“In the years after the stock market peaked, Morgan Stanley worked overtime to persuade regulators that its research was fair and free of investment-banking-related conflicts. But the strategy failed, and the firm agreed to pay $50 million in fines last April to settle regulatory accusations that it issued biased research,” writes Gretchen Morgenson in today’s Wall Street Journal.

“Now the firm is working equally hard to convince arbitrators hearing cases brought by aggrieved investors that the research settlement it struck is not relevant and should not be considered. This strategy, too, has failed, at least in a ruling made public yesterday by a NASD arbitration panel.”

“The case was brought by Joseph Kenith, a retired engineer living in Florida who was a Morgan Stanley client from 1996 to 2001. Last May, the arbitrators hearing the case ruled that Morgan Stanley must pay $100,000 to Mr. Kenith. They found that the firm was liable because it had failed to supervise Mr. Kenith’s broker and because of the findings in the research settlement that the firm had signed with regulators.”

“Morgan Stanley immediately objected to the arbitrators’ inclusion of the research settlement as part of the basis of its award. The firm appealed to the panel to strike the reference to it in the award. Yesterday, the panelists declined to do so. Now the case is in federal court in the Southern District of Florida.”

“Morgan Stanley declined to comment on its efforts to get the arbitrators to rewrite the justification for their award.”

“Bret Gallaway, a spokesman, said, ‘There was no claim ever made against Morgan Stanley for liability pursuant to the research settlement.’ The firm is not asking to modify the award, which it has already paid.”

“The Kenith case illustrates what a problem the research settlement is posing, not just to Morgan Stanley but all Wall Street firms. While the brokerage firms agreeing to the settlement neither admitted nor denied the regulators’ findings of tainted research, arbitrators appear to be using the settlement documents even when they hear cases that do not hinge on research.”

“When he filed suit against Morgan Stanley in 2001, Mr. Kenith, 74, sought $3.3 million from the firm. This amount represented the value of his account at the market’s peak, said Darren C. Blum, a lawyer in Plantation, Fla., who represented Mr. Kenith.”

“The $100,000 award may seem like small potatoes compared with the amount Mr. Kenith sought, but it is significant. Mr. Kenith did not lose money in his years with Morgan Stanley and, unlike many former clients who are suing their brokers, he was a sophisticated investor. Indeed, he wound up making about $500,000 investing with Morgan Stanley from 1996 to 2001, Mr. Blum said.”