Friday, December 18, 2015

A Wrinkle in the Arbitration of Broker Promissory Notes

Little did Laura Facsina know that when she joined Morgan Stanley (MS) in 2009 as a financial adviser (FA) she would battle, not only the wirehouse for gender discrimination, but MS’s right to arbitrate the matter.

After bringing suit in court against MS, Ms. Facsina received a forgivable loan settlement of $280,000. But, a FINRA panel subsequently ordered that she repay a $419,000 promissory note, which was upheld in district court. The panel’s ruling is now before the 6th Circuit U.S. Court of Appeals, where Facsina is claiming there is a crucial jurisdictional issue negating FINRA’s determination.

According to the suit, it was not Morgan Stanley Smith Barney (MSSB) that owned the note, but rather its non-FINRA member subsidiary Morgan Stanley Smith Barney FA Notes Holdings. As such, Facsina argues, FINRA had no standing to entertain the arbitration, as only members may compel use of the forum by associated persons and clients.

“Moreover, Facsina’s settlement states that unless approved by all parties, no portion of the agreement – including the promissory note – is assignable. Facsina never gave consent for the note to be assigned to MSSB FA Notes Holding.”[i] This, she claims, is just one example of an on-going deceptive practice in which the true holders of promissory notes have been hidden, with significant consequences for hundreds of brokers.

Citing the research of a former MS employee turned whistleblower, website Think Advisor in its article “Ex-Morgan Advisor, in Unusual Move, Takes FINRA Arb Case to Federal Court,” found that between June 2009 and August 2015, of the 382 cases against advisors, only 12 were won by (ex-)employees and 330 by the company. Of those, MSSB FA Notes Holdings were believed to hold 160 of the notes.

These promissory notes are the overwhelming majority issue heard by FINRA’s arbitration panels. Notably, the panels also serve as the basis counterclaims in defamation and tortious interference claims brought by FAs. Food for thought…

[i] Ex-Morgan Advisor, in Unusual Move, Takes FINRA Arb Case to Federal Court (2015 November 24). Retrieved from

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