updated 6/22/2005 9:18:53 AM ET 2005-06-22T13:18:53

Profit at embattled Wall Street brokerage Morgan Stanley fell 24 percent in the second quarter, the company announced Wednesday, due to difficult market conditions and higher legal expenses in connection with high-profile lawsuits.

The company added it is still reviewing a potential spin-off of its Discover Financial Services credit card division — a low-margin business that nonetheless provides Morgan Stanley with strong cash flow.

For the quarter ending May 31, Morgan Stanley posted earnings of $928 million, or 86 cents per share, compared to $1.22 billion, or $1.10 per share, in the second quarter a year ago. Net revenues fell 9 percent to $6 billion, compared to $6.8 billion last year.

The company was expected to earn 92 cents per share on $5.7 billion in revenues, according to analysts surveyed by Thomson Financial.

Morgan Stanley said its legal expenses totaled $140 million for the quarter, mostly due to its defense in the collapse of Italy’s Parmalat dairy company. A number of U.S. investment banks have been investigated for their alleged role in the financial scandal at the Italian firm.

The company did not increase its legal reserve for damages awarded last month to billionaire investor Ronald Perelman, who won a $1.45 billion judgment against Morgan Stanley after alleging the company did not disclose the true financial state of its client, Sunbeam Corp., when Perelman invested.

Morgan Stanley said June 13 that its earnings for this quarter would be 15 percent to 20 percent lower than the $1.10 per share the company earned in the second quarter of 2004. The announcement came the same day that Chairman and Chief Executive Phil Purcell announced he would retire as soon as a successor was named.

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