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Morgan Stanley Rebuked on Disclosure

Stocks in this article: MS BAC C JPM GS

NEW YORK ( TheStreet) -- Morgan Stanley (MS) drew criticism from a pair of well-known Wall Street commentators, including an analyst who is a former treasurer of the firm, for choosing not to disclose a tax windfall that accounted for a quarter of the company's second-quarter earnings.

"It strikes me that if you're going to have a big tax thing like this it would be easy enough to file an 8-K. Come on, it's a big deal; it's a one-time event; it is arguably material for the stock, at least in the quarter," said Brad Hintz, analyst at Bernstein Research who worked at Morgan Stanley for 10 years, including a stint as treasurer from 1992-1996.

Morgan Stanley's second-quarter earnings report, which came out before Wednesday's opening bell, noted the company earned $345 million, or nearly a quarter of its $1.4 billion in profit for the period, due to "a tax benefit...associated with the remeasurement of tax reserves based on the status of federal and state examinations." A spokesman declined to address Hintz's criticism.

Robert Willens, a highly-regarded corporate tax consultant at Robert Willens LLC says companies find out about such rulings whenever the audit is completed. Unless that happened to be on the last day of the quarter, Morgan Stanley would have had a chance to file an 8-K, the Securities and Exchange form used to disclose material events to investors.

"I think an 8-K would have made a lot of sense here," Willens said.

Overall, Morgan Stanley's profit of 80 cents a share bested the average analysts' estimate compiled by Thomson Reuters of 46 cents. And even without the tax benefit, earnings would have been 60 cents per share, comfortably above the consensus view.

Bernstein's Hintz argues that the beat is further diluted by lower compensation costs, which added eight cents per share to earnings. Therefore, Hintz concludes, the actual beat was a nickel versus the 47 cent estimate he was using.

"Nothing wrong with a five-cent beat," Hintz said, before continuing to fume about the tax issue.

The outspoken comments by Hintz are especially notable since Hintz is a longtime Morgan Stanley bull. He rated Morgan Stanley "outperform" with a $38 price target in a July 12 report.

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