While brokerage firms prevail in most of their promissory note and forgivable loan cases, there are exceptions to the rule when a financial advisor can claim a “win”. Typically, however, the “win” involves the arbitration panel awarding the advisor a “shave” or reduction, sometimes substantial, on the note balance. But, still, even in those “wins”, the broker is nonetheless obligated to pay a portion of the outstanding note, in addition to perhaps interest and/or attorney’s fees. Yes – a win of sorts, but still not so much of a win really.
And then came the recent arbitration award involving Dale Cebert, a former Morgan Stanley advisor, who Morgan Stanley sued for repayment of sums due under certain promissory notes. Cebert counter-sued alleging libel and slander, tortious interference and other bad acts. Morgan Stanley evidently did not realize it was messing with the wrong broker.
After a full evidentiary hearing that included 39 hearing sessions over 21 days, testimony from 24 fact and 3 expert witnesses and the introduction of over 700 exhibits, the FINRA Arbitration Panel issued an award netting the parties’ competing claims and demands, and ordered Morgan Stanley to pay Cebert as follows:
• $1.12 million on his counterclaim;
• $726,331 for his attorney’s fees;
• $92,777 for his costs; and
• $500,000 in punitive damages.
Ouch! … the pain just radiates from the pages of this award.
Notably, in articulating its grounds for the imposition of punitive damages, the Panel found that Morgan Stanley had: “conducted, acted upon and reported with reckless disregard for its accuracy and completeness and for the defamatory consequences it would have” a “flawed internal investigation” of Cebert.
As an additional ground for punitive damages, the Panel cited: “Communications with Respondent’s customers conducted in at least a grossly negligent manner (if not with a self-serving, malicious motive) by one or more managers and/or authorized representatives of Claimant MSSB regarding Respondent and his departure from Claimant MSSB that defamed or were intended to defame the Respondent in the minds of his customers.”
This case should serve as a strong wake-up call to the broker-dealer community that there are consequences for reckless, self-interested internal investigations, the filing of false and libelous Form U-5 statements and improper communications with a departing broker’s clients. It just takes the right set of facts and an arbitration panel with the courage to do justice.
A smackdown to be sure, but apparently justified.
David Chase, Esq. is a securities lawyer and principal of the Law Firm of David R. Chase, located in Fort Lauderdale, Florida. Mr. Chase represents financial advisors in defense of promissory note and forgivable loan arbitration cases throughout South Florida, including Miami, Fort Lauderdale, Boca Raton and the Palm Beaches. You may contact Mr. Chase toll-free at: (800) 760-0912, or by email at: firstname.lastname@example.org. The firm’s website is: davidchaselaw.com.