14.4 billion compensation pay-

out, representing an astonishing 62% of the Company’s net revenues, even though Morgan

Stanley reported a profit of only $1.15 billion for the year (and, in fact, a loss of $900 million

when taking into account diluted shares). The 2009 payout is especially indefensible given that


w much of the revenues reported by Morgan Stanley in 2009 was substantially attributable to

factors other than the performance or any skill of Morgan Stanley’s employees. Specifically,

Morgan Stanley’s 2009 performance is attributable directly to the extraordinary assistance and

intervention of the federal government, specifically the injection of $10 billion into Morgan

Stanley under the federal government’s emergency Troubled Asset Relief Program (“TARP”),

which allowed Morgan Stanley to stay afloat. It is attributable also to the injection by the federal

government of tens of billions of dollars into AIG, which then proceeded to funnel these bail-out

funds to counter-parties such as Morgan Stanley, allowing Morgan Stanley to salvage otherwise

worthless contracts held with AIG. Furthermore, Morgan Stanley’s very existence in 2009

depended on a highly dilutive $9 billion capital injection from a Japanese financial institution at

the end of 2008. Finally, Morgan Stanley’s 2009 performance benefited from a shift in the start

of the Company’s fiscal year, which allowed Morgan Stanley to omit from the 2009 results

approximately $1.6 billion of losses for the month of December 2008 (losses which would have

wiped out the $1.15 billion profit otherwise reported by the Company).

7. In summary, Defendants’ conduct shows that they have scant regard for the

interests of those shareholders and that they have instead operated the Company principally for

the benefit of its employees, Consequently, Plaintiffs have brought waste claims against the

Director Defendants (as defined herein) for approving compensation in 2006, 2007 and 2009 in

an amount so disproportionately large compared to the Company’s performance and shareholder

earnings as to be unconscionable (Count I). Plaintiffs have brought breach of the duty of loyalty

claims against the Director Defendants for failing to consider the poor performance of the

Company when awarding compensation in 2007 and 2009. In 2009, compensation levels were

especially egregious because the Company was kept afloat because of a massive government

3


bailout of the financial industry (Count 11). Plaintiffs have brought breach of the duty of loyalty

claims against the Director Defendants for awarding compensation in 2006 based on increased

revenue generated by inflating the worth of assets held by Morgan Stanley, and for failing to

recoup this revenue when the true value of the assets became known (Count 111). Because the

Director Defendants were beholden to the Executive Offxcer Defendants (as defined herein)

when making these decisions, Plaintiffs have brought waste (Count IV) and breach of the duty of

loyalty claims (Count V) against the Executive Officer Defendants for causing Morgan Stanley

to issue excessive compensation in 2006,2007, and 2009. Plaintiffs have also brought an unjust

enrichment claim against the Executive Officer Defendants for receiving an amount of

compensation that did not reflect the Company’s poor performance, the government bailout of

the financial industry, and the fact that Morgan Stanley’s revenues were inflated in 2006 (Count

VI).

JURISDICTION AND VENUE

8. Under New York Civil Practice Law and Rules (“CPLR”) $0 301 & 302, this

Court has personal jurisdiction over all of the Defendants. Each of the Defendants either resides

in New York or conducts continuous and systematic business in New York. Nominal Defendant

Morgan Stanley’s world headquarters are located at 1585 Broadway, New York, NY 10036 and

the Company conducts much of its business from that office, including investment banking,

wealth management and asset management services. Additionally, the transactions, events, and

occurrences giving rise to the claims alleged herein occurred in New York.

9. Under CPLR 5 503, venue is proper in this county.


10. P i n i

THE PARTIES

Ff Security Police and Fire Professionals o h e r i c a Retirement Fund owns

shares of Nominal Defendant Morgan Stanley and has held such shares since at least January

2009.

11. Plaintiff Arthur Murphy, Jr., on behalf of the Jean E. Murphy Revocable Trust,

owns shares of Nominal Defendant Morgan Stanley and has held such shares since at least

November 2000.

12. Plaintiff Central Laborers’ Pension fund is an Illinois pension fund that owns

shares of Nominal Defendant Morgan Stanley and has held such shares since at least June 2007.

13. Nominal Defendant Morgan Stanley is a Delaware corporation headquartered at

1585 Broadway, New York, NY 10036. Morgan Stanley is a leading global financial services

firm providing investment banking, wealth management and asset management services to a

diversified client base that includes individual investors, companies, institutions and government

agencies.

14. Defendant John J. Mack (“Mack”) has served as the Chairman of the Board of

Morgan Stanley since June 2005, Defendant Mack was also Chief Executive Officer (“CEO”) of

Morgan Stanley from June 2005 to December 2009. Previously, Defendant Mack spent thirty

years at the Company in a variety of positions. Defendant Mack is being sued in his capacity as

an officer and a director of the Company.

15. Defendant James P. Gorman (“Gorman”) has served as the CEO and President of

Morgan Stanley since January 2010. Previously, Defendant Gorman served as Co-President of

the Company from December 2007 to December 2009. Mr. Gorman joined Morgan Stanley in

February 2006 as President and Chief Operating officer of the Company’s Global Wealth

Management Group. From October 2007 to December 2009, Defendant Gorman also served as

5


co-head of corporate strategy. Defendant Gorman is being sued in his capacity as an officer and

a director of the Company,

16. Defendant Roy J. Bostock (“Bostock”) has served as a director of the Company

In addition, Defendant Bostock has served as a member of the since September 2005.

Nominating and Governance Committee and the Risk Committee during the Relevant Period.

17. Defendant Erskine B. Bowles (“Bowles”) has served as a director of the Company

since December 2005. Defendant Bowles worked at the Company from July 1969 to January

1972. In addition, Defendant Bowles has served as the Chair of the Compensation, Management

Development and Succession Committee during the Relevant Period.

18. Defendant Howard 5. Davies (“Davies”) has served as a director of the Company

since 2004. In addition, Defendant Davies has served as a member of the Audit Committee and

as the Chair of the Risk Committee during the Relevant Period.

19, Defendant James H. Hance, Jr. (“Hance”) has served as a director of the Company

since July 2009. In addition, Defendant Hance has served as a member of the Audit Committee

and the Risk Committee during the Relevant Period.

20. Defendant Nobuyuki Hirano has served as a director of the Company since March

2009, In addition, Defendant Hirano has served as a member of the Risk Committee during the

Relevant Period.

2 1 , Defendant C. Robert Kidder (“Kidder”) has served as a director of the Company

since 1993. In addition, Defendant Kidder has served as the Lead Director of the Board and as a

member of the Compensation, Management Development and Succession Committee during the

Relevant Period.


22. Defendant Donald T. Nicolaisen (“Nicolaisen”) has served as a director of the

Company since April 2006. In addition, Defendant Nicolaisen has served as a member of the

Audit Committee and the Compensation, Management Development and Succession Committee

during the Relevant Period.

23. Defendant Charles H. Noski (“Noski”) has served as a director of the Company

since September 2005. In addition, Defendant Noski has served as the Chair of the Audit

Committee during the Relevant Period,

24, Defendant Hutham S. Olayan (“Olaym”) has served as a director of the Company

since 2006. In addition, Defendant Olayan has served as a member of the Compensation,

Management Development and Succession Committee during the Relevant Period.

25. Defendant Charles E. Phillips, Jr. (“Phillips”) has served as a director of the

Company since June 2006. Previously, fiom November 1995 to May 2003, Defendant Phillips

served as a Managing Director at Morgan Stanley in Equity Research, and fiom December 1994

to November 1995 he served as a Principal at the Company. In addition, Defendant Phillips has

served as a member of the Nominating and Governance Committee during the Relevant Period.

26. Defendant 0. Griffith Sexton (Texton’’) has served as a director of the Company

since September 2005. Previously, fiom 1973 to 1995, Defendant Sexton was an investment

banker at the Company. Defendant Sexton was also an advisory director at the Company from

May 1995 to September 2008. In addition, Defendant Sexton has served as a member of the

Audit Committee during the Relevant Period.

27. Defendant Laura D. Tyson (“Tyson”) has served as a director of the Company

since 1997. In addition, Defendant Tyson has served as a member of the Nominating and

Governance Committee during the Relevant Period.


c

28. Defendant Klaus Zumwinkel (“Zumwinkel”) served as a director of the Company

fiom 2004 to 2008. Defendant Zumwinkel served as a member of the Audit Committee fiom in

or about 2005 to March 2006. Defendant Zumwinkel then served as a member of the

Nominating and Governance Committee fiom March 2006 to 2008.

29. Defendant Walid A. Chammah (“Chammah”) was Co-President of Morgan

Stanley between December 2007 through December 2009. Defendant Chammah is currently

Chairman and CEO of Morgan Stanley International.

30. Defendant Zoe Cruz ((‘CI”’’) began working for Morgan Stanley in 1982.

Defendant Cruz was co-president of Morgan Stanley from February 2006 until October 2007.

3 1. Defendant Jerker Johansson (L‘Johansson”) has worked for Morgan Stanley since

1985. Defendant Johansson was Co-Head of Institutional Sales and Trading and Head of the

Worldwide Institutional Equities Division at Morgan Stanley from 2005 to December 2007. He

was vice chairman of Morgan Stanley Europe when he resigned in February 2008.

32. Colm Kelleher (“Kelleher”) served as Chief Financial Officer of Morgan Stanley

from October 2007 through December 2009. Defendant Kelleher is currently Morgan Stanley’s

Co-President of Institutional Securities.

33. Defendant Gary G. Lynch (“Lynch”) is the Chief Legal Officer of Morgan

Stanley. Defendant Lynch has held that position since July 2005,

34. Defendant Thomas R. Nides (‘T\Tides”) was the Chief Administrative Officer of

Morgan Stanley between September 2005 through December 2009. He is currently the Chief

Operating Officer of Morgan Stanley.

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35. Defendant Robert W. Scully (“Scully”) was the Co-President of Morgan Stanley

from February 2006 to December 2007, Defendant Scully also served as a member of the Office

of the Chairman from December 2007 to January 2009.

36. Defendant Neal A. Shear (“Shear”) was Co-Head of Institutional Sales and

Trading and Head of the Worldwide Fixed Income Division from 2005 to December 2007.

Defendant Shear was Chairman of Morgan Stanley’s commodities business from December

2007 until March 2008 when he left Morgan Stanley.

37. Defendant David H. Sidwell (“Sidwell”) was the Chief Financial Officer of

Morgan Stanley from March 2004 to October 2007.

38. Defendants Mack, Gorman, Bostock, Bowles, Davies, Hance, Hirano, Kidder,

Nicolaisen, Noski, Olayan, Phillips, Sexton, Tyson, Zumwinkel, Chammah, Cruz, Johansson,

Kelleher, Lynch, Nides, Scully, Shear and Sidwell shall be referred to herein as “Defendants.”

39. Defendants Bostock, Bowles, Davies, Hance, Hirano, Kidder, Nicolaisen, Noski,

Olayan, Phillips, Sexton, Tyson and Zumwinkel shall be referred to herein as the “Director

Defendants. ”

40. Defendants Chammah, Cruz, Gorman, Johansson, Kelleher, Lynch, Mack, Nides,

Scully, Shear and Sidwell shall be referred to herein as the “Executive Officer Defendants.”

41. Defendants Bowles, Kidder, Nicolaisen and Olayan shall be referred to herein as

the “Compensation Committee Defendants.”

DEFENDANTS’ DUTIES

42. By reason of their positions as officers and directors of Morgan Stanley and

because of their ability to control the business and corporate affairs of Morgan Stanley,

Defendants owed Morgan Stanley and its shareholders fiduciary obligations of good faith,

loyalty and candor, and were and are required to use their utmost ability to control and manage

9


I the Company in a fair, just, honest and equitable manner. Defendants were and are required to

act in furtherance of the best interests of Morgan Stanley and its shareholders so as to benefit all

shareholders equally and not in furtherance of Defendants’ personal interest or benefit. Each

director and officer of the Company owes to Morgan Stanley and its shareholders the fiduciary

duty to exercise good faith and diligence in the administration of the affairs of the Company and

in the use and preservation of its property and assets, and the highest obligations of fair dealing.

43. Because of their positions of control and authority as directors andor officers of

Morgan Stanley, Defendants were able to and did, directly andor indirectly, exercise control

over the wrongful acts complained of herein. Because of their advisory, executive, managerial,

and directorial positions with Morgan Stanley, each of the Defendants had knowledge of material

non-public information regarding the Company.

44. To discharge their duties, the officers and directors of Morgan Stanley were

required to exercise reasonable and prudent supervision over the management, policies, practices

and controls of the Company. By virtue of such duties, the officers and directors of Morgan

Stanley were required to, among other things, exercise their business judgment to act in good

faith, on an informed basis and in what they reasonably believe to be the best interests of the

Company and its shareholders.

45. Pursuant to the Board of Directors’ Corporate Governance Policies, the members

of the Nominating and Governance Committee wer6 required to be guided by the following three

objectives:

a. Compensation should fairly pay directors for work required in a company of

Morgan Stanley’s size and scope;

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I

1 b. Compensation should align directors’ interests with the long-term interests of

shareholders; and

c. The structure of the compensation should be easy for shareholders to

understand,

46. Pursuant to the Compensation, Management Development and Succession

Committee Charter, the members of the Compensation, Management Development and

Succession Committee were required to, among other things:

a. Review and approve compensation of the Company’s executive officers;

b. Review and approve corporate goals and objectives relevant to the

compensation of the Chairman and CEO, evaluate the performance of the CEO in light of those

goals and objections; and in determining the long-term incentive component of CEO

compensation, consider the Company’s performance and shareholder returns; and

c. Administer, approve and make recommendations to the Board regarding any

present or future incentive compensation plan.

SUBSTANTIVE ALLEGATIONS

I. BACKGROUND OF THE COMPANY

47. Morgan Stanley began operations in 1935 in New York City, quickly becoming

one of the leading investment banks in the United States, In its first full year of operation, the

Company managed over $1.1 billion in public offerings and private placements. For nearly 40

years thereafter, underwriting was the Company’s primary business. In the 1970s, the Company

added sales and trading operations. Morgan Stanley is now one of the largest investment banks

in the world, operating in 1,200 offices in 36 countries.

11


1 48. For much of its existence, Morgan Stanley operated as a partnership. In 1986,

Morgan Stanley converted to a publicly-traded corporation. Currently, over 99% of Morgan

Stanley’s shares are held by public shareholders.

11. UNDER DEFENDANT MACK’S LEADERSHIP, MORGAN STANLEY’S EMPLOYEES RAMP UP THE COMPANY’S LEVERAGE AND RISK-TAKING

49. As has been widely publicized, the financial markets in the United States and

around the world came close to total collapse in 2008 as credit dried up, and the value of

investments of all classes plummeted. At the center of this financial crisis stood the U.S.

investment banks, including Morgan Stanley. Over the preceding several years, these banks had

gorged on the easy credit offered by the Federal Reserve, and had piled into all manner of risky

assets, including sub-prime mortgages, commodities, credit default swaps and other esoteric

financial instruments. With the credit spigot fully turned on, employees at investment banks

such as Morgan Stanley turned Wall Street into a casino as they placed risky bets in the pursuit

of short term gains and the large Compensation payouts that went hand in hand with these short

term gains.

50. Morgan Stanley’s current Chairman and former CEO John Mack has publicly

conceded Morgan Stanley’s role in remaking Wall Street into a casino, and the firm’s role in the

crisis that followed from this reckless behavior. In a January 2010 statement provided to the

federal government’s Financial Crisis Inquiry Commission, Mack explained that Wall Street

firms, including Morgan Stanley, “were too highly leveraged, took on too much risk and did not

have sufficient resources to manage those risks effectively in a rapidly changing environment.”

John Mack, Written Submission of Morgan Stanley to the Financial Crisis Inquiry Commission,

(Jan. 13, 201 O)(available at http://www.fcic.gov/hearings/pdfs/2010-0113-Mack.pdf); see also

Mark Pittman, Subpriine Securities Market Began as ‘Group uf 5 ’ Over Chinese, BLOOMBERG,

12


December 17, 2007 (reporting that Morgan Stanley agreed with other investment banks to

I Morgan Stanley as nimble and dynamic as possible .... He’s doing much more than glad-

market derivatives based on subprime mortgages that may have caused the financial crisis).

~

for the bank and on behalf of its clients, in an effort to catch up with Goldman in the ever-more-

51. In the summer of 2005, Defendant Mack made a much-publicized return to

Morgan Stanley after a four year hiatus from the Company. In 2001, after losing to Philip

I important trading business.’’ Stanley Reed et al., Morgan Stanley s Mack Attack,

Purcell in a bitter power struggle, Mack had abruptly departed to head up Credit Suisse First

~ BUSINESSWEEK, June 2 1,2006.

Boston. When Purcell failed to perform as expected during his four years as chief executive

I 52. Significantly, Morgan Stanley’s employees were encouraged to branch out into

officer, Morgan Stanley brought back Mack to head the Company, Upon Mack’s return, Morgan

~

areas in which they had no experience or expertise. According to the New Yurk Times:

Stanley took on a new direction. Under Mack’s leadership, Morgan Stanley’s employees were

now exhorted to deploy more of the Company’s capital and increase the Company’s “value-at-

risk” (the maximum amount that could potentially be lost from trading on a single day), in order

to keep pace with leverage-driven trading gains at other investment banks, such as Goldman

Sachs. As Businessweek reported in June 2006, “Mack, 61, is ... embark[ingJ on a radical

shakeup of Morgan Stanley . . e e Mack is drawing on his skills as a salesman and operator to make

handing, though: He’s building out new businesses and putting vast sums of money at risk, both

After his return to the firm more than two years ago, Mr. Mack spoke publicly of adopting a higher risk profile and pushed the firm into in-vogue investment areas like subprime mortgages, lending to private equity firms and using more of the firm’s own capital to take big trading positions .... These businesses, while lucrative for trading firms like Goldman Sachs, were outside the traditional expertise of Morgan Stanley.

13


Landon Thomas, Jr., Morgan Stanley Executive Ousted After Trading Loss, N.Y. TIMES, Nov.

30, 2007. As one journalist succinctly described it, “[i]t was Mack’s insistence that Morgan

compete with the others - leverage the firm more, dive headlong into securitized debt, and grab

those ‘alpha’ returns that surpass market indexes - that put the bank in peril.’’ Robert Kolker,

Speed Chaser: Would the fate of Morgan Stanley be any different if John Mack hadn’t

vanquished Philip Purcell?, N.Y. MAGAZINE, Sept. 2 1,2008.

53. In response to Morgan Stanley’s new focus, Morgan Stanley’s leverage ballooned

from 23.6 times as of November 30, 2001, to 30.4 times, as of November 30,2006. By the end

of 2007, Morgan Stanley’s leverage ratio had increased again, to a massive 32.6 times. That is,

as of 2007, Morgan Stanley funded the assets on its balance sheet by borrowing $32.60 for every

$1 of its own capital that Morgan Stanley invested. Hand-in-hand with this increase in leverage,

Morgan Stanley increased the amount that Morgan Stanley stood to lose on any given day. As

the New York Times reported, “[flor the [2006] second quarter, the firm’s value-at-risk ratio, a

measure of the amount of risk that an investment bank bears, reached $96 million. That level was

seldom reached during the time of Philip J. Purcell, Mr. Mack’s predecessor, who took a more

cautious approach to risk-taking.” Landon Thomas, Jr., Morgan Proflt Soars I I I % and Revenue

Rises 48%, N.Y. TIMES, June 22,2006.

54. Although the long-term consequences of this increased leverage and risk-taking

would eventually bring about the near-collapse of Morgan Stanley (as described below), in the

short term, Morgan Stanley succeeded in boosting its performance. On February 13, 2007,

Morgan Stanley issued its 2006 annual report on Form lO-K, in which it reported that, for the

2006 full year, Morgan Stanley’s net income was $7.472 billion, a 51% increase from $4.939

billion in 2005. The Company reported that net revenues rose 26% ($7.1 billion) to a record

14


$33.86 billion. The vast bulk of this increase was driven by the ramp-up in increased leverage

and risk-taking by Morgan Stanley’s trading divisions. According to Morgan Stanley, its

Institutional Securities business segment (which encompassed, among other activities, sales,

trading, financing and market-making activities in equity securities and related products, fixed

income securities, foreign exchange and commodities):

recorded income from continuing operations before losses from unconsolidated investees, income taxes and net cumulative effect of accounting change of $8,160 million, a 72% increase from a year ago. Net revenues rose 38% to $21,562 million driven by record results in fixed income and equity sales and trading and fixed income underwriting, along with strong results in advisory revenues . . . .

Fixed income sales and trading revenues were a record $9,577 million, up 41% from a year ago. The increase was driven by record results from commodities, credit products, and interest rate and currency products. Commodities revenues reflected strong results from electricity, natural gas products and oil liquids. Credit product revenues benefited from significantly improved corporate credit trading and strength in residential and commercial securitized products. Commodities and interest rate and currency products benefited from revenues recognized on structured transactions as a result of increased observability of market value . . . . Equity sales and trading revenues were a record $6,320 million, up 32% from a year ago. The increase was broad based and included higher revenues from derivatives and equity cash products, financing products, prime brokerage and principal trading strategies.

’

Morgan Stanley, 2006 Form 10K, at 39 (Feb. 13,2007).

111. DUE TO THE EXCESSIVE LEVERAGE AND RISK-TAKING BY ITS EMPLOYEES, MORGAN STANLEY IS DRIVEN TO THE BRINK OF COLLAPSE

55. Not surprisingly, all the gains reported by Morgan Stanley in 2006 proved to be

painfully short-term. Commencing in the summer of 2007, the very same bets for which the

Company’s employees had been richly rewarded in prior years began to wreak widespread

damage on the Company.


A. Morgan Stanley Requires A $5.5 Billion Capital Injection In 2007 From A Chinese Sovereign Wealth Fund In Order To Bolster Its Balance Sheet

56. One of the major ways by which Morgan Stanley embarked on the quest for short-

term profits was to pile into the risky, subprime market. As the New York Times reported,

“[slubprime mortgages was one of the investment areas identified by Mr. Mack when he

returned to the firm in the summer of 2005. Under his predecessor, Philip J. Purcell, mortgages

did not receive any strategic emphasis.” Landon Thomas, Jr., Morgan Stanley Takes a Hit on

Mortgages, N.Y. TIMES, Nov. 8, 2007. Morgan Stanley’s ill-fated venture into subprime

occurred in at least two ways.

57. First, in August 2007, Morgan Stanley acquired subprime lender Crescent Real

Estate Equities (“Crescent”) for $6.5 billion. Although many questioned the Crescent acquisition

in light of growing concerns about the subprime mortgage market, the Company claimed in an

August 3, 2007 press release that the acquisition would “maximize the value” of its real estate

portfolio. Instead, the acquisition hamstrung Morgan Stanley with massive debt and illiquid

investments. After recording hundreds of millions in write-downs and borrowing $2 billion from

Barclays just to keep Crescent operating, the Company announced, on November 20, 2009, that

it sold Crescent to Barclays at a loss because it was unable to repay Barclays’ loan.

58. Second, aside from the Crescent acquisition, Morgan Stanley invested heavily in

subprime-related securities. Although its subprime investments generated short-term profits at

the height of the real-estate bubble, these investments caused Morgan Stanley to suffer disastrous

losses when the market declined. As Morgan Stanley disclosed on December 19, 2007, when

reporting 2007 fourth quarter results, the Company was forced to recognize a massive $9.4

billion in mortgage related write-downs as a result of the deterioration in the market for subprime

and other mortgage related securities, Of this total, $7.8 billion represented write-downs of the


Company’s US. subprime trading positions, principally “super senior derivative positions in

collateralized debt obligations” entered into by the Company’s proprietary trading group.

Another $1.2 billion of writedowns related to Morgan Stanley’s holdings of other mortgages,

specifically, “European Non-Conforming Loans, CMBS, ALT-A, and Non-Performing and

Other Loans”.

59. Thus, by the fourth quarter of 2007, even before the full brunt of the global

financial crisis had yet to be felt, Morgan Stanley had already distinguished itself among the

investment banks by requiring a capital injection to shore up its balance sheet. In December

2007, Morgan Stanley entered into an agreement with China Investment Corporation Ltd.

(,‘CIC’’>, a Chinese sovereign wealth fund, under which CIC agreed to make a long-term

investment in the Company by injecting $5.5 billion of new capital into Morgan Stanley in return

for securities paying a fixed annual rate of 9 percent with mandatory conversion into company

stock. The sale effectively gave CIC a 9.9 percent stake in the Company, and diluted the existing

shareholders.

B. Morgan Stanley Obtains A $9 Billion Capital Injection From A Japanese Financial Institution To Stave Off Collapse

In 2008, the global financial crisis accelerated sharply. The storied investment

banks Bear Stearns and Lehman Brothers collapsed in March and September 2008 respectively.

60.

Bear S tems was absorbed by JPMorgan Chase at a bargain-basement price. Lehman Brothers

filed for bankruptcy. As was widely reported at the time, due to the parlous state of its balance

sheet, Morgan Stanley appeared to be the next domino to fall.

61. To forestall a collapse, on September 29,2008, Morgan Stanley announced that it

reached a definitive agreement with Mitsubishi UFJ Financial Group (“Mitsubishi”) whereby

Mitsubishi would invest $9 billion in equity in Morgan Stanley in exchange for a 21 percent

17


interest in the Company on a fully diluted basis. Under this agreement, Mitsubishi would

acquire $3 billion of common stock at a price of $25.25 per share and $6 billion of preferred

stock with a 10 percent dividend at a price of $3 1.25 per share.

62. However, after the deal was announced, concerns about Morgan Stanley’s

liquidity drove the Company’s stock price to under $10 per share, leading to speculation about

that Mitsubishi might back out of the deal. See, e.g. , M a m a Desmond, Morgan Stanley’s Mess,

FORBES.COM, Oct. 10, 2008. As a result, Morgan Stanley was required to sweeten the deal to

ensure Mitsubishi would close in October 2008. Instead of the mix of common and preferred

stock the parties originally agreed to, the revised deal gave Mitsubishi $7.8 billion in convertible-

preferred stock with a 10 percent dividend and convertible price of $25.25 per share along with

$1.2 billion in non-convertible preferred stock, also with a 10 percent dividend, According to

press reports, under the original deal, Morgan Stanley’s existing shareholders would have been

diluted by 20 percent. See, e.g., Joseph A. Giannone, Morgan Stanley to sell Mitsubishi 20

percent stake, REUTERS, Sept. 22,2008, Thus, under the revised deal, shareholders were diluted

even more.

C. Morgan Stanley Requires Another $10 Billion In Federal Taxpayer Funds And Other Extensive Federal Subsidies To Survive

63. Reflecting the depth of the problems caused by Morgan Stanley’s employees, the

Mitsubishi bailout proved insufficient.

64. To save the US . economy (and the nation’s largest banks), the federal

government enacted the Emergency Economic Stabilization Act of 2008, which provided the

US. Treasury Department with $700 billion to aid financial institutions under TARP.

Essentially, TARP provided government funds to prevent the collapse of the world’s economy

18


and this country’s largest banks, and enabled such companies to remove so-called ‘Yoxic” assets

from their books.

65. On October 28, 2008, Defendants accepted a $10 billion TARP loan for Morgan

Stanley. This massive infusion of TARP funds, however, came with significant restrictions.

Among other things, corporations such as Morgan Stanley that accepted TARP dollars were

subject to oversight by the federal government, were restricted in their ability to pay out

generous compensation, and were required to provide shareholders with an advisory vote on

compensation policies (so-called “say-on-pay” provisions). Eager to rid themselves of such

restrictions, Defendants announced the Company’s intention to pay back the TARP loan as soon

as it could do so.

66. However, the direct TARP loan was not the only source of federal relief provided

to Morgan Stanley. On September 21,2008, Morgan Stanley obtained approval from the Federal

Reserve to convert from an investment bank to a commercial bank holding company. This was

achieved by converting a wholly owned indirect subsidiary, Morgan Stanley Bank (Utah), from a

Utah industrial bank to a national bank. The effect of the conversion was that Morgan Stanley

simultaneously became a financial holding company under the Bank Holding Company Act of

1956. This enabled the Company to accept federally-insured deposits in order to build its capital

position. It also enabled Morgan Stanley to generate $24 billion in cash by issuing debts insured

by the Federal Deposit Insurance Corporation (“FDIC”) through the Temporary Liquidity

Guarantee Program (“TLPG”). Christine Harper, Morgan Stanley Won’t Issue More FDIC-

Guaranteed Debt, BLOOMBERG, June 16, 2009. That program had been designed to increase

liquidity by insuring debt issued by certain qualifying financial institutions. According to

Barrons, “[plarticipants probably are saving about two percentage points in annual interest costs

19


by selling debt with FDIC guarantees, rather than by issuing debt on their own.” Andrew Barry,

How Do You Spell Sweet Deal? For Banks, It’s TLGP, BARRON’S, Apr. 20, 2009, at 47. Stated

another way, the federal government and U.S. taxpayers were “backstopping” the Company’s

debt.

67. These aggressive and unprecedented government initiatives proved critical to

Morgan Stanley’s survival. As U.S. Treasury Secretary Timothy Geithner explained on

December 5 , 2009, “[n[one of [the largest banks] would have survived’’ had the government

stood aside and let the crisis run its course. “The entire US. financial system and all the major

firm in the count ry... were at that moment at the middle of a classic run, a classic bank run.”

(emphasis added).

D.

68.

Morgan Stanley Benefits From The Bailout of AIG

In addition to the direct government aid Morgan Stanley received through the

TAW and TLGP programs, the Company also benefitted indirectly from the government’s

bailout of AIG.

I

I 69. Until the 1980s, AIG operated primarily as a life and general insurance company.

In 1987, AIG created AIG Financial Products Corp. (“AIGFP”). In essence, AIGFP insured

risky trades in complex securities made by other banks. In the lead-up to the financial crisis,

AIGFP agreed to assume the risk of billions of dollars in trades through credit default swaps,

which are insurance-like instruments. Under credit default swaps, AIGFP received a series of

payments from counterparties in return for AIGFP agreeing to insure the counterparties for any

losses suffered in the event that an underlying security was downgraded or defaulted. If the

underlying securities were never downgraded or never defaulted, AIGFP collected a profit from

its counterparties’ regular payments. Among AIGFP’s counterparties was Morgan Stanley, who

had entered into more than a billion dollars worth of credit default swaps with AIGFP.

20


70. Although credit default swaps are similar to insurance contracts, they are not

regulated like insurance contracts. Consequently, AIGFP was not required to hold reserves to

cover losses as it would be if it sold insurance policies, If AIGFP did not have the cash to honor

its obligations under the credit default swaps with its counterparties, including Morgan Stanley,

Morgan Stanley would bear the entire risk of its securities losing value.

71. Beginning as early as the third quarter of 2007 and continuing through 2008,

AIGFP’s financial condition deteriorated significantly. As the market for credit and asset backed

securities collapsed, AIGFP did not have sufficient capital to pay its obligations under the credit

default swaps. Furthermore, credit ratings agencies downgraded both AIG and AIGFP’s credit

ratings. To satisfy its obligations under its credit default swaps contracts, AIGFP was required

by its counterparties to post collateral, By late summer 2008, AIGFP did not have sufficient

liquidity to post the required collateral and was on the verge of defaulting on its obligations to its

counterparties under its credit default swaps.

72. On September 16,2008, to forestall a potentially devastating impact on the global

economy if AIG failed, the Federal Reserve Board and the US. Treasury Department authorized

the Federal Reserve Bank of New York (“FRBNY”) to lend up to $85 billion to assist AIG in

meeting its obligations. In addition to the $85 billion FRBNY loan that AIG received, the

Treasury Department subsequently injected another $40 billion into AIG by (1) purchasing

newly-issued AIG preferred shares through TAW’S capital purchase program in November

2008, (2) purchasing two AIG divisions for $30 billion in March 2009, and (3) purchasing

another $50 billion in toxic assets from AIG.

73. The federal government’s efforts prevented AIG from entering bankruptcy, a

scenario which would have caused creditors such as Morgan Stanley to receive only a fraction of

21


the amounts AIG owed them. Instead, AIG (using government funds) repaid its counterparties,

including Morgan Stanley, in full. In total, AIG diverted nearly $1.2 billion of government

bailout money to Morgan Stanley, according to a list of counterparties released by AIG under

public pressure.

74. Without this federally-funded $1.2 billion, Morgan Stanley would have recorded a

loss of $1.2 billion, thereby impacting the Company’s 2009 earnings upon which 2009 bonuses

were based, In short, the $1.2 billion included in the Company’s earnings constituted a direct

transfer of wealth from US. taxpayers to Morgan Stanley and cannot be attributed to the

performance of Morgan Stanley’s employees.

E. Morgan Stanley Has Acknowledged That The Federal Government’s Intervention Was Critical To Morgan Stanley’s Survival

Defendants have themselves acknowledged the role of the government bailout in

Morgan Stanley’s survival. As ABC News reported, “[o]utgoing Morgan Stanley CEO John

Mack asked the bank’s board to withhold his bonus, citing ‘the extraordinary financial support

governments provided to our industry,’ he wrote in the memo sent today to all Morgan Stanley

employees.” Zunaira Zaki & Alice Gomstyn, Morgan Stanley CEO John Mack Rejects Year-

75.

End Bonus, ABC NEWS, Dec. 18, 2009. When questioned at a hearing by the Financial Crisis

Inquiry Commission, Mack further stated that the financial crisis was ‘“a powerful wake-up call

for this firm”’ and that the Company had “overhauled its compensation practices in an effort to

discourage excessive risk-taking.” Wall Street Chiefi Defend Compensation at Firms,

ASSOCIATED PRESS, Jan. 13, 2010. According to Mack, “We at Morgan Stanley recognize how

close the global financial system came to collapse during the fall of 2008 and the critical role that

the federal government, and TAW in particular, played in restoring stability to the financial

system.”

22


IV. MORGAN STANLEY’S 2009 RESULTS HAVE BENEFITED FROM A SHIFT IN THE START OF THE COMPANY’S ACCOUNTING YEAR.

76. Apart from the numerous bailouts and government assistance described above,

Morgan Stanley’s revenues and earnings for 2009 were also artificially inflated through a shift in

the Company’s fiscal year.

77. Previously, Morgan Stanley reported its financial results based on a fiscal year

commencing on December 1 and ending on November 30 of the following year. In September,

2008, however, in order to access emergency Federal Reserve funds, Morgan Stanley converted

itself from an investment bank to a bank holding company, as described above. Under

accounting rules governing holding companies, Morgan Stanley was required to change its

reporting period to coincide with the calendar year, instead of beginning in December and ending

in November. As a result, December 2008 was left as a stand-alone month and was not included

in either the 2009 first quarter or 2008 fourth quarter results. See Joseph A. Giannone, Morgan

Stanley posts loss, slushes dividend, RFAJTERS, Apr. 22, 2009; see also David Jolly, Morgan

Stanley Posts Loss, Hurt by Revenue Drop and Write-Downs, N.Y. TIMES, Apr. 23,2009.

78. The omission of December 2008 had a significant impact on improving the

Company’s 2009 reported first quarter results. December 2008 was a horrible month for Morgan

Stanley, in which the Company reported a net loss of $1.6 billion. By omitting the $1.6 billion in

losses, Morgan Stanley was able to report, on April 22, 2009, a smaller first quarter net loss

applicable to common shareholders of $578 million, or 57 cents a share. If the December 2008

losses were included, the 2009 first quarter net loss would have been significantly greater. As

reported in the New York Times, the accounting shift therefore allowed Morgan Stanley to

essentially “dress up what would otherwise have been a poor [2009 first] quarter.” Jolly, Morgan

Stanley Posts Loss, Hurt by Revenue Drop and Write-Downs.

23


79. Because Defendants have approved Morgan’s 2009 compensation payout based

Executive Mack cruz Scully Johansson Shear

on these 2009 results, Morgan Stanley’s 2009 compensation payment has been directly inflated

Total Compensation $41,411,283 $30,046,887 $20,093,087 $20,120,728 $35,067,277

by the omission of the December 2008 losses.

V. DEFENDANTS BREACHED THEIR FIDUCIARY DUTIES IN APPROVING MORGAN STANLEY’S 2006 COMPENSATION AWARD BECAUSE IT WAS BASED ON SHORT-TERM GAINS THAT WERE EVENTUALLY REVERSED.

80. In 2006, based on the short-term, pumped-up gains from Morgan Stanley’s risky

and highly leveraged bets, Defendants richly rewarded Morgan Stanley’s employees. As

disclosed in Morgan Stanley’s 2006 annual report, Morgan Stanley paid its employees a then-

record amount of nearly $14 billion in full-year compensation, based on the Company’s

purported record net revenues. According to Morgan Stanley, for 2006, “[c]umpensation and

benefits expense increased 27%, primarily reflecting higher net revenues.” (emphasis added).

As the chart below shows, the compensation of the Executive Officer Defendants was

unconscionably high in 2006:

8 1. When approving this record payout, Defendants never considered or assessed the

real reasons for the dramatic increase in net revenue. In particular, Defendants failed to take into

account the fact that these increases were attributable to risky, leveraged gambles which,

although producing seemingly positive results in the short term, might turn sour in the long term,

requiring revenues to be reversed, and possibly devastating the Company. As it turns out, a

significant portion of the short-tern gains reported in 2006 eventually were reversed, resulting in

significant losses in later years. Accordingly, by approving the 2006 compensation award,

24


Defendants breached their fiduciary duties by failing to consider the quality and source of the

revenues based upon which compensation was being calculated; failing to implement

mechanisms for ensuring that the compensation award would tie with the long-term performance

of the Company, as opposed to merely the performance of the Company in any given year; and

failing to properly exercise their business judgment. Accordingly, Defendants are liable for all

overpayments of 2006 compensation to the Executive Officer Defendants.

VI. DEFENDANTS BREACHED THEIR FIDUCIARY DUTIES IN APPROVING MORGAN STANLEY’S 2007 AND 2009 COMPENSATION AWARDS BY FAILING TO CONSIDER THE UNDERLYING PERFORMANCE OF THE COMPANY, THE TRUE CONTRIBUTIONS OF THE EMPLOYEES AND THE CHANGED CIRCUMSTANCES OF MORGAN STANLEY.

82. On December 19, 2007, Morgan Stanley reported its results for the 2007 fourth

quarter and full year. As already stated, Morgan Stanley was forced to record $9.4 billion in

subprime mortgage-related write-downs. For the full year, Morgan Stanley’s profit plunged 62%

to $3.44 billion from $9.10 billion in 2006. Net revenues fell to $28.03 billion from the $33.86

billion reported for 2006. Commenting on the quarter, Defendant Mack described the 2007

fourth quarter’s results as “deeply disappointing.” On a conference call to discuss the fourth

quarter, Mack stated that “[tlhe results . . . are embarrassing for me, for our firm.” Despite this

poor performance for 2007, Morgan Stanley disclosed in its 2007 annual report that it would set

aside a record $16.6 billion, or 59% of 2007 net revenues, for compensation and bonuses for the

Company’s employees. As the chart below shows, the compensation of the Executive Officer

Defendants was unconscionably high in 2007:

25


I Executive I Total ComDensation Mack Mr. Kelleher Sidwell

$1,602,458 $21,015,689 $ 14.608.693

Scully Mr. Lynch

I Mr. Nides I $6,333,148

$ 15,211,212 $ 11,899,964

83. On January 20, 2010, Morgan Stanley announced 2009 full-year net revenues of

$23.4 billion and a modest overall year-end profit of $1.15 billion. However, when including

diluted shares reflecting preferred dividends and the repurchase of TAW capital, the Company

actually reported a year-end loss of $907 million. Despite the miserable performance, Morgan

Stanley announced that it had set aside $14.4 billion for compensation, or a record 62% of net

revenues.

84. Commentators were universally stunned at the excessiveness of this compensation

ratio. As the New York Times reported, “[dlespite the first annual loss in its 74-year history,

Morgan Stanley earmarked 62 cents of every dollar of revenue for compensation, an astonishing

figure, even by the gilded standards of Wall Street.” Graham Bowley, Morgan Stanley’s

Quarter is Weak, Unlike its Pay Pool, N.Y. TIMES, Jan. 21,2010. See also Simon Duke, Morgan

Stanley ignores calls for restraint and doles out 8.8bn to bankers, THE DAILY MAIL, Jan. 21,

201 0 (reporting that “[aln astonishing 62 per cent of revenues were set aside for pay - the highest

level in at least a dozen years and nearly twice the 33 per cent level earmarked by rival JP

Morgan,”)

85. For the reasons set forth below, Morgan Stanley’s compensation payment to

employees of 59% of net revenues for 2007, and its proposal to surpass that by paying a

staggering 62% of its net revenues for 2009, are both excessive.

26


A. Defendants Have Richly Rewarded Morgan Stanley’s Employees Year After Year, While Shareholders Have Suffered Enormous Losses In Each Of Those Years

~

consequences of its employees’ excessive leverage and risky gambles, Defendants again richly

86. Despite their role in bringing about the near-collapse of the Company and causing

enormous wealth destruction for Morgan Stanley and its shareholders, Morgan Stanley’s

employees have continued to be richly reward by Defendants, year after year. Morgan Stanley’s

shareholders, in contrast, have paid the ultimate price for the employees’ follies, watching

Morgan Stanley’s stock price plummet from over $80 at the start of 2007 to around $27 today.

87. For 2007, a year which ended with a bailout by the foreign sovereign wealth fund,

CIC, Defendants approved a record $16.6 billion in compensation for employees, amounting to

59% of the Company’s net revenues. This amounted to approximately $343,000 per employee.

See Christine Harper, Morgan Stanley Bonus Pool Rises As CEO Forgoes Pay, BLOOMBERG,

Dec. 19, 2007 (“Average pay per employee climbed to $343,004”). While Morgan Stanley’s

employees received a record compensation payout, the Company’s shareholders experienced

vastly different fortunes. As a consequence of the losses sustained from Morgan Stanley’s

employees’ risky gambles, Morgan Stanley’s stock price fell from around $81 at the start of

2007, to close at approximately $53, a loss of nearly 35%. This drop reflected the fact that, for

the 2007 full year, Morgan Stanley’s profit had plunged 62% to $3.44 billion from $9.10 billion

in 2006.

88. In 2008, as Morgan Stanley teetered on the brink of death due to the

rewarded the Company’s employees. For the 2008 full year, Defendants approved the payment

of $12.3 billion in compensation and benefits to employees, amounting to nearly 50% of the

Company’s net revenues, and representing an average payout of $262,000 per employee, In

contrast, Morgan Stanley’s shareholders continued to see their wealth evaporate. Starting the

27


*

year at approximately $53, Morgan Stanley’s stock price proceeded to plummet all the way

down to just $16 by the end of the year, a staggering loss of 70% for the whole of 2008 (on top

of 2007’s 35% drop).

89. Now, in 2009, Defendants propose to divert another $14.4 billion to Morgan

Stanley’s employees, representing an historic 62% of net revenues. As alleged herein, Morgan

Stanley not only registered a loss for 2009, Morgan Stanley’s losses would have been even

greater if not for the extensive bailouts by the federal government and private institutional

investors. While, for Morgan Stanley’s employees, it is now clearly “back to business” as far as

their compensation is concerned, Morgan Stanley’s shareholders have been left out in the cold.

Although Morgan Stanley’s stock price has rallied to approximately $29.60 at the end of 2009,

Morgan Stanley’s stock price is still nearly 64% less than where it started in 2007.

90. In short, Defendants have breached their fiduciary duties by repeatedly doling out

generous compensation awards, year after year, regardless of the performance of the Company.

B. For 2009, Defendants Continue To Pay Employees As If Morgan Stanley Were An Investment Bank, Even Though Morgan Stanley Is Now A Commercial Bank

Morgan Stanley’s proposed 2009 payout of $14.4 billion, or nearly 62% of net

revenues, is also excessive because it reflects a compensation practice that Defendants applied

when Morgan Stanley was an investment bank. When Morgan Stanley was an investment bank,

Morgan Stanley looked to its investment bank peers and tried to maintain a high compensation

payout in terms of average compensation per employee. However, as a result of the financial

crisis, Morgan Stanley was required to change its business structure and convert into a

commercial bank holding company.

91.

92. As Time has reported, the financial crisis has had a permanent effect on Morgan

Stanley’s business structure.

28


What a difference a financial crisis makes. Mack has spent much of the past year putting Morgan Stanley on safer ground. He has dramatically lowered borrowing and shut down the firm’s proprietary trading desk, He changed Morgan from a Wall Street dealer to a bank holding company, and more than tripled the firm’s deposit base, which is a safer source of capital. And in a major break from the bank’s 70-year history he de-emphasized investment banking as the driver of Morgan Stanley’s profits. In June, he completed the purchase of a majority stake in Salomon Smith Barney’s brokerage division, instantly turning Morgan Stanley, once an elite white-shoe institution, into the largest brokerage house in America.

* * *

Morgan . . * estimated the most it could lose on its daily trading desk on any given day was $1 14 million, or less than half of what Goldman could lose. And Morgan is in the process of eliminating nearly all of the trading it does for its own account, which means how much it risks in the market each day should continue to drop. And Morgan, unlike Goldman, seems to be really interested in building up its deposit base. Last year, the firm hired former Wachovia executive Cece Sutton to run its retail-banking division. Last month, Morgan said it would soon be adding more employees in Charlotte and New York to help expand its banking operations. Already the bank has nearly tripled its customers’ deposits to just over $100 billion.

Stephen Gandel, How the Financial Crisis Reshaped Morgan Stanley, TIME, Sept. 22,2009.

93. Similarly, at the time of Morgan Stanley’s conversion into a commercial bank

holding company, Business Week reported:

With their historic moves to become commercial banks, Goldman Sachs Group (GS) and Morgan Stanley (MS) have ducked the financial disaster that befell bankrupt Lehman Brothers (LEH) and led to panic sales for Bear Steams (JPM) and Merrill Lynch (MER), but the firms will never be the same. The swashbuckling, risk-taking, and financially ingenious investment banks that produced stellar returns for years-and turned Wall Street into a stunningly lucrative place for even the most junior staffers-are fast becoming distant memories. Instead, Wall Street observers say, these firms will now operate like conventional big banks whose bywords will be prudence, far more careful risk management. [sic] and less of the financial inventiveness that spawned the subprime crisis and its myriad toxic offspring.

* * *

The conversion of the two firms into traditional bank holding companies, agreed to on Sept. 21 by the banks and the Federal Reserve, could mean big staff changes as high-powered investment bankers and damn-the-torpedoes traders may find

29


them less rewarding places to work. Shareholders may also have to adjust to far lower gains. Analyst Michael Hecht of Bank of America (BAC) predicts “a reduction in risk appetite (and hence, also lower returns).” Annual returns on equity, which have averaged a stunning 22.1% at Goldman and 19.5% at Morgan since 1999, may drop to as little as 13%, closer to those of conventional bank holding companies, Hecht warns.

Joseph Weber, Goldman Sachs, Morgan Stanley: Playing It Safer, BUSINESSWEEK, Sept. 22,

2008.

94. Despite the Company’s historical transformation, Defendants cling to past

practice and continue to award Morgan Stanley’s employees as if Morgan Stanley were an

investment bank, paying employees a high average compensation amount per employee. Thus,

in 2009, Morgan Stanley will pay out average compensation of $241,000 per employee,

comparable to 2008’s payout of $262,000 per amount.

95. In contrast, commercial banks generally have a lower level of compensation for

employees compared to investment banks. See Eric Dash, Ailing Bunks Favor Salaries Over

Shareholders, THE NEW YORK TIMES, January 27, 2010. For instance, for 2009, JPMorgan

Chase has earmarked approximately $379,000 per employee for its investment bank employees.

However, for the same period, JPMorgan Chase has allocated $121,000 per employee for the rest

of its employees, or i t s commercial bank employees. Tomoeh Murakami Tse, JP. Morgan

Chase posts big proftt, paydays, WASH. POST, Jan. 16, 2010, at A1 1. Other predominantly

commercial banks have similar levels of compensation payouts. The Washington Post also

reported that for 2009, Bank of America is expected to average roughly $1 1 1,000 per employee

for compensation. Tomoeh Murakami Tse, Morgan Stanley, Bank of America increase employee

pay by billions, WASH. POST, Jan. 21, 2010. Also, Citigroup reported an average 2009

compensation per employee, including salary, benefits and bonuses, of only $90,000. Stephen

Bernard, Citigroup loses $7.8B in 4Q, ASSOCIATED PRESS, Jan. 19,2010.

30


96. If the compensation practices that applied when Morgan Stanley was an

investment bank were excessive, they are even more excessive now that Morgan Stanley is not

an investment bank. By failing to adjust compensation practices to reflect Morgan Stanley’s new

business model, Defendants have breached their fiduciary duties.

C. Morgan Stanley’s 2009 Performance Was Attributable To The Federal Government’s Intervention, Bailouts Provided By Private Institutions And An Accounting Manipulation

97. As set forth above, Morgan Stanley’s 2009 reported revenues, from which the

bonuses are drawn, are not the product of the performance of the Company’s executives, but are

the result of a multi-trillion dollar investment by the American taxpayers to stabilize the financial

industry. Remarking on this factor, a former managing director of Morgan Stanley recently

commented, “‘the profits these companies are distributing now as compensation are largely

based on actions that the government took to stabilize and bailout the financial system. To argue

that their profitability is due to their own hard work is simply not true.’” Lauren Pearle &

Zunaira Zaki, Big Pay at Banks, but Moneyfiom Taxpayers?, ABC NEWS, Oct. 30, 2009. In

addition, without significant capital injections from private financial institutions, first from CIC,

then from Mitsubishi, Morgan Stanley would not even have survived. Furthermore, as alleged

above, Morgan Stanley’s 2009 performance received a significant boost from the omission of the

$1.6 billion of losses for the month of December 2008, a month which in the past would have

been incorporated as part of Morgan Stanley’s 2009 results.

98, Even with all these distorting factors, Morgan Stanley reported only a timid return

to profitability in the fourth quarter of 2009. Indeed, as the New York Times reported, when one

digs deeper, “[flor all of 2009, on a diluted basis, which includes new shares that have been sold,

the bank lost 93 cents a share.” Bowley, Morgan Stanley’s Quarter Is Weak, Unlike Its Pay


award its employees a startling 62% of net revenues in compensation for 2009.

99. Accordingly, by approving the 2007 and 2009 Compensation awards, Defendants

I I

breached their fiduciary duties by failing to ensure that the compensation awards tied with the

~ long-term performance of the Company; failing to take into account the fact that Morgan

Stanley’s revenues - indeed, Morgan Stanley’s very existence - was in large attributable to the

numerous bailouts from the federal government and private financial institutions, as opposed to

any real or exceptional contributions from Morgan Stanley’s employees; and failing to properly

exercise their business judgment. Accordingly, Defendants are liable for all overpayments of

2007 and 2009 compensation to the Executive Officer Defendants.

I I

DERIVATIVE AND DEMAND ALLEGATIONS

100. Plaintiffs bring this action derivatively in the right and for the benefit of Morgan

Stanley to redress the breaches of fiduciary duty and other violations of law by Defendants.

101. Plaintiffs will adequately and fairly represent the interests of Morgan Stanley and

its shareholders in enforcing and prosecuting its rights.

102. Plaintiffs have not made a demand upon the board of Morgan Stanley because

demand is futile. The wrongdoing complained of herein was not a product of a valid exercise of

the business judgment of the Defendants, who participated in, approved, and/or permitted the

wrongs, Additionally, because the Board is beholden to Morgan Stanley and its executives, the

Board is not disinterested and lacks sufficient independence to exercise its business judgment in

setting a compensation policy.

103. Morgan Stanley’s board currently consists of the following fourteen (14)

individuals: Defendants Mack, Goman, Bostock, Bowles, Davies, Hance, Hirano, Kidder,

Nicolaisen, Noski, Olayan, Phillips, Sexton, and Tyson. Plaintiffs have not made any demand on

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I : the present Board to institute this action because such a demand would be a futile, wasteful and

useless act, for the following reasons.

104. All Defendants face a substantial likelihood of personal liability for their failure to

fulfill their fiduciary duties in good faith and thus demand on all Defendants would be futile.

105. During the Relevant Period, Defendants Bowles, Kidder, Nicolaisen, and Olayan

each served as members of the Compensation, Management Development and Succession

Committee (“Compensation Committee”). The Company’s Compensation Committee Charter

states the Compensation Committee has, inter alia, the following duties:

Review and approve corporate goals and objectives relevant to the compensation of the Chairman and CEO, evaluate his or her performance in light of those goals and objectives, and determine his or her compensation level based on that evaluation. In determining the long-term incentive component of CEO compensation, the Committee should consider the Company’s performance and relative shareholder returns, the value of similar incentive awards to counterparts at comparable companies, the awards given to the CEO in past years and such other factors as the Committee considers appropriate.

* * * Oversee the Company’s policies on structuring compensation programs for executive officers to preserve tax deductibility, and, as and when required, establish performance goals and certify that performance goals have been attained for purposes of Internal Revenue Code Section 162(m).

Review and approve any employment agreement, new hire award or new hire payment proposed to be made with or to a proposed or current executive officer.

Review and approve any severance, change-in-control or similar termination agreement, award or payment proposed to be made with or to any current or former executive officer.

Oversee the evaluation of management.

* * *

Ensure compliance with applicable aspects of the Emergency Economic Stabilization Act of 2008 with respect to fulfilling the Committee’s duties and responsibilities related to executive compensation.

33


Administer, amend, approve, and make recommendations to the Board regarding, as it determines appropriate, any present or future incentive compensation plan, equity-based plan or employee benefit plan providing that it shall be administered or amended by the Board or the Committee. The Committee is also authorized to exercise and perform any power, authority, discretion or duty of the Board or the Committee that any such plan provides shall be exercised or performed by the Board or the Committee, including without limitation to (i) issue or grant equity- based awards pursuant to such plan, (ii) authorize or reserve shares of common stock for issuance thereunder and (iii) make any such equitable anti-dilution adjustments required in the event of an equity restructuring or similar event.

Create and amend, as it determines appropriate, any trusts (including existing trusts) related to any present or future incentive compensation plan, equity-based plan or employee benefit plan providing that it shall be administered or amended by the Board or the Committee. The Committee is also authorized to exercise and perform any power, authority, discretion or duty of the Board or the Committee that any such trust provides shall be exercised or performed by the Board or the Committee.

Retain and terminate, in its sole discretion, any compensation consultant used to assist in the evaluation of CEO or senior executive compensation and to approve the consultant's fees and other retention terms.

106. The Compensation Committee Defendants failed to cany out their duties outlined

in the Compensation Committee Charter and thus face a substantial likelihood of liability for

their breach of fiduciary duties. As a result, demand upon Bowles, Kidder, Nicolaisen, and

Olayan would be futile.

107. Defendants Mack and Gorman were executives at Morgan Stanley in 2009 and

each earned substantial compensation in 2009. Both Mack and Gorman received a base salary of

$800,000, according to a Morgan Stanley Form 8-K filed on May 22,2009. In addition, Gorman

received 97,295 shares of Morgan Stanley that vest in three years, according to a Morgan Stanley

Form 8-K filed on January 20,2010. These shares are currently worth $2,605,560. The amount

of shares awarded to Goman will double if Morgan Stanley meets certain metrics relating to

return on equity and total shareholder returns. Because Mack and Gorman profited substantially

34


from Morgan Stanley’s compensation decisions, they are unable to independently consider a

demand.

108. Each non-executive director is beholden to Morgan Stanley and its executives.

As illustrated by the chart below, each non-executive director is paid a significant yearly stipend,

creating a financial incentive for these directors to retain their positions as directors, thereby

29,195 14,180 26.005

shattering any claims of independence.

67,442

Outstanding Equity Awards as of November 30,2008

Bostock Bowles Davies Kidder Nicolaisen Noski Olavan Phillips Sexton Tvson

2008 Total Compensation

$3 3 5,000 $335,000 $340.000 $375,000 $350,000 $355,000 $33 5.000 $340,000 $325.000 $345.000

2007 Total Compensation

$335,000 $335,000 $340.000 $376,733 $350,000 $3 55,000 $335.000 $340,000 $325.000 $346.733

Number of Options Exercisable Within 60 Number of Stock

Units Days

19,216 25.544 19.268 I 7.049

18.943 I 14,984 2 1.547 4.596 I 57,700

109. Defendants Hance and Hirano joined the board in 2009 and are not listed in the

chart above but will likely receive similar compensation for services performed in 2009.

110. There are numerous other social and economic relationships between the non-

employee directors and Morgan Stanley that render the Board unable to independently assess

compensation policies at Morgan Stanley*

11 1. Defendant Bostock’s son-in-law is the co-CEO of FrontPoint Partners, LLC, a

subsidiary of Morgan Stanley. Morgan Stanley’s 2009 Proxy Statement states:

In connection with the Company’s acquisition of Frontpoint Partners LLC (Frontpoint) in December 2006, a son-in-law of Mr. Bostock who was employed

35


at FrontPoint and held less than 5% of the equity interests in FrontPoint became a managing director of the Company in the Company’s asset management business and is currently the Co-CEO of FrontPoint.

Morgan Stanley, Proxy Statement, at 7 (Mar. 25,2009).

112. According to Morgan Stanley’s 2009 Proxy Statement, Bostock’s son-in-law

‘&received his pro rata share of the merger consideration (including contingent consideration that

was paid in fiscal 2008 upon satisfaction of certain conditions) [and] will receive a retention

payment in 2009 in connection with the December 2006 acquisition of FrontPoint that induced

him to become and remain a Morgan Stanley employee.” Id. Defendant Bostock is beholden to

Morgan Stanley and its executives because they could cause Bostock’s son-in-law to lose his

position at Frontpoint. As a result, demand on Bostock is futile.

113. Defendant Noski is a partner at Deloitte & Touche, which is Morgan Stanley’s

independent auditor. According to Morgan Stanley’s 2009 Proxy Statement, Morgan Stanley

paid Deloitte & Touche $51.8 million in 2008 and $47.0 million in 2007. Defendant Noski is

beholden to Morgan Stanley and its executives because they could cause the Company to cut its

ties with Deloitte & Touche thereby harming Defendant Noski’s relationship with Deloitte &

Touche. Thus, demand on Defendant Noski is futile.

114. Defendant Olayan is a senior director and executive of The Olayan Group.

Morgan Stanley conducts a significant amount of business with The Olayan Group. For

example, Morgan Stanley and The Olayan Group, among others, are owners of Bracor, a real

estate investment company that recently invested $500 million in a business center in Sa0 Paulo.

Defendant Olayan is beholden to Morgan Stanley and its executives because the Company’s

business decisions have a substantial impact on The Olayan Group. Thus, demand is futile on

Defendant Olayan.

36


115. Defendant Phillips is a president and director of Oracle and owns 3,192,500

shares of Oracle. Morgan Stanley analysts cover Oracle and their recommendations can have a

significant impact on the stock price of Oracle. For example, on January 14, 2010, Morgan

Stanley added Oracle to the Company’s “Best Idea List.” That day, the price of Oracle increased

47 cents or 1.9 percent to $25.34. Defendant Phillips is beholden to Morgan Stanley and its

executives because the Company has significant power to affect Oracle’s stock price. As a

result, demand on Defendant Phillips is futile.

116. Defendant Sexton was a former banker at Morgan Stanley from 1973 to 1995.

This long standing relationship with Morgan Stanley and its executives renders him unable to

independently assess executive compensation at Morgan Stanley. Thus, demand on Sexton is

futile.

117. Domination of the Director Defendants by management is demonstrated by the

Director Defendants’ pattern of awarding unconscionable compensation to employees year after

year. As set forth in the chart below, compensation expenses have consistently dwarfed

2006 2007 2008 2009

$13,986 $16,552 $11,052 $14,438

$7,453 $3,141 ($731) ($907)

shareholder earnings:

Total

$93,626

$25,156

$ in millions

Comp. Expens. Earnings applicable to

shareholders

common

2005

$11,313

2002

$7,9 10

$2,988 $4,939

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CAUSES OF ACTION

COUNT I AGAINST DIRECTOR DEFENDANTS FOR WASTE IN 2006,2007 AND 2009

1 18. Plaintiffs repeat and reallege each and every allegation above as if set forth in full

herein.

119. The Director Defendants are liable for waste for approving compensation in 2006,

2007 and 2009 for Morgan Stanley employees in amounts so disproportionately large in relation

to the Company’s performance and shareholder earnings as to be unconscionable.

120. In 2006, compensation was calculated based on metrics that were inflated because

Morgan Stanley overvalued its assets, thereby inflating its revenues. For 2007 and 2009,

compensation was calculated without taking into account the underlying performance of the

Company, or the real contributions of Morgan Stanley’s employees.

121. No person acting in good faith on behalf of Morgan Stanley could approve such

large amounts of compensation to Morgan Stanley’s employees.

122. Morgan Stanley and its stockholders have suffered and will continue to suffer

harm as a result of the Director Defendants’ wasteful conduct.

COUNT I1 AGAINST DIRECTOR DEFENDANTS FOR

BREACH OF THE DUTY OF LOYALTY IN 2007 AND 2009

Plaintiffs repeat and reallege each and every allegation above as if set forth in full 123.

herein.

124. Director Defendants had a fiduciary duty to continually assess Morgan Stanley’s

compensation scheme to ensure that it reasonably compensated employees and was not wasteful.

Director Defendants failed to carry out this duty in good faith and/or were 125.

beholden to executives of Morgan Stanley.

38


126. When awarding Compensation in 2007 and 2009, the Director Defendants failed

In 2009, the Director Defendants set to consider the poor performance of the Company.

compensation at levels as if Morgan Stanley was a well-performing investment bank. In reality,

Morgan Stanley had become an under-performing commercial bank.

127. In awarding compensation in 2009, Director Defendants failed to consider that a

large portion of Morgan Stanley’s “revenues” directly resulted from the US . government’s

intervention to rescue the financial system. Among other reasons, Morgan Stanley was able to

stay afloat because of a $10 billion TAW loan from the federal government. The largesse of

U.S. taxpayers, not the performance of executives, was responsible for the net revenue at Morgan

Stanley. Under these circumstances, paying record bonuses to Morgan Stanley employees is

particularly egregious.

128. By failing to properly examine Morgan Stanley’s compensation scheme in light of

these facts, Director Defendants wholly abdicated their fiduciary duty to exercise their business

judgment in setting compensation in the best interests of shareholders and favored the interests of

the Executive Officer Defendants.


harm as a result of the Defendants’ breach of fiduciary duty.

COUNT111 AGAINST DIRlECTOR DEFENDANTS FOR

BREACH OF THE DUTY OF LOYALTY IN 2006

130. Plaintiffs repeat and reallege each and every allegation above as if set forth in full

herein.

13 1. Director Defendants had a fiduciary duty to continually assess Morgan Stanley’s

compensation scheme to ensure that it reasonably compensated employees and was not wasteful.

39


132. Director Defendants failed to carry out this duty in good faith andor were

beholden to management of Morgan Stanley.

133. Morgan Stanley paid compensation in 2006 based on revenues that were inflated

due to Defendants overvaluing assets held by the Company,

134. Director Defendants breached their fiduciary duty by failing to recoup

compensation paid in 2006 when the true value of the assets was revealed.


harm as a result of the Director Defendants’ breach of fiduciary duty.

COUNT IV AGAINST EXECUTIVE OFFICER DEFENDANTS FOR

WASTE IN 2006,2007 AND 2009

136. Plaintiffs repeat and reallege each and every allegation above as if set forth in full

herein.

137. The Executive Officer Defendants are liable for waste for causing the Director

Defendants, who were at all relevant times beholden to the Executive Officer Defendants, to pay

compensation for 2006, 2007 and 2009 in amounts so disproportionately large in relation to the

Company’s performance and shareholder earnings as to be unconscionable.

138. No person acting in good faith on behalf of Morgan Stanley could cause the

Director Defendants to approve such large amounts of compensation.


harm as a result of the Executive Officer Defendants’ wasteful conduct.

COUNT V AGAINST EXECUTIVE OFFICER DEFENDANTS FOR

BREACH OF THE DUTY OF LOYALTY IN 2006,2007 AND 2009

140. Plaintiffs repeat and reallege each and every allegation set forth above, as though

fully set forth herein.

40


caused the Director Defendants, who were at all relevant times beholden to the Executive Officer

Defendants, to pay the Executive Officer Defendants compensation in 2006, 2007, and 2009 in

amounts that were unfair to shareholders and the Company.


harm as a result of the Executive Officer Defendants’ breach of fiduciary duty.

COUNT VI AGAINST EXECUTIVE OFFICER DEFENDANTS FOR

UNJUST ENRICHMENT IN 2006,2007 AND 2009

143.

fully set forth herein.

Plaintiffs repeat and reallege each and every allegation set forth above, as though

144. By their wrongful acts and omissions, the Executive Officer Defendants received

compensation fiom Morgan Stanley in 2006,2007 and 2009 that was unwarranted and excessive,

for the reasons set forth above, and therefore, by accepting such payments, the Executive Officer

Defendants were unjustly enriched at the expense of and to the detriment of Morgan Stanley.

145. Plaintiffs, as shareholders and representatives of Morgan Stanley, seek restitution

from the Executive Officer Defendants and seek an order of this Court disgorging all profits,

benefits and other compensation obtained by them, and each of them, from their wrongful

conduct and fiduciary breaches.

PRAYER FOR RELIEF

WHEREFORE, Plaintiffs demand judgment as follows:

1. Against all Defendants and in favor of the Company for the amount of damages

sustained by the Company as a result of Defendants’ breaches of fiduciary duties;

2. Directing Morgan Stanley to take all necessary actions to reform and improve its

corporate governance and internal procedures to comply with applicable laws and to protect the

41


Company and its shareholders fiom a repeat of the damaging events described herein, including,

but not limited to, putting forward for shareholder vote resolutions for amendments to the

Company’s By-Laws or Articles of Incorporation and taking such other action as may be

necessary to place before shareholders for a vote a proposal to strengthen the Board’s

supervision of operations, and develop and implement procedures for greater shareholder input

into the policies and guidelines of the Board;

3. Awarding to Morgan Stanley restitution from the Executive Officer Defendants,

and each of them, and ordering disgorgement of all profits, benefits and other compensation

obtained by the Defendants;

4. Awarding to Plaintiffs the costs and disbursements of the action, including

reasonable attorneys’ fees, accountants’ and experts’ fees, costs, and expenses; and

5 . Granting such other and further relief as the Court deems just and proper.

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. JURY DEMAND

Plaintiffs demand a trial by jury.

Dated: February 1 1,20 10 GRANT & EISENHOFER P.A.

JAY W. EISENHOFER RICHARD SCHIFFRIN MICHAEL J. BARRY HUNG G. TA MICHELE CARINO ANANDA CHAUDHURI NATALIA WILLIAMS CHRISTIAN KEENEY 485 Lexington Avenue, 29* Floor New York, NY 100 17 Tel: 646-722-8500 Fax: 646-722-8501

THE WEISER LAW FIRM, P.C. ROBERT B. WEISER BRETT D. STECKER JEFFREY J. CIARLANTO 121 N. Wayne Avenue, Suite 100 Wayne, PA 19087 Telephone: (610) 225-2677 Facsimile: (610) 225-2678

Counsel for Plaintifs

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