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Wall St. company warns on earnings

Spinoff of Discover will likely take toll, CEO Purcell says

NEW YORK -- Morgan Stanley's bottom line will likely suffer after the spinoff of Discover Financial Services and the division's strong cash flow, but the company is focused on expanding its other businesses to compensate, chairman and chief executive Philip Purcell said yesterday before a standing-room-only crowd of investors.

Purcell, speaking at UBS's Global Financial Services Conference, downplayed the recent high-level executive departures that have fed criticism of his leadership. Five of the 14 members of Morgan Stanley's executive committee left the company over the past six weeks.

''When you choose some people in a new management structure, you don't choose others, and in the process we lost some valued members of our management team," Purcell said. ''We are very happy with the choices that we've made."

The departures, which included highly regarded investment banker Joseph Perella, added to calls for Purcell's dismissal from a group of eight former executives and shareholders, who had already been blaming Purcell for what they felt was mediocre performance and a lagging stock price.

This dissident group has proposed replacing Purcell with one of their number, former president Robert Scott, and has been courting institutional investors to back their plans for the company.

Purcell and his two new copresidents, Zoe Cruz and Stephen Crawford, said they were working to improve employee morale and stem the tide of departures, and though turnover would remain lower than that of other Wall Street firms, more losses were likely.

''We will have more departures," Crawford said. ''This is the season and the competition for talent is intense, but we can and will thrive in spite of the losses."

Purcell's warning about second-quarter earnings and the loss of Discover's revenues pressured Morgan Stanley's stock, which fell 2.6 percent yesterday in trading on the New York Stock Exchange. The stock has traded between $46.54 and $60.51 over the past 52 weeks.

In his first major address to investors since the furor over his leadership erupted in March, Purcell said the firm's strategy remains sound, but admitted that the company's return on equity has been ''middle of the pack" -- unusual for a company that has traditionally led Wall Street's brokerage houses in most measures of success.

Purcell acknowledged that the company's returns have lagged over the past few years as it made investments to increase its size and reach, but that the new leadership would focus on improving the company's bottom line.

''I give you my assurance that every decision we make is focused on our return to premium status in relation to our peers," Purcell said. However, Purcell added that the current quarter would prove difficult given Wall Street's generally poor performance.

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