CLIENT, WHO HOLDS A FAILED AUCTION RATE SECURITY POSITION THAT SHE PURCHASED FROM ANOTHER BROKER-DEALER APPROXIMATELY SIX YEARS AGO, AND THEN TRANSFERRED WITH HER INVESTMENT REPRESENTATIVE TO LEHMAN BROTHERS IN OR ABOUT 2004, SENT AN EMAIL TO THE INVESTMENT REPRESENTATIVE STATING THAT THE RISK ASSOCIATED WITH AUCTION RATE SECURITIES WAS NOT SUFFICIENTLY DISCLOSED AT THE TIME OF HER PURCHASE. NOTABLY, TWO DAYS LATER THE CLIENT SENT A FOLLOW UP EMAIL STATING THAT SHE HAD NOT INTENDED FOR THE FIRM TO INTERPRET HER CORRESPONDENCE AS A COMPLAINT, BUT RATHER, AS AN EXPRESSION OF HER FRUSTRATION WITH THE ILLIQUIDITY OF THE AUCTION RATE MARKETS IN GENERAL. SHE FURTHER STATED IN WRITING, THAT TO THE EXTENT HER CORRESPONDENCE HAD BEEN DEEMED A COMPLAINT, THE FIRM SHOULD CONSIDER IT WITHDRAWN.

UNSPECIFIED BUT ESTIMATED TO EXCEED MINIMUM FILING REQUIREMENTS.

ON JUNE 7, 2000, I RECEIVED VERBAL INSTRUCTIONS FROM [CUSTOMER] TO SELL 1,200 OF THE 2,600 FREEMARKETS,INC. (FMKT) SHARES THAT [CUSTOMER] HAD IN HER ACCOUNT AS A RESULT OF HER JANUARY 2000 EXERCISE OF OPTIONS SHE HAD RECEIVED FROM FMKT. MORGAN STANLEY'S JUNE 2000 MONTHLY STATEMENT TO [CUSTOMER] CONFIRMED THE SALE OF THE 1,200 SHARES. THEREAFTER, MORGAN STANLEY SENT HER MONTHLY STATEMENTS THAT INDICATED THAT SHE CONTINUED TO HOLD 1,400 SHARES. ON FEBRUARY 26, 2001, MORGAN STANLEY RECEIVED A LETTER (DATED FEBRUARY 21, 2001) FROM [CUSTOMER] IN WHICH SHE ASSERTS THAT I FAILED TO SELL ALL OF THE SHARES THAT SHE HAD EXERCISED IN JANUARY 2000 AND, THEREFORE, FAILED TO SELL A SUFFICIENT AMOUNT OF SHARES TO DISQUALIFY HER FROM ALTERNATIVE MINIMUM TAX LIABILITY.

$215,000.00

$60,000.00

AFTER INVESTIGATION, MORGAN STANLEY DETERMINED THAT I HAD ACTED APPROPRIATELY IN ALL MATERIAL RESPECTS WITH REGARD TO EXECUTING THE JUNE 2000 ORDER I RECEIVED FROM [CUSTOMER] ON THIS NON-DISCRETIONARY ACCOUNT. INDEED, IN DECEMBER 2000, I CONTACTED [CUSTOMER] BY ELECTRONIC MAIL AND TELEPHONE TO REMIND HER THAT SHE CONTINUED TO OWN 1,400 SHARES WHICH SHE MIGHT WANT TO CONSIDER SELLING PRIOR TO THE END OF THE CALENDAR YEAR. [CUSTOMER], HOWEVER, DID NOT CONTACT ME BY THE END OF THE YEAR TO SELL SUCH STOCK. MORGAN STANLEY INVESTIGATED THIS MATTER AND BELIEVES THAT NEITHER MORGAN STANLEY NOR I IS RESPONSIBLE FOR ANY FINANCIAL OR TAX LOSSES THAT [CUSTOMER] MAY EXPERIENCE AS A RESULT OF HER INSTRUCTION TO SELL 1,200 SHARES RATHER THAN 2,600 SHARES OF FMKT STOCK IN THE CALENDAR YEAR 2000. HOWEVER, TO AVOID THE TIME, BUSINESS DISRUPTION, EFFORT, AND EXPENSE OF PROTRACTED ARBITRATION, MORGAN STANLEY AND [CUSTOMER] AGREED TO SETTLE THIS MATTER FOR $60,000. THE ENTIRE SETTLEMENT AMOUNT WILL BE PAID BY MORGAN STANLEY AND NO PORTION WILL BE PAID BY ME PERSONALLY.