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$5 Million Arbitration Award We Obtained Against Morgan Stanley for Two Broker Clients Reinstated and Confirmed on Appeal

by Erwin. J. Shustak, Esq. SHUSTAK REYNOLDS & PARTNERS, P.C. July 2014       

$5 Million Arbitration Award We Obtained Against Morgan Stanley for Two Broker Clients Reinstated and Confirmed on Appeal Although it took almost two years, we are pleased to announce that a $5 million arbitration award we obtained for two firm clients has been confirmed on appeal. On June 30th the California Court of Appeal reversed a lower court and reinstated and confirmed a $5 million arbitration award that a San Diego-based FINRA panel assessed against Morgan Stanley in favor of our clients, two brokers whom Morgan Stanley had recruited from UBS in 2008. In reversing the trial court and confirming the arbitration award, the Court of Appeals overturned the lower court’s order which had vacated the award on the grounds that one of the three arbitrators, industry panelist Barry Kersh, failed to make required disclosures when he was selected as one of the three panelists to hear the case.

The Appellate Court, which reviewed the case de novo, determined that “although we conclude the arbitrator failed to make certain disclosures, these undisclosed facts could not cause an objective observer to doubt the arbitrator’s impartiality.  In addition, we determined that Morgan Stanley was aware of certain key facts, namely its efforts to recruit two of the arbitrator’s coworkers, and thus the arbitrator was not required to disclose those facts.”  According to partner Erwin Shustak, who tried the arbitration with associate George Miller, the Appellate Court’s decision totally vindicated our clients and made it clear that large brokerage firms, like Morgan Stanley, cannot play fast and loose with the arbitration process.  “Morgan Stanley selected this same arbitrator to sit on this and three other FINRA cases in which Morgan Stanley was a party.  Morgan Stanley had recruited one of the arbitrator’s sons-in-law to leave Kersh’s firm and join Morgan Stanley and had unsuccessfully attempted to recruit his other son-in-law to also leave Kersh’s firm and join MS.  MS knew this all along and, only after they lost the case and faced a $5 million judgment, did Morgan Stanley cry foul, arguing that the arbitrator should have disclosed facts that Morgan Stanley knew before the case was started and the arbitration panel selected” said Erwin.  “The Appellate Court emphatically determined that Morgan Stanley could not sit back, wait to see the outcome of the case and, when it was hugely unsuccessful, play “gotcha” by trying to  vacate the award relying on facts that the Appellate Court determined Morgan Stanley knew all along” he  added.

The Underlying Arbitration-

In 2008, Morgan Stanley actively recruited Todd Vitale and John Vitale from UBS.  In their arbitration, Vitale and Paladino complained that they were induced to join Morgan Stanley based on express promises made by Morgan Stanley management that (i) Vitale would become a salaried sales manager within six months of joining the firm and a branch manager within a year; and (2) once Vitale transitioned his clients to Morgan Stanley and became a salaried, non-producing branch manager, Paladino, the junior partner of the team, would take over Vitale’s seasoned book of business and handle that as well as his own clients.

Morgan Stanley, however, never made Vitale a salaried manager and, consequently, Paladino never was able to take over the combined books of business.  After three frustrating years of waiting for Morgan Stanley to make good on its promises and assurances, they filed their arbitration in 2011 and retained Shustak Reynolds & Partners, P.C. to prosecute their claims before a FINRA arbitration panel.  Their claims included breach of written and oral contract; negligent and intentional misrepresentations and fraud.  After seven days of hearings in the Spring of 2012, a three person FINRA panel- consisting of two attorneys and Barry Kersh, a longtime San Diego based member of the brokerage community, awarded the pair a total of $4,965,016, including $4.6 million in compensatory damages, $355,000.00 in attorney’s fees and $10,000 in sanctions for discovery abuses by Morgan Stanley.

Morgan Stanley’s Moves to Vacate the Arbitration Award-

Within ten days after the award was issued in June, 2012, Morgan Stanley filed a petition in the San Diego Superior Court to vacate the award.  In that Petition, Morgan Stanley raised the following complaints in asking the court to vacate the award:

Kersh failed to disclose (1) that his son-in-law, Mathew Childs, had been recruited by Morgan Stanley from the firm where Kersh was a long time branch manager and worked as a broker in Morgan Stanley’s San Diego region; 2) Childs and Kersh’s daughter were in the midst of a contentious divorce; 3) Morgan Stanley had unsuccessfully attempted to recruit Kersh’s other son from the same firm where Kersh worked; and 4) Kersh’s daughter had one or more investment accounts at Morgan Stanley.

In support of its Petition to Vacate, Morgan Stanley submitted declarations from a San Diego based complex manager and officer.  That manager admitted that before the arbitration began or arbitrators were selected, he knew that Morgan Stanley had recruited and hired one of Arbitrator Kersh’s sons-in-law from Kersh’s office and had attempted to recruit Kersh’s other son-in-law from the same firm.  In opposition to Morgan Stanley’s Petition to Vacate, Vitale and Paladino submitted sworn declarations from two former Morgan Stanley San Diego based branch managers and Morgan Stanley’s former regional director for Southern California and Hawaii.  Those former MS representatives all were involved in some way in MS’ recruitment of Childs from Kersh’s firm and office and all three stated it was known to them and others at Morgan Stanley that Childs worked for his father-in-law, Kersh, at Kersh’s firm.

After considering all of the evidence, and hearing oral argument, the trial court granted Morgan Stanley’s Petition and vacated the arbitration award, finding that Arbitrator Kersh had not made mandatory, required disclosures regarding his daughter’s accounts at Morgan Stanley and her alleged former employment in the securities industry.  The Court also determined that Vitale and Paladino had not proven that “Kersh’s relationships to Morgan Stanley” were known by Morgan Stanley.  Vitale and Paladino then appealed the Court’s order vacating their award.

The Appellate Court Reverses the Lower Court and Reinstates the Award-

            On appeal, our clients argued that not only had Arbitrator Kersh  made all required, objectively reasonable disclosures required under FINRA rules but also Morgan Stanley was aware of the allegedly non-disclosed facts relating to Kersh and his sons-in-law’s involvement with Morgan Stanley.

The Appellate Court, however, stated the rule of disclosure in arbitration cases in California as a two pronged test.  First, were the allegedly non-disclosed facts things that the arbitrator was required to disclose, and second, would a reasonable, objective and “well-informed, thoughtful observer” view the non-disclosed facts as making the arbitrator biased for or against a party to the arbitration.  The Appellate Court, in its review of the entire record before it, determined that the two alleged non-disclosures that the trial court focused on- Kersh’s daughter’s alleged employment in the securities industry more than ten years earlier and her alleged accounts held by Morgan Stanley, could not, in and of themselves and assuming those facts to be true, create a “reasonable perception that Kersh was biased against Morgan Stanley”.  Moreover, since Morgan Stanley, who argued the existence and non-disclosure of Kersh’s daughter’s investment accounts at Morgan Stanley, had failed to produce “any print out of the accounts, applications, or signature cards”, the Appellate Court determined there was, in fact, nothing in the record before it “to show that Kersh or [his daughter] were aware of the existence of the accounts”.

Regarding Kersh’s alleged failure to disclose his relationship with his two sons-in-law and their recruitment- one successful, one not- away from Kersh’s firm to Morgan Stanley, the Appellate Court found that there was no “…rule that specifically requires an arbitrator to disclose the information Morgan Stanley contends should have been disclosed”.  Specifically, the Appellate Court determined that FINRA rules specifically do not require mandatory disclosure regarding the employment history of in-laws.  Moreover, the Appellate Court found that based upon the sworn declarations before it, prior to the arbitration, Morgan Stanley was aware that Kersh had worked with his two sons-in-law and Morgan Stanley knew it had recruited one and tried to recruit the other to leave Kersh’s office and join Morgan Stanley. Given Morgan Stanley’s knowledge of these relationships before the case was started and before the arbitrators were selected, the Appellate Court determined that “In this sense, Morgan Stanley’s post-arbitration claim that Kersh concealed and failed to disclose pertinent facts, which denied Morgan Stanley the opportunity to further investigate Kersh, rings hollow”.

In reversing the lower court and reinstating the original $5 million arbitration award, the Appellate Court determined that “Because Morgan Stanley had actual knowledge of these facts, Kersh did not have to disclose them”.  The lower court’s order vacating the award was reversed and the case was remanded to the trial court “with directions for the superior court to enter an order confirming the arbitration award”.

We pointed out to the trial court, and the Appeals Court agreed, that Morgan Stanley had accepted  Kersh as a panelist in at least three other, prior arbitrations, one of which also involved Morgan Stanley’s recruiting practices and resulted in an award largely in Morgan Stanley’s favor.  Our firm represented the broker in that other case which we tried and which was decided just several weeks prior to the $5 million award in this case. That earlier decision, however, resulted in an award of approximately $1 million in Morgan Stanley’s favor and Morgan Stanley never complained about Kersh’s impartiality when it won that first case.  The Appeals Court specifically found that “It is clear… that Morgan Stanley knew of all of Kersh’s relationships with his sons-in-law all along and only raised an argument of Kersh’s non-disclosure when it suited the firm”, a fact that obviously troubled the three person appeals panel.

We are pleased that justice has prevailed for our clients and the arbitration award that they, and we, worked hard to obtain has been reinstated and confirmed.

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