http://www.nytimes.com/2003/05/01/business/01CND-SEC.html S.E.C. Chastises Morgan Stanley Chief By FLOYD NORRIS he chairman of the Securities and Exchange Commission has chastised the chief executive of Morgan Stanley and warned that Morgan Stanley could face further legal action if it continues to deny it acted badly in the research scandal. The blistering letter from William H. Donaldson was released this morning, a day after The New York Times reported that Phillip J. Purcell, Morgan Stanley's chief executive, told a conference of institutional investors that, "I don't see anything in the settlement that will concern the retail investor about Morgan Stanley." He was referring to the settlement that required Morgan Stanley to pay $50 million, without admitting or denying charges filed by the S.E.C. It was part of a settlement with numerous Wall Street firms. Mr. Donaldson, in a letter dated April 30, said he was "deeply troubled" by the report in The Times, and had decided to write even though Mr. Purcell had already discussed the article with Stephen M. Cutler, the S.E.C.'s director of enforcement. "First, your statements reflect a disturbing and misguided perspective on Morgan Stanley's alleged misconduct," Mr. Donaldson wrote. "The allegations in the commission's complaint against Morgan Stanley are extremely serious. They include charges that Morgan Stanley paid other firms to provide research coverage, compensated its research analysts, in part, based on the degree to which they helped generate investment banking business, offered research coverage by its analysts as a marketing tool to gain investment banking business and failed to establish adequate procedures to protect research analysts from conflicts of interests. "In light of these charges," Mr. Donaldson continued, "your reported comments evidence a troubling lack of contrition and lead me to wonder about Morgan Stanley's commitment" to complying with the law. Mr. Donaldson noted that the settlement required Morgan Stanley not to deny the allegations, and added that that requirement applied to Mr. Purcell. "I caution you that the commission would regard a violation of that obligation as seriously as a failure to comply with any other term of the settlement," the chairman added. Ray O'Rourke, a spokesman for Mr. Purcell, did not immediately return a telephone call today. The settlement with the S.E.C. and with Elliott Spitzer, the New York attorney general, had revealed that Morgan Stanley paid $2.7 million to other Wall Street firms to get them to provide research on companies whose initial public offerings were underwritten by Morgan Stanley. Mr. Purcell, asked about that on Tuesday, told a reporter that everything about those payments had been disclosed. "The issuer asked for it so that they could get more coverage," he said. "The $2.7 million went to pay firms for independent research. We didn't make the decision." On Tuesday, Mr. O'Rourke said that "Mr. Purcell was clearly and only referring to the fact that, as the S.E.C.'s complaint states, the issuers' registration statements and other offering documents disclosed both the other banks as part of the underwriting syndicate and as receiving payments. What the complaint charged was that payment for research was not specifically disclosed."