Employee Loses But Sort Of Wins Twilight Zone Promissory Note Arbitration Against Citigroup And Morgan Stanley

June 13, 2012

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Welcome to the other dimension of FINRA mandatory intra-industry arbitration

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in July 2010 and as amended, Claimant Schwarz asserted:

  • breach of contract;
  • breach of the implied covenant of good faith and fair dealing;
  • negligence;
  • intentional misrepresentation;
  • negligent misrepresentation;
  • fraudulent inducement;
  • tortious interference with actual and prospective economic advantage;
  • constructive fraud;
  • promissory estoppel; and
  • violation of California Labor Code § 2802.

In the Matter of the FINRA Arbitration Between Oliver Schwarz, Claimant, vs. Citigroup Global Markets, Inc., Citigroup Global Markets Holdings, Inc., and Morgan Stanley Smith Barney, Respondents - AND - Morgan Stanley Smith Barney, Counter-Claimant, vs. Oliver Schwarz, Counter-Respondent (FINRA Arbitration 10-03113, June 8, 2012).

This dispute relates to Claimant Schwarz's employment relationship with Respondents Citigroup and Morgan Stanley Smith Barney, and a promissory note executed by Claimant on May 28, 2009 (the "Note"). Claimant ultimately sought:

  • $4,553,009.00 in compensatory damages plus unspecified punitive damages;
  • a declaratory judgment that he is not obligated to pay the disputed forgivable note;
  • the cancellation of the Note (or a finding that it is null and void); or, in the alternative, an offset against the damages he recovers;
  • reimbursement of all filing fees, forum and hearing fees;
  • reasonable attorneys' fees and expenses; and

Respondents generally denied the allegations, asserted various affirmative defenses. Respondent Morgan Stanley Smith Barney Counterclaimed for repayment on the Note to the extent of $1.538.662.24 principal plus interest, fees, and expenses. 

Although Respondent Citigroup Holdings is not a FINRA member firm, the Panel has determined that it voluntarily submitted to arbitration and the jurisdiction of the Panel on all issues submitted.


The FINRA Arbitration Panel ruled as follows:

1. The Panel unanimously finds for Schwarz on the negligent misrepresentation claim only. The Panel, however, finds no compensatory damages.

2. MSSB, CGMI and Citigroup Holdings are jointly and severally liable for and shall pay to Schwarz the amount of $486,615.77 in costs, expert fees, and attorneys' fees, pursuant to law. the employment agreement, and the Note. This Award is subject to an offset, as described in Item 4 below. MSSB. CGMI and Citigroup Holdings' obligations are extinguished by the offset.

3. The Panel finds for MSSB on its Counterclaim. Schwarz is liable for and shall pay to MSSB the principal balance of the Note in the amount of $1,538,662.24.

4. Schwarz's award in the amount of $486,615.77 is an offset to MSSB's award. As such, Schwarz is liable for and shall pay to MSSB the amount of $1,538,662.24 minus $486,615.77 awarded to Schwarz for a net amount due to MSSB of $1,052,046.47.

5. Schwarz is liable for and shall pay to MSSB post-judgment interest on the amount of $1,052.046.47 at the contractual rate of 9.25% from July 31, 2012 until the date the amount awarded to MSSB is paid in full.

6. Schwarz is liable for and shall pay to MSSB the amount of $85,264.59 in attorneys' fees pursuant to the Note.

7. Schwarz is liable for and shall pay to MSSB the amount of $6,175.00 in costs.

8. MSSB, CGMI and Citigroup Holdings are jointly and severally liable for and shall pay to Schwarz $200.00 as reimbursement for the non-refundable portion of the initial claim filing fee previously paid by Schwarz to FINRA.

Bill Singer's Comment

I offer this FINRA arbitration to you in the form of a curio.

The case starts out as a claim filed by the former employee for some $4.6 million in damages and a demand for forgiveness of the Note. The former employer responds with its own demand for some $1.5 million in damages, largely derived from the outstanding Note.

The Panel rejected nine of Claimant's ten causes of action but found in his favor on "negligent misrepresentation."  All of which is well and fine but for the fact that the Panel awarded Claimant no damages.  Huh? So, what are we to make of that?  Given that the Panel awarded Claimant some $486,000 in costs and fees on a cause of action for which no damages were awarded, that oddball set of facts should motivate arbitrators to offer some rationale in the Decision.  Notwithstanding, there's no meaningful explanation.

Having disposed of Claimant's claims, the Panel then awarded Respondent MSSB $1.5 million on the Note, minus the costs/fees awarded to Claimant, for a net award of about $1 million plus interest, attorneys' fees and costs.

Try as I might, I really can't make heads or tails out of this Decision. The Panel made short shrift of all but one of Claimant's claims but still found Respondent liable for negligent misrepresentation - as to exactly what that misconduct was, we truly haven't a clue and we certainly don't know why that didn't entitle the prevailing Claimant to damages.  This is a common yet unfortunate byproduct of far too many FINRA mandatory intra-industry arbitrations.  The issues raised in this case are pertinent not only to current and former employees of Citigroup and Morgan Stanley Smith Barney, but to many others similarly situated at Wells Fargo, Merrill Lynch, JP Morgan, and other firms that resort to various financial enticements to obtain and retain registered persons.

All of which puts me in mind of those famous opening lines to one of my favorite childhood television series:

You're travelling through another dimension, a dimension not only of sight and sound but of mind; a journey into a wondrous land whose boundaries are that of imagination. That's the signpost up ahead - your next stop, the Twilight Zone!