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Morgan Stanley Hit With Punitive Damages In Customers Arbitration
February 4, 2016
Three public customers sued FINRA member firm Morgan Stanley Smith Barney for $1.28 million in damages. After arguing their case before a FINRA Arbitration Panel, the customers emerged victorious. The arbitrators not only awarded punitive damages but also chastised Morgan Stanley for having a hiring process that failed to "vet" the purportedly responsible but unnamed registered representative. Notwithstanding all of that, BrokeAndBroker.com Blog's Bill Singer is troubled by the FINRA Arbitration Decision. Bill offers you a direct link to the FINRA Arbitration Decision and asks you to judge for yourself. Is it time for industry reformers and public-customer advocates to demand more?
Case In Point
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in May 2014 and as amended thereafter, public customer Claimants Artek Media, Levkov, and Lewis asserted that Respondent Morgan Stanley Smith Barney's agent ran a Ponzi scheme, took personal loans from the customers, and recommended unsuitable investments. Claimants alleged:
- wrongful conduct;
- breach of fiduciary duty;
- breach of written contract;
- constructive fraud;
- fraud by misrepresentation and omission;
- failure to supervise; and
- violation of state and federal securities laws, NASD Rules of Fair Practice and NYSE Rules.
Claimants sought at least $1.28 million in general/compensatory damages; punitive damages, costs, interest, rescission, and attorneys' fees. As of the close of the arbitration hearing, however, Claimants refined their damages claims to $398,508.02 for Claimant Artek and Levko; and $517,131.56 for Claimant Lewis. In the Matter of the FINRA Arbitration Between Artek Media International Inc., Maxim Levkov, and Marlene F. Lewis, Claimants, vs. Morgan Stanley Smith Barney, LLC,, Respondent (FINRA Arbitration Case Number: 14-01604, February 1, 2016).
Respondent Morgan Stanley Smith Barney generally denied the allegations and asserted various affirmative defenses.
Award
The FINRA Arbitration Panel found Respondent Morgan Stanley Smith Barney liable to and ordered it to pay a $600 reimbursement for initial FINRA claim filing fee to all Claimants and to pay:
Claimants Artek Media and Levkov:
- $150,000 in compensatory damages
- $37,500 in punitive damages per California Civil Code § 3294(a)
- 5% per annum interest from May 20, 2014, until the above awards are paid in full
Claimant Lewis:
- $510,000 in compensatory damages
- $127,500 in punitive damages per California Civil Code § 3294(a)
- 5% per annum interest from May 20, 2014, until the above awards are paid in full
SIDE BAR: California Civil Code § 3294. Exemplary damages; when allowable, definitions(a) In an action for the breach of an obligation not arising from contract, where it is proven by clear and convincing evidence that the defendant has been guilty of oppression, fraud, or malice, the plaintiff, in addition to the actual damages, may recover damages for the sake of example and by way of punishing the defendant.(b) An employer shall not be liable for damages pursuant to subdivision (a), based upon acts of an employee of the employer, unless the employer had advance knowledge of the unfitness of the employee and employed him or her with a conscious disregard of the rights or safety of others or authorized or ratified the wrongful conduct for which the damages are awarded or was personally guilty of oppression, fraud, or malice. With respect to a corporate employer, the advance knowledge and conscious disregard, authorization, ratification or act of oppression, fraud, or malice must be on the part of an officer, director, or managing agent of the corporation.(c) As used in this section, the following definitions shall apply:(1) "Malice" means conduct which is intended by the defendant to cause injury to the plaintiff or despicable conduct which is carried on by the defendant with a willful and conscious disregard of the rights or safety of others.(2) "Oppression" means despicable conduct that subjects a person to cruel and unjust hardship in conscious disregard of that person's rights.(3) "Fraud" means an intentional misrepresentation, deceit, or concealment of a material fact known to the defendant with the intention on the part of the defendant of thereby depriving a person of property or legal rights or otherwise causing injury.(d) Damages may be recovered pursuant to this section in an action pursuant to Chapter 4 (commencing with Section 377.10) of Title 3 of Part 2 of the Code of Civil Procedure based upon a death which resulted from a homicide for which the defendant has been convicted of a felony, whether or not the decedent died instantly or survived the fatal injury for some period of time. The procedures for joinder and consolidation contained in Section 377.62 of the Code of Civil Procedure shall apply to prevent multiple recoveries of punitive or exemplary damages based upon the same wrongful act.(e) The amendments to this section made by Chapter 1498 of the Statutes of 1987 apply to all actions in which the initial trial has not commenced prior to January 1, 1988.
Curious Admonition
Finally, in rendering their award, the Arbitrators asserted that:
Bill Singer's CommentThe Panel found that Respondent's hiring process was not sufficient to vet the financial advisor who was the cause of the losses incurred by Claimants.
Truly, my soul aches and I have grown tired of having to report about these FINRA Arbitration Decisions lacking adequate "content and context," as I have coined the phrase. To be clear and fair, I am NOT blaming the arbitrators for such absurdly incomplete Decisions. To be clear and fair, however, I am blaming FINRA for a lack of quality control and what comes off as a cynical stance on the substantive nature of its published arbitration decisions.
In Artek Media, we have three public customers filing an arbitration -- perhaps you would allow me to use the more inflammatory term: lawsuit -- against one of the largest FINRA member firms. The customers' initial claim of at least $1.28 million is significant by most measures, even if it may amount to nothing more than the daily cost of toilet paper for FINRA or Morgan Stanley Smith Barney. You may dismiss my reference to the dollar amount of the customers' claims, and your position would have merit if you argued that customer attorneys are legendary for multiplying and adding zeros to the actual damages sustained (if at all) by their clients. Fair enough . . . except, in this arbitration, you can't get around the fact that the arbitrators awarded a total of $825,000 in compensatory and punitive damages plus 5% interest.
Under the applicable California Civil Code § 3294(a), the arbitrators found that Respondent Morgan Stanley Smith Barney's conduct rose to the level of "oppression, fraud, or malice." Not only do those three terms sound shocking but they become even more so after you consider the specific statutory definitions: [Ed: yellow highlighting added]:
(1) "Malice" means conduct which is intended by the defendant to cause injury to the plaintiff or despicable conduct which is carried on by the defendant with a willful and conscious disregard of the rights or safety of others.(2) "Oppression" means despicable conduct that subjects a person to cruel and unjust hardship in conscious disregard of that person's rights.(3) "Fraud" means an intentional misrepresentation, deceit, or concealment of a material fact known to the defendant with the intention on the part of the defendant of thereby depriving a person of property or legal rights or otherwise causing injury.
Summing up Artek Media, iwe have three customers alleging over a million dollars in damages, and those customers walk away with an award of $825,000 plus interest. The FINRA arbitrators found that Respondent Morgan Stanley Smith Barney engaged in conduct that would likely be characterized as despicable and/or intentionally dishonest and/or deceitful and/or calculated to conceal material facts. Moreover, the arbitrators chastized the member firm by noting that Morgan Stanley effectively failed to "vet the financial advisor who was the cause of the losses . . ."
Now . . . do me and yourself a favor, please view a copy of the full-text FINRA Arbitration Decision at:
While you're clicking on the link that I have provided, ask yourself if FINRA could have made the process of locating this decision any more cumbersome. I suspect that you will not be able to pull up the decision simply by clicking on the link. No, you will likely have to agree to FINRA's terms of use and then try to obtain a direct link. Even after agreeing to terms, it is often difficult to directly obtain access to the linked decision and many users are presented with over 50,000 results! You may prefer to fill in the FINRA online form as if the so-called direct link I list above didn't exist. If necessary, simply enter the case name and/or docket number at the start of your search. Good luck!
Now, follow along with me and try to answer the following questions by referencing the FINRA Arbitration Decision:
- What were the specific securities and transactions at issue?
- How were the awarded damages calculated by the arbitrators?
- Who was the registered representative/financial advisor assigned to handle the accounts?
- What trades, if any, were allegedly unsuitable?
- What were the substantive defenses raised at the hearing by Morgan Stanley Smith Barney?
- On which causes of action did the FINRA Arbitration Panel predicate liability?
- What was Morgan Stanley Smith Barney's "hiring process" and in what way was it found inadequate to properly vet the unnamed registered representative?
- Given the award of punitive damages and the specific finding of an inadequate hiring process, did the arbitrators refer this matter to FINRA for a regulatory investigation?
- Given the publication of this FINRA Arbitration Award, will FINRA institute a regulatory investigation?
Ultimately, the public has a right to be informed about examples of the industry's misconduct and to be educated as to the warning signs of investment fraud. The industry has a right to be educated as to better practices and policies, which could be derived from a meaningful discussion of the substance of customers' allegations, the defenses raised by industry respondents, and the rationale of the arbitrators.
Although I fully appreciate and respect the right to privately contract for alternative dispute resolution, the reality is that you simply cannot open a brokerage account on Wall Street with most (if not all) FINRA member firms without being forced to arbitrate your disputes at FINRA, which, frankly, is a member organization and the members are all brokerage firms such as Morgan Stanley Smith Barney. That exclusive franchise imposes some onerous obligations upon FINRA, not the least of which should be to ensure adequate "content and context" in its Arbitration Decisions.