Morgan Stanley 2009 Annual Report Download - page 75

Legal, Regulatory and Tax Contingencies.
In the normal course of business, the Company has been named, from time to time, as a defendant in various
legal actions, including arbitrations, class actions and other litigation, arising in connection with its activities as a
global diversified financial services institution. Certain of the actual or threatened legal actions include claims for
substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. In some
cases, the issuers that would otherwise be the primary defendants in such cases are bankrupt or in financial
distress.
The Company is also involved, from time to time, in other reviews, investigations and proceedings (both formal
and informal) by governmental and self-regulatory agencies regarding the Company’s business, including,
among other matters, accounting and operational matters, certain of which may result in adverse judgments,
settlements, fines, penalties, injunctions or other relief.
Reserves for litigation and regulatory proceedings are generally determined on a case-by-case basis and represent
an estimate of probable losses after considering, among other factors, the progress of each case, prior experience
and the experience of others in similar cases, and the opinions and views of internal and external legal counsel.
Given the inherent difficulty of predicting the outcome of such matters, particularly in cases where claimants
seek substantial or indeterminate damages or where investigations and proceedings are in the early stages, the
Company cannot predict with certainty the loss or range of loss, if any, related to such matters, how such matters
will be resolved, when they will ultimately be resolved or what the eventual settlement, fine, penalty or other
relief, if any, might be.
The Company is subject to the income and indirect tax laws of the U.S., its states and municipalities and those of
the foreign jurisdictions in which the Company has significant business operations. These tax laws are complex
and subject to different interpretations by the taxpayer and the relevant governmental taxing authorities. The
Company must make judgments and interpretations about the application of these inherently complex tax laws
when determining the provision for income taxes and the expense for indirect taxes and must also make estimates
about when in the future certain items affect taxable income in the various tax jurisdictions. Disputes over
interpretations of the tax laws may be settled with the taxing authority upon examination or audit. The Company
regularly assesses the likelihood of assessments in each of the taxing jurisdictions resulting from current and
subsequent years’ examinations, and tax reserves are established as appropriate.
The Company establishes reserves for potential losses that may arise out of litigation and regulatory proceedings
to the extent that such losses are probable and can be estimated in accordance with the requirements for
accounting for contingencies. The Company establishes reserves for potential losses that may arise out of tax
audits in accordance with accounting for income taxes. Once established, reserves are adjusted when there is
more information available or when an event occurs requiring a change. Significant judgment is required in
making these estimates, and the actual cost of a legal claim, tax assessment or regulatory fine/penalty may
ultimately be materially different from the recorded reserves, if any.
See Notes 11 and 20 to the consolidated financial statements for additional information on legal proceedings and
tax examinations.
Special Purpose Entities and Variable Interest Entities.
The Company’s involvement with SPEs consists primarily of the following:
• Transferring financial assets into SPEs;
• Acting as an underwriter of beneficial interests issued by securitization vehicles;
• Holding one or more classes of securities issued by, or making loans to or investments in, SPEs that hold
debt, equity, real estate or other assets;
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