FINRA Arbitrators Award Damages Against Morgan Stanley In Case Alleging Customer Lacked Mental Capacity
April 11, 2023
FINRA Code of Arbitration Procedure for Customer Disputes Rule 12904: Awards provides that an award "may contain a rationale underlying the award." If you'd like some rationale with your lawsuit, FINRA offers a so-called "Explained Decision" replete with the arbitrators' "general reason(s)" for their decision; however, that's gonna cost ya extra and requires your adversary's consent. I ain't gonna pull my punches here: FINRA Rule 12904 is absurd and anti-consumer. Bad enough that customers are forced to use FINRA's arbitration forum, but, worse, a FINRA Arbitration Award often raises more questions than it answers, as demonstrated in today's featured case.
Case in Point
In the Matter of the Arbitration Between Deborah (a/k/a Debbie) Broadway, Claimant, v. Morgan Stanley Smith Barney, LLC and John Malcolm McLarty, Respondents (FINRA Arbitration Award 22-01003)
https://www.finra.org/sites/default/files/aao_documents/22-01003.pdf
In a FINRA Arbitration Statement of Claim filed in May 2022, Claimants asserted breach of contract – third-party beneficiary; violations of FINRA rules; violations of industry standards; violations of federal law; violations of state law; and negligence and breach of fiduciary duty. At the hearing, Claimant sought $999,933.07 in damages.The causes of action relate to:
[R]espondents allegedly wrongfully and unduly influencing their customer FINRA (“Customer”) who, for all practical purposes was the adoptive mother of Claimant, into making written changes to the Customer’s investment-account beneficiaries, while allegedly knowing or at least strongly suspecting that the Customer lacked the mental capacity to make said changes.
Respondent MSSB and Respondent McLarty generally denied the allegations and asserted affirmative defenses.
Award
The FINRA Arbitration Panel found Respondent MSSB liable and ordered it to pay to Claimant $153,489.04 plus interest, and $400 in filing fees. Claimant's claims against Respondent McLarty were denied.
Bill Singer's Comment
The key allegations in this FINRA arbitration were that the customer was
- "wrongfully and unduly" influenced by industry Respondents; and
- "lacked the mental capacity to make" changes to her beneficiaries.
Frankly, those are serious allegations. In response to those allegations, three FINRA arbitrators awarded over $153,000 in compensatory damages as against Respondent MSSB.
Compensation for what exactly?
The FINRA Arbitration Award doesn't say.
Why was the award about $153,000 rather than the nearly $1 million sought at the hearing by Claimant?
The FINRA Arbitration Award doesn't say.
Just exactly what did Morgan Stanley do wrong for which it was found liable?
The FINRA Arbitration Award doesn't say.
Did the arbitrators find that Respondent MSSB had "wrongfully and unduly" influenced the customer (Claimant's adoptive mother)?
The FINRA Arbitration Award doesn't say.
Did the arbitrators find that the customer "lacked the mental capacity" to make changes to her beneficiaries?
The FINRA Arbitration Award doesn't say.
Given that the FINRA Arbitration Award was rendered in favor of Claimant and against FINRA member firm MSSB, why did the Panel assess $8,855 of the $14,950 in Hearing Session Fees against the prevailing party Claimant?
The FINRA Arbitration Award doesn't say.
As the above Q&A demonstrates, this FINRA Arbitration Award raises many questions for which there are no answers. That's not a good outcome. That's not fair to similarly situated industry customers faced with similar fact patterns. Ultimately, this is yet another example of lousy quality control from FINRA.
When it comes to FINRA Arbitration Awards, applicable Rule 12904 only provides that the document "may contain a rationale underlying the award." May? How's that?? May??? Of course, FINRA does offer a so-called "Explained Decision" replete with the arbitrators' "general reason(s)" for their decision; however, that will require "all parties jointly request an explained decision," and, further, it's gonna cost ya extra. For me, that's the world upside down. The default should be an Explained Decision at no extra charge. If the parties unanimously prefer a non-explained decision, then that should be permitted if all parties request.
SIDE BAR: FINRA Code of Arbitration Procedure for Customer Disputes Rule 12904: Awards
(a) All awards shall be in writing and signed by a majority of the arbitrators or as required by applicable law. Such awards may be entered as a judgment in any court of competent jurisdiction.
(b) Unless the applicable law directs otherwise, all awards rendered under the Code are final and are not subject to review or appeal.
(c) The Director will serve the award on each party, or the representative of the party.
(d) The panel shall endeavor to render an award within 30 business days from the date the record is closed.
(e) The award shall contain the following:
(1) The names of the parties;
(2) The name of the parties' representatives, if any;
(3) An acknowledgement by the arbitrators that they have each read the pleadings and other materials filed by the parties;
(4) A summary of the issues, including the type(s) of any security or product, in controversy;
(5) The damages and other relief requested;
(6) The damages and other relief awarded;
(7) A statement of any other issues resolved;
(8) The allocation of forum fees and any other fees allocable by the panel;
(9) The names of the arbitrators;
(10) The dates the claim was filed and the award rendered;
(11) The number and dates of hearing sessions;
(12) The location of the hearings; and
(13) The signatures of the arbitrators.
(f) The award may contain a rationale underlying the award.
(g) Explained Decisions
(1) This paragraph (g) applies only when all parties jointly request an explained decision.
(2) An explained decision is a fact-based award stating the general reason(s) for the arbitrators' decision. Inclusion of legal authorities and damage calculations is not required.
(3) Parties must make any request for an explained decision no later than the time for the prehearing exchange of documents and witness lists under Rule 12514(d).
(4) The chairperson of the panel will be responsible for writing the explained decision.
(5) The chairperson will receive an additional honorarium of $400 for writing the explained decision, as required by this paragraph (g).