UPDATE: Federal Court Confirms Multi-Million Dollar FINRA Arbitration Award for Charles Schwab Against Morgan Stanley
November 6, 2023
Ya had layoffs at Morgan Stanley. Ya got layoffs at Charles Schwab. The axe has fallen, is falling, and will fall all over Wall Street. While the big boys are trimming their ranks, they're still suing former employees. Sure -- there are times when the recently departed did so in the wrong way and should be sued. I'm not gonna argue against that. On the other hand, it's hard to blame folks for seeing the handwriting on the wall and wanting to get out while the gettin' is still good. All of which makes me laugh when the industry's employers talk about loyalty and unfair competition. Oh well, another day on Wall Street and another lawsuit.
2019 FINRA Arbitration Claims
In a FINRA Arbitration Statement of Claim filed in April 2019, FINRA member firm Claimant Charles Schwab & Co. asserted "breach of contract; misappropriation of trade secrets (Defend Trade Secrets Act, 18 U.S.C. § 1836 et seq. and the New Jersey Trade Secrets Act, N.J.S.A. 56:15-1); breach of duty of loyalty; tortious interference with contracts and with prospective business relations; unfair competition in violation of N.J.S.A 56:4-1; aiding and abetting and participation in breach of duty of loyalty and other unlawful conduct; and civil conspiracy." In the Matter of the Arbitration Between Charles Schwab & Co., Inc, Claimant, v. Morgan Stanley, Christopher Robert Armstrong, Randall Brian Kiefner, Respondents (FINRA Arbitration Award 19-00948 / February 27, 2023)
https://www.finra.org/sites/default/files/aao_documents/19-00948.pdf
Respondent Morgan Stanley and associated person Respondent Armstrong and associated person Kiefner (Armstrong and Kiefner herein referred to as the "AP Respondents") generally denied the allegations, and asserted affirmative responses.
Cross Claims and Counter Claims
Morgan Stanley filed a Cross-Claim against the AP Respondents asserting "abuse of process, and attorneys' fees."
AP Respondents filed a Counterclaim against Claimant Schwab seeking the expungement of their Form U5s. Also, AP Respondents filed a Cross-Claim against Morgan Stanley asserting "tortious interference with an actual business relationship and contract; tortious interference with a prospective business relationship and contract; breach of contract; breach of covenant of good faith and fair dealing; promissory estoppel; contribution and indemnity; civil conspiracy; defamation; and expungement of Form U5."
FINRA Arbitration Award
The FINRA Arbitration Award found as follows:
1. Respondents are jointly and severally liable for and shall pay to Claimant the sum of $3,026,485.44 in compensatory damages.
2. Respondent Morgan Stanley is liable for and shall pay to Claimant the sum of $3,026,485.44 in punitive damages pursuant to Federal and Florida law, and New Jersey Trade Secrets Statutes (DTSA, Section 1836; FL-UTSA, Section 688.004; NJ-UTSA, Section 56:15-4) and New Jersey’s Unfair Competition Statute (N.J.S.A. Section 56:4-2).
3. Respondents are jointly and severally liable for and shall pay to Claimant the sum of $104,833.89 in costs.
4. Respondents are jointly and severally liable for and shall pay to Claimant the sum of $1,136,459.08 in attorneys’ fees pursuant to Defend Trade Secrets Act of 2016, DTSA, Section 1836; FL-UTSA, Section 688.005; NJ-UTSA, Section 56:15-6, and as provided for in Armstrong and Kiefner’s Agreements with Claimant. (Florida and New Jersey Uniform Trade Secret Act).
5. Morgan Stanley is liable for and shall pay to Christopher Robert Armstrong the sum of $2,850,900.00 in compensatory damages.
6. Morgan Stanley is liable for and shall pay to Randall Brian Kiefner the sum of $1,173,900.00 in compensatory damages.
7. Morgan Stanley is liable for and shall pay to Christopher Robert Armstrong and Randall Brian Kiefner the sum of $672,399.00 in attorneys’ fees. Attorneys’ fees are awarded as Morgan Stanley promised to engage legal counsel and to “cover everything” if Claimant sued. Attorneys’ fees are awarded also pursuant to Revised Uniform Arbitration Act (RUAA) Section 21(b); AAA Commercial Rule 49.; R-49 (d)(ii).
8. Morgan Stanley is liable for and shall pay to Christopher Robert Armstrong and Randall Brian Kiefner the sum of $35,371.76 in costs.
9. Morgan Stanley’s Cross-Claim against Christopher Robert Armstrong and Randall Brian Kiefener is denied.
10.The Panel recommends the expungement of the Reason for Termination and Termination Explanation in Section 3 of Christopher Robert Armstrong’s (CRD Number 1446768) Form U5 filed by Morgan Stanley (CRD Number 149777) on May 1, 2019 and maintained by the Central Registration Depository (“CRD”). The Reason for Termination shall be changed to “Voluntary”, and the Termination Explanation should be deleted in its entirety and shall appear blank. This directive shall apply to all references to the Reason for Termination and Termination Explanation. The Panel further recommends the expungement of Occurrence Number 2029531 from the registration records maintained by the CRD for Christopher Robert Armstrong. Any “Yes” answers should be changed to “No,” as applicable. The Panel recommends expungement based on the defamatory nature of the information. The above recommendations are made with the understanding that the registration records are not automatically amended. Christopher Robert Armstrong must forward a copy of this Award to FINRA’s Credentialing, Registration, Education and Disclosure Department for review.
11.The Panel recommends the expungement of the Reason for Termination and Termination Explanation in Section 3 of Randall Brian Kiefner’s (CRD Number 2078087) Form U5 filed by Morgan Stanley (CRD Number 149777) on May 1, 2019 and maintained by the CRD. The Reason for Termination shall be changed to “Voluntary”, and the Termination Explanation should be deleted in its entirety and shall appear blank. This directive shall apply to all references to the Reason for Termination and Termination Explanation. The Panel further recommends the expungement of Occurrence Numbers 2029590 and 2029592 from the registration records maintained by the CRD for Randall Brian Kiefner. Any “Yes” answers should be changed to “No,” as applicable. The Panel recommends expungement based on the defamatory nature of the information. The above recommendations are made with the understanding that the registration records are not automatically amended. Randall Brian Kiefner must forward a copy of this Award to FINRA’s Credentialing, Registration, Education and Disclosure Department for review.
12. Any and all claims for relief not specifically addressed herein are denied.
SIDE BAR: For some context on the above arbitration, read:
"Fired Morgan Stanley Brokers Blame Law Firm for Botched Move" (AdvisorsHub by Jake Martin / April 1, 2021) https://www.advisorhub.com/fired-morgan-stanley-brokers-blame-law-firm-for-botched-move/
"Fired Morgan Stanley Reps Blame Law Firm's Bad Advice / The Morgan Stanley–recommended law firm that represented the transitioning advisors told them their nonsolicit agreements with Schwab were unenforceable, according to their lawsuit against the lawyers." (WealthManagement.com by Patrick Donachie / Mar 26, 2021)
https://www.wealthmanagement.com/regulation-compliance/fired-morgan-stanley-reps-blame-law-firms-bad-advice
2023 Federal Court Opinion
In the United States District Court for the District of New Jersey ("DNJ"), Morgan Stanley Smith Barney LLC filed a Petition and Motion to Confirm the FINRA Arbitration Award. Morgan Stanley Smith Barney LLC, Plaintiff, v. Christopher Armstrong, et al., Defendants (Opinion, DNJ, 23-CV-01688 / October 31, 2023)
https://www.govinfo.gov/content/pkg/USCOURTS-njd-3_23-cv-01688/pdf/USCOURTS-njd-3_23-cv-01688-0.pdf The Court noted the following circumstance:
The amounts for which the parties incurred joint and several liability totaled $4,320,765.91. Divided by three—Morgan Stanley, Armstrong, and Keifner—comes out to $1,440,255.30. In March 2023, Armstrong and Keifner informed Morgan Stanley that they would not be paying any portion of the amount owed to Schwab. Morgan Stanley paid the full amount due to Schwab in April 2023.1 (ECF No. 20)
= = =
Footnote 1: In a subsequent arbitration, Morgan Stanley now seeks contribution from Armstrong and Keifner.
at Page 3 of the DNJ Opinion
. . .
The parties do not dispute the Arbitration Award. Morgan Stanley, Armstrong, and Keifner request that it merely be confirmed. Morgan Stanley submitted a proposed order to that effect. (ECF No. 11.) Schwab, however, requests that the Award be confirmed and that judgment be entered “which mirrors the Award’s terms.” Id. It supplies a competing proposed order that it argues accomplishes this goal. (ECF No. 15.) Schwab states that it will execute a satisfaction of judgment once payment from Morgan Stanley cleared. In the meantime, however, Morgan Stanley has since confirmed that its payment has cleared. See Response in Support of Motion for Confirmation of the Arbitration Award; April 17, 2023 Letter in Support of its Motion (ECF No. 20) (confirming its payment of $7,294,263.85, which was inclusive of the amount it owed individually, had cleared.2 ) Id.
= = =
Footnote 2: The Award states that Morgan Stanley was individually liable to Charles Schwab $3,026,485.44 in punitive damages pursuant to Federal and Florida law, and New Jersey Trade Secrets Statutes (DTSA, Section 1836; FL-UTSA, Section 688.004; NJ-UTSA, Section 56:15-4) and New Jersey’s Unfair Competition Statute (N.J.S.A. Section 56:4-2), in addition to the amount for which it was jointly and severally liable.
at Page 4 of the DNJ Opinion
So the Court is confronted with adjudicating something that is not in dispute. You don't see that everyday. Let's walk through this slowly.
Everyone is in federal court -- that much is clear. Why are they in federal court? Apparently, none of the parties disputes the FINRA Arbitration Award; and all of the Respondents in the Arbitration (Morgan Stanley, Armstrong, and Keifner) want the Award confirmed.
So what's Schwab's problem? Yeah, I know, that's a great question.
Apparently, Schwab doesn't want the FINRA Award confirmed; or, more precisely, Schwab wants a Judgment by the Court that "mirrors the Award's terms."
So . . . Schwab doesn't want a run-of-the-mill confirmation but one involving some mirrors.
Schwab wants the Court to engage in some form of reflection?
Further complicating what seems a fairly simply issue of confirming a FINRA Arbitration Award, Schwab asserts that it will execute a Satisfaction of Judgment once Morgan Stanley's payment of $7,294,263.85 has cleared. That's an odd thing for Schwab to promise the Court because Morgan Stanley has already confirmed that said payment has, in fact, cleared and, notably, that amount includes Morgan Stanley's individual liability to Schwab of $3,026,485.44 in punitive damages in addition to the joint-and-several Award imposed upon all Respondents by the FINRA arbitrators.
On the one hand, Schwab is owed $X; but, on the other hand, the $X has been paid -- which, on the third hand, leaves Schwab asking the Court to haul out some massive judicial mirror and to capture the reflection of the fully paid FINRA Arbitration Award but to not confirm that Award but to mirror it. No matter how many times your repeat that last sentence it still comes off as silly.
Sometimes there's a compelling reason to make a fuss over some esoteric point because some important principle -- as arcane or obtuse as it may appear at first glance. Esoteric, obtuse, or otherwise, I still don't quite get what Schwab is making such a fuzz about. Moreover, since Morgan Stanley has apparently fully paid nearly $7.3 million, it doesn't much matter whether the Court issues a run-of-the-mill Order confirming the FINRA Award or goes to some thrift shop and buys an antique mirror in front of which some clerk will hold up the FINRA Award. Regardless, this is how the Court parsed through the issues:
Having reviewed the parties’ competing submissions, the Court agrees that Morgan Stanley has established that it has satisfied the terms of the Arbitration Award. In any event, the Court sees no benefit to adopting Schwab’s proposed order that selectively quotes from the Award. This is more likely to lead to confusion as to why certain portions were included while others were omitted. The Court will instead enter the proposed form Order supplied by Morgan Stanley that it is “ordered, adjudged, and decreed” that the Award is “confirmed in all respects.”
At Pages 4 - 5 of the DNJ Opinion
November 2023: FINRA Arbitration Panel Awards Morgan Stanley Nearly $3 Million in Contribution
In a FINRA Arbitration Statement of Claim filed in March 2023, Claimant Morgan Stanley asserted contribution and sought a permanent injunction. Claimant sought "an award against each Respondent in the amount of $1,440,255.30; permanent injunction restraining and enjoining Respondents from dissipating, disposing, or transferring assets, including the money paid to them by Claimant, up to $1,440,255.30 each; interest; and for such other relief as is just and proper." In the Matter of the Arbitration Between Morgan Stanley, Claimant, v. Christopher Robert Armstrong and Randall Brian Kiefner, Respondents (FINRA Arbitration Award 23-00721 / November 8, 2023)
https://www.finra.org/sites/default/files/aao_documents/23-00721.pdf
Respondents generally denied the allegations, asserted affirmative defenses, and filed a Counterclaim asserting malicious prosecution. In May 2022, the Respondents filed a Stipulated Notice of Dismissal with Prejudice of Counterclaim, and, accordingly, ,the FINRA Arbitration Panel made no determination of said claims.
The FINRA Arbitration Panel found Respondents Armstrong and Kiefner each liable for and shall pay to Claimant, as contribution, the sum of $1,440,225.30 each. The sums presently held by Claimant from Respondents in an escrow account are to be used to satisfy this award.
Bill Singer's Comment
Online FINRA BrokerCheck disclosures as of November 6, 2023, disclose that Kiefner with "25 Years of Experience" was employed by Schwab from 2008 to 2019, somewhat over a decade. In March 2019, he left Schwab for Morgan Stanley; and his status is presently denoted as "This broker is not currently registered."
BrokerCheck also discloses that Armstrong with "30 Years of Experience" was employed by Schwab from 2004 to 2019, some 15 years before decamping in April 2019 for Morgan Stanley; and his status is presently denoted as registered with Cetera Advisors LLC since June 30, 2022.
Somewhat lost amid all the litigation coverage of the two FINRA arbitrations and the federal court case are the recent layoffs by Schwab; for example, see, "Charles Schwab lays off 5% to 6% of total headcount" (Reuters / November 1, 2023)
https://www.reuters.com/business/finance/charles-schwab-lays-off-5-6-total-headcount-2023-11-01/.
Also, let's not forget Morgan Stanley's recent wave of job cuts (roughly 5%); for example, see "Wall Street is cutting more jobs as Morgan Stanley plans 3,000 layoffs" (CNBC by Hugh Son / May 2, 2023) https://www.cnbc.com/2023/05/02/wall-street-layoffs-morgan-stanley.html
All of which does not bode well for Wall Street's beleaguered workers. The FINRA broker-dealer business model appears unsustainable and beyond repair. Over the last two decades, the number of FINRA member firms has steadily declined as the migration from the brokerage platform to the registered investment advisory continues -- and as the loss of commission revenues and the mounting costs of compliance strangle many smaller firms. All of which takes on the appearance of an existential game of musical chairs. If Armstrong and Kiefner had remained at Schwab in 2019, would they have been drowned in the current tsunami of layoffs at that firm? If they were both at Morgan Stanley since 2019, would they have been sent packing in May 2023 per Morgan Stanley's job cuts? Can't stay. Can't go. Of course, it's an ill wind that doesn't blow well for lawyers.