In today's featured FINRA public customer arbitration against both UBS and Morgan Stanley, we have some curious facts and allegations. We go a mother and father and their daughter. We got the son-in-law stockbroker. We got a disputed kickboxing investment. We got some odd decisions to drop parties and not to call certain witnesses. We got allegations involving money that seems to have come and gone and come back without damage. All in all, it's a confusing case that becomes even more so after you read the arbitrators' decision.
Case in Point
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in May 2017 and as amended thereafter, Claimant Heffernan in her individual capacity and on behalf on an estate asserted violation of Connecticut Uniform Securities Act; negligence and negligent supervision; breach of fiduciary duty; violation of FINRA Rules 2010, 2120, 2111, and 3110; fraudulent misrepresentation; and vicarious liability; fraudulent concealment in connection with what the FINRA Arbitration Decision characterizes as a "real estate development and a kickboxing investment." Claimant sought $575,000.00 compensatory damages; punitive damages, interest; attorneys' fees; and costs. In the Matter of the FINRA Arbitration Between Candida Heffernan, Individually and on behalf of the Estate of Thomas Heffernan, Claimants, vs. UBS Financial Services Inc., Respondent; Morgan Stanley Third-Party-Claimant/ Respondent; and [REDACTED by BrokeAndBroker.com Blog], Respondent vs. [REDACTED by BrokeAndBroker.com Blog], Third-Party-Respondent (FINRA Arbitration 17-01417, June 22, 2018)
NOTE: Subsequent to the initial publication of this article, in its sole discretion, the BrokeAndBroker.com Blog redacted the name of the Third-Party Respondent.
Respondents UBS, Morgan Stanley, [REDACTED by BrokeAndBroker.com Blog] generally denied the allegations and asserted various affirmative defenses. Respondent Morgan Stanley filed a Third-Party Claim against Third Party Respondent. In its Third-Party claim , Respondent Morgan Stanley sought $250,000.00 in damages.
Third-Party-Respondent asserted that she is not subject to FINRA jurisdiction, and she generally denied the allegation and asserted affirmative defenses.
Third-Party-Claimant / Respondent and Third Party Respondent appeared pro se.
After ordering Morgan Stanley to provide written argument in support of its contention that FINRA had jurisdiction of Third Party Respondent, the FINRA Arbitration Panel dismissed without prejudice Morgan Stanley's claim for lack of jurisdiction. The Panel permitted Morgan Stanley to file a further Motion to add Third Party Respondent as a party provided evidence was presented "such as copies of relevant account agreements, in support of FINRA jurisdiction." Following Morgan Stanley's motion to reconsider, the Panel again denied the motion.
In May 2018, Claimants notified FINRA that they had dismissed with prejudice Respondent [REDACTED by BrokeAndBroker.com Blog].
At the evidentiary hearing, Claimants notified the Panel that they had settled with Respondent UBS.
After Claimants' case-in-chief, Respondent Morgan Stanley moved to dismiss. In response to Respondent Morgan Stanley's announcement that it would not put on a case, the Panel held the Motion in abeyance.
The FINRA Arbitration Panel denied Claimant's claims against Respondent Morgan Stanley and provided a "Report" setting forth their rationale. Note that the report is titled "Arbitrator's Report," (in the singular) which appears in error as it seems to have been prepared by and on behalf of the Panel of three arbitrators:
The Panel fully credits the testimony of Claimant Candida Heffernan; it is clear that Mrs. Heffernan and her late husband have suffered significant financial loss and that Mrs. Heffernan is not responsible for causing any part of the loss.
In order to prevail against Morgan Stanley, however, Claimants bear the burden of proving a causal connection between the loss and wrongful actions or inactions of the Respondent.
Claimants demonstrated that the Heffernans were fraudulently induced to provide $250,000 for an investment in October 2012. Mrs. Heffernan credibly testified that she was present for a conversation in which [REDACTED by BrokeAndBroker.com Blog] (the Heffernan's Morgan Stanley financial advisor and son-in-law) solicited an unauthorized investment. ([REDACTED by BrokeAndBroker.com Blog] was originally named as a respondent but was dismissed from the case by Claimants and was not subpoenaed to testify by any party.)
The evidence also showed, however, that the Claimants regained possession of that money (in their checking account) by November 2012. Thus, even if the October 2012 transaction was wrongful, it did not cause damage to the Claimants.
In January 2013, Mr. Heffernan wrote a check for $250,000 from the Heffernan's bank account to fund Heffernan Investments LLC, an entity controlled by the Heffernan's daughter, L. Cadan. Morgan Stanley's records indicated that this money was disbursed as directed by Ms. Cadan. Claimants did not provide contrary evidence. (Ms. Cadan was living with Mrs. Heffernan at the time of the hearing and apparently within the subpoena power of the Panel but was not called as a witness by Claimants.)
Even if the Claimants retained an interest in the money after it was transferred to Heffernan Investments LLC, Claimants failed to show that any transfer out of that account was contrary to their daughter's instructions and therefore caused them damage.
Thus, the Claimants have failed to demonstrate damage flowing from any claimed errors or omissions by Morgan Stanley. (Because he was voluntarily dismissed by Claimants, the Panel cannot appropriately consider any wrongdoing by [REDACTED by BrokeAndBroker.com Blog].
Bill Singer's Comment
Among the first aspects of this arbitration that caught my eye was the characterization of the investments at issue as being a real estate development and a kickboxing venture -- that's an oddball bit of diversification. Somewhat lost in the shuffle of procedural and substantive issues is that Respondent [REDACTED by BrokeAndBroker.com Blog] was the Heffernan's son-in-law and he was married to their daughter Third-Party-Respondent. For whatever reasons, Claimants dismissed [REDACTED by BrokeAndBroker.com Blog] and he was not called by any party to testify. I'm still trying to understand that bit of fancy footwork.
As to the Panel's reference to the so-called "October 2012" issue, I get more lost the more I read and re-read the explanation. As best I understand it, the October 2012 thing involved a $250,000 "unauthorized investment." It is not set forth in sufficient detail as to what was "unauthorized." Moreover, even assuming that the investment was unauthorized, the Panel found that Claimants had "regained possession" of the funds by November 2012 and did not sustain any damage as a result of the purported transaction. All of which would seem to fall under the basketball pick-up-game rule of "No Harm, No Foul."
Then there is the somewhat mystifying reference by the Panel to a $250,000 check written in January 2013 to fund Heffernan Investments LLC. The LLC was controlled by Third Party Respondent, who apparently was living with her mother Claimant Candida Heffernan at the time of the hearing but was not called as a witness by the Claimants. As to whether Third Party Respondent and [REDACTED by BrokeAndBroker.com Blog] were married, separated, or whatever as of the date of the arbitration hearing is not set forth in the FINRA Arbitration Decision. As to the purpose of the LLC and why $250,000 was used to fund it, and the how or why of the funds transfer -- well, we're pretty much left to fill in far too many blanks to make any sense of the titillation. Worse, it's not even explained in the Decision as to exactly what Heffernan Investments LLC had to do with Morgan Stanley. Perhaps the LLC had an account at the brokerage firm or funds were transferred from the LLC into an account at Morgan Stanley? Guess all you want because the FINRA Arbitration Decision does not offer enough detail to prompt a meaningful inference. In any event, the arbitrators concluded that Claimants had failed to demonstrate that any transfer of the cited funds from some account in the LLC's name was contrary to their daughter Third Party Respondent's instructions and had caused them damage.
Online FINRA BrokerCheck records as of June 26, 2018, disclose that [REDACTED by BrokeAndBroker.com Blog] was first registered in 1996 and was granted a Chapter 7 discharge in bankruptcy in 2013.
Online FINRA BrokerCheck records disclose nine matters under the heading "Customer Dispute -- Settled" three matters under "Customer Dispute- Closed-No Action / Withdrawn / Dismissed / Denied" and one matter under "Customer Dispute -- Pending"
Online BrokerCheck records also disclose that on December 21, 2016, "MSWM" (probably Morgan Stanley Wealth Management") discharged [REDACTED by BrokeAndBroker.com Blog] based on allegations:
Concerns related to employee's exercise of discretion and investment strategy.