Former Morgan Stanley Advisor Sues the Brokerage Firm for Attorney’s Fees After Establishing It Had No Right to Pursue Claim on Forgivable Loan

Morgan Stanley Smith Barney, LLC (“Morgan Stanley”) is now being sued in court for attorney’s fees incurred by one of its former financial advisors who, in a FINRA arbitration hearing, succeeded in proving that FINRA member Morgan Stanley had no standing (i.e., no legal right) to sue him in FINRA arbitration for repayment of a bonus.

In order to convince high producing financial advisor, James Eastman, to join and then stay with Smith Barney when Smith Barney merged with Morgan Stanley, Mr. Eastman received a significant “bonus” in the form of what the industry refers to as a forgivable loan.  When Mr. Eastman was subsequently terminated, Morgan Stanley immediately commenced collection proceedings against its former employee through a collection letter.  The letter sought collection pursuant to two “promissory notes” and demanded that Mr. Eastman remit the alleged balance owed payable to Morgan Stanley Smith Barney LLC.  The letter falsely alleged that the original creditor of the debt was Morgan Stanley.   In response to Morgan Stanley’s letter, Mr. Eastman questioned Morgan Stanley’s ownership of the notes and requested documents supporting Morgan Stanley’s right to collect the alleged debt.   No documents were produced in response.

Shortly thereafter, Morgan Stanley filed a FINRA arbitration claim against Mr. Eastman to collect on the two promissory notes.  In the arbitration claim, Morgan Stanley once again falsely alleged the following: “Morgan Stanley [i.e., Morgan Stanley Smith Barney, LLC] is prosecuting this claim against Eastman as the assignee of the Promissory Notes signed by Eastman.”  Mr. Eastman then disputed this claim that FINRA member Morgan Stanley was the assignee of the notes.  As a result, as part of his answer and affirmative defenses to the claims by Morgan Stanley, Mr. Eastman alleged, among other issues, Morgan Stanley’s lack of standing.

After multiple pleadings, including a Motion to Dismiss Morgan Stanley’s claim in advance of the final hearing, Morgan Stanley amended its claim to add a new party that apparently owned the notes.  Nevertheless, Morgan Stanley continued to claim that it had standing to pursue collection of the notes as a “third-party beneficiary” of Mr. Eastman’s promissory notes.

Through discovery and testimony at the final arbitration hearing, including the testimony of Morgan Stanley’s Chief Financial Officer, Mr. Eastman and his attorneys established that Morgan Stanley had no “standing” to pursue Mr. Eastman for repayment of the incentive bonuses.  As a result, after a five-day hearing in Tampa, Florida, the arbitrators granted Mr. Eastman’s Motion to Dismiss Morgan Stanley’s claims against Mr. Eastman for repayment of the bonus (i.e., the promissory notes).  In its award, the panel went on to specifically determine that Mr. Eastman was the prevailing party in his dispute with Morgan Stanley and deferred the issue of attorney’s fees to court, in accordance with Florida law.

In addition to the foregoing, the FINRA arbitration panel found that the actual holder of the notes (a Morgan Stanley entity that is not a FINRA member) was only entitled to bonus repayment of less than 50 percent of the amount it sought from Mr. Eastman at the final arbitration hearing.

Mr. Eastman, a top producer at Morgan Stanley, pursued the case because of his concerns regarding how much of the industry has become so focused on things that are not consistent with investor’s needs.  Mr. Eastman is now seeking to recover his attorney’s fees in court from Morgan Stanley for pursuing collection claims against him without any right to do so.

With respect to the issue of standing to pursue the claim, Mr. Eastman’s attorney Chris Vernon stated that he believes “this establishes a basis for FINRA to investigate FINRA member Morgan Stanley for pursuing claims that it has no right to pursue.  We believe it is important for FINRA to self-initiate an investigation because it is difficult for a single arbitration panel to initiate a referral on this type of technical issue.”   Mr. Vernon’s colleague, Victor Bayata added:  “It is the pattern and practice of Morgan Stanley doing this repeatedly that is troubling and should be stopped by FINRA.”  Beyond the jurisdiction of FINRA, a New York Times article released yesterday explores how Mr. Eastman’s case also exposed one of Morgan Stanley’s motives behind its actions to have a different entity hold the promissory notes; that is to reduce its Net Capital requirements.

Mr. Eastman, for his part, is glad he took on Wall Street and helped to reveal just one of Wall Street’s troubling behaviors that continues beyond the 2008 financial crisis.  “We fought for morals and ethics over self-serving policies of Wall Street,” said Mr. Eastman.  “I hope other advisors and investors continue to chip away at these Wall Street firms until they change their ways or exit the business.”

Vernon Litigation Group represents financial advisors nationwide in disputes against the financial industry.  With respect to their financial advisor representation, Vernon Litigation Group represents advisors in disputes against their current or previous employer in cases of whistleblower claims, promissory note disputes, wrongful termination, U5 employer defamation (as well as other defamation), and other employment-related abuses by the financial institutions.  Vernon Litigation Group’s financial advisor site “Financial Advisor Attorney” is tailored to financial advisors as a resource when dealing with employment-related issues, including the possibility of transitioning to another Firm as well as how to deal with promissory note concerns.

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