Plaintiff lawyers pursuing claims against Morgan Stanley through Finra have been frantically telephoning Jeffrey Erez in recent days to get the inside scoop on the award he just won for his clients.
Erez represents investor claimants who this month won a rarefied favorable Finra-panel ruling granting a request for sanctions based on allegations that the wirehouse attempted to conceal evidence. The panel ordered Morgan Stanley to pay $3.3 million to investors in Puerto Rican bond cases.
“I think Morgan Stanley might be facing this award again, particularly if somebody suspects they are withholding documents again. The lawyers would certainly think about what’s happened in the past to contextualize their arguments. I’ve already been contacted by a lawyer dealing with a Morgan Stanley case at Finra,” Erez, of Miami-based Erez Law, told FA-IQ.
Other lawyers who appear before Finra panels have tagged the sanctions ruling as unprecedented based on its size. One lawyer, who represents both defendants and plaintiffs at those panels, labels the ruling as an “embarrassment” for Finra and “an abuse of discretion” and a “vindictive” action by the three-judge panel that issued it.
If Morgan Stanley appeals the ruling to the federal court, it will likely be overturned as “not fair and unreasonable,” the same lawyer says.
Erez’s clients — Isabel Litovich-Quintana and Jose Torres — had claimed breach of fiduciary duty, negligence, fraud and breach of contract related to Puerto Rico bonds and closed-end bond funds and the use of a securities-backed loan, according to the final arbitration award document published by Finra.
The claimants had sought at least $2.7 million in damages, $515,624 in lawyers’ fees and $11 million in punitive damages, according to the document.
The Finra panel — three public arbitrators — ordered the wirehouse to pay $261,420 in compensatory damages to the claimants plus interest on the sum. But the bulk of the award -- $3 million -- was awarded based on sanctions for attempting to withhold evidence, according to the award document.
In explaining the amount, the panel alleged Morgan Stanley “failed to produce critical documents responsive to claimants’ discovery request and thereby concealed documents relevant to the central issues in the matter,” according to the award document.
"The panel took note of the extreme prejudice [Morgan Stanley’s] failure of compliance caused claimants’ counsel in preparing their case and asserting their claims without the withheld documents, which the panel deemed were highly relevant to the dispute in question, the central figure of which was the terminated employee whose related documents were being withheld," according to the award document.
A Morgan Stanley spokesperson told FA-IQ that they “strongly disagree with the panel’s award of monetary sanctions in this case, which we believe are unwarranted and excessive.”
But the same spokesperson declined to comment about any plans the wirehouse may have to appeal the ruling.
Ultimately, Erez and his clients retrieved all the documents from Morgan Stanley about the terminated employee, a financial advisor who wasn’t named as a defendant and no longer works in the industry, Erez says. But extracting that evidence from Morgan Stanley only occurred in staggered releases during 19 days of Finra hearings that took place over the course of three months, says the lawyer. “They didn’t comply all at once,” Erez adds.
The award captured the attention of legal veterans on both sides of investor-wirehouse battles.
Bradley Bennett, a former head of Finra enforcement now in private practice in Washington, D.C., who usually defends broker-dealers, describes the award as “very unusual — one of the biggest discovery sanctions I know of.”
Thomas Lewis, an attorney with Lawrenceville, N.J.-based Stevens & Lee, who represents both FAs and their employers, strenuously objects to the ruling.
“This is an embarrassment for a Finra arbitration panel. This is not a fair decision. The panel is completely off the rails,” Lewis says.
The panel could have awarded Erez’s clients the same amount in compensatory damages and in that scenario, Morgan Stanley would have little likelihood of success on appeal. But because the panel based the bulk of the award on sanctions for discovery violations, a court is likely to find that ruling unfair and unreasonable, Lewis says.
The panel appears to have decided to become “vindictive,” Lewis says. “There are other ways in arbitration to balance out a discovery violation,” he says.
The panel could have charged Morgan Stanley for the attorney fees and costs spent by the plaintiffs to pursue the withheld documents, he says. The panel also could have heaped all of the roughly $60,000 in costs for the hearings on Morgan Stanley, but instead its ruling splits those expenses in half, Lewis adds.
“I think this arbitration panel made a mistake. I don’t think any court will uphold the award. Finra needs to take a look at this award. It’s not good for plaintiffs and defendants,” Lewis says. About the panel: “They messed up. These arbitrators abused their discretion and misapplied the law,” he says.