Morgan Stanley ( MS) is in hot water with regulators for using the Sept.11 terror attack as an excuse for not producing documents in customer arbitrations.

The NASD is suing the big Wall Street firm claiming it falsely told investors and their lawyers that critical emails were lost in the terror attacks that destroyed the World Trade Center complex, where Morgan Stanley had maintained a big operation.

Regulators allege the claim was a false because the firm was able recover most of those emails within days of the attack.

The NASD decided to sue Morgan Stanley after it was unable to reach a settlement with the firm.

The NASD claims that Morgan Stanley failed to provide pre-September 11 emails to investors and regulators in numerous proceedings from October 2001 through March 2005. Regulators "also charged that Morgan Stanley falsely claimed in many of those proceedings that such email had been destroyed.''

Four years ago, TheStreet.com first reported that Morgan Stanley was hiding behind the 9/11 terror attacks. , citing the destruction of broker commission records stored on computers at 5 World Trade Center as a defense in a number of customer arbitration proceedings.

In fact, in one arbitration case that was pending back in 2002, a Morgan Stanley executive filed an affidavit saying it was technically possible for the firm to recover some of the lost commission records, but that doing so would be difficult and time-consuming. In the affidavit, a copy of which was obtained by TheStreet.com, the brokerage contends it "has no business need to retrieve this data," other than to assist its adversaries in litigation.

"It is essential that firms comply with discovery obligations in arbitration proceedings and respond fully and truthfully to regulatory requests," said James S. Shorris, the NASD's head of enforcement. "In this case, we charge that Morgan Stanley's conduct fell far below those standards, with the firm repeatedly making false statements about the existence of important evidence, and failing to provide that evidence in numerous proceedings.

This is not the first time that Morgan Stanley has run into trouble with regulators over allegations it failed to produce requested emails.

Earlier this year, the SEC ordered Morgan Stanley pay a $15 million fine to settle allegations that the investment firm had repeatedly failed to turn internal emails requested by regulators. In that matter, the SEC charged Morgan Stanley failed to produce "tens of thousands of emails'' that were repeatedly demanded by regulators over a five-year period, beginning in 2000. The SEC said the firm's actions "compromised'' the two investigations.

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