David R. Chase, P.A.
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David R. Chase, P.A.
Call Us Now: 800-760-0912


David Slays Goliath: Financial Advisor Wins FINRA Promissory Note Case

Chalk up one for the good guy.

Brandon Neal, a former Morgan Stanley broker, achieved a rare, total victory in defense of a FINRA promissory note arbitration claim filed against him by Morgan Stanley. The claim sought approximately $215,000 in debt and another $100,000 or so in interest and attorney’s fees. In response, Mr. Neal alleged that he was, in essence, fraudulently induced into accepting employment by Morgan Stanley and entering into the promissory notes, and sought around $1.3 million in damages in his counterclaim for lost business.

During the hiring process, Morgan Stanley allegedly represented to Mr. Neal that he could bring over his clients and continue to conduct his business involving a “niche investment strategy” — a line of business the firm claimed it would support. Once at Morgan Stanley, however, Mr. Neal was unable to bring over his biggest clients, hurting his ability to do business and earn a living, according to his lawyer. His lawyer further claimed that: “internal emails from Morgan Stanley showed the firm ‘had no intention of allowing [Neal] to bring this kind of business over.”

Evidently finding the evidence compelling, the FINRA arbitration panel awarded Mr. Neal $300,000 in damages, plus interest, on his counterclaim, and denied in its entirety Morgan Stanley’s claim for the promissory note debt, attorney’s fees and interest. As is usual, the arbitrators did not provide a rationale for their award.

The substantial upfront monies paid by securities firms to brokers under promissory notes, or employee forgivable loans, are often used by securities firms to entice advisors from competing firms. The amount of the note is typically based upon a percentage of the broker’s trailing twelve months of revenue, and is forgiven in installments over the course of the note — as long as the broker remains employed. If the broker leaves the firm prior to the completion of the note’s duration, typically for any reason (whether a termination for cause or a voluntary resignation), the remaining balance on the note becomes immediately due and payable. The true economic reality of these promissory notes, however, is that the securities firm is purchasing the advisor’s book of business for the term of the note, with the implicit quid-pro-quo understanding that it will provide the necessary platform for the advisor to profitably run his business.

While FINRA arbitration panels usually enforce broker promissory notes, thus making these cases difficult for brokers to win — and FINRA statistics clearly prove it –there are notable exceptions. Based upon my experience, the most defensible broker promissory note cases have two characteristics:

(1) the firm has engaged in either negligent or intentional conduct that has materially damaged the financial advisor’s ability to do business and achieve profitability, and hence the ability to repay the note. Examples include where the firm denies the advisor access to certain countries, financial products or markets, or where it misrepresents key facts about the employment opportunity and the firm’s platform; and

(2) a clear and explicit paper trail corroborating the broker’s claims. For example, contemporaneous written complaints by the broker about the firm’s wrongful conduct, as well as internal firm emails evidencing the firm’s knowledge and culpability.

The Neal case evidently had both of these elements — which gave David the sling to slay Goliath.

Securities attorney David R. Chase of the Law Firm of David R. Chase, P.A., represents stock brokers and financial advisors in defense of broker promissory note arbitration cases nationwide, including in Miami, Fort Lauderdale, Boca Raton and throughout South Florida. Mr. Chase also represents those in the financial services industry that are under investigation by the SEC, FINRA and state securities regulatory authorities.

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