Former Morgan Stanley Smith Barney Brokers Win $5 Million Employment Dispute Arbitration Award

June 20, 2012

Morgan Stanley stopped in its tracks at FINRA intra-industry arbitration

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in April 2011 and thereafter amended, Claimants Paladino and Vitale asserted

  • fraudulent misrepresentation;
  • promissory fraud;
  • fraudulent concealment and/or omission;
  • negligent misrepresentation;
  • negligent concealment and/or omission;
  • breach of implied covenant of good faith and fair dealing;
  • intentional interference with existing and prospective economic advantage;
  • breach of oral and written contract;
  • violations of the California Labor Code;
  • promissory estoppel;
  • failure to supervise/negligent supervision; and
  • constructive fraud

The allegations arose in relation to the Claimants' employment with Respondent Morgan Stanley. Initially, the Claimants sought unspecified compensatory and punitive damages plus attorneys' fees, and other fees and costs.  At the close of the hearing, Claimants requested a total of $6,550,053.93 in damages. In the Matter of the FINRA Arbitration Between John P. Paladino and Todd G. Vitale, Claimants, vs. Morgan Stanley Smith Barney, Respondent (FINRA Arbitration 11-01633, June 19, 2012)

Respondent Morgan Stanley generally denied the allegations and asserted various affirmative defenses.

Discovery Difficulties

On February 29, 2012, Claimants filed a Motion to Compel, which the Respondents opposed. On March 21, 2012, the Chair of the FINRA Arbitration Panel conducted a pre-hearing conference on Claimants' motion and on March 21, 2012, issued a Discovery Order granting Claimants' motion.

A few weeks later, on April 19, 2012, Claimants filed a request for an expedited discovery hearing to address discovery issues, including Respondent's alleged violation of the Discovery Order. Claimants sought an award of attorneys' fees and discovery sanctions against Respondent, which Respondent opposed..

On May 14, 2012, the Chair determined the discovery issues to be moot because the parties had resolved the issues between themselves. Notwithstanding, the Chair determined that Claimants' request for discovery sanctions would be heard by the full Panel at the evidentiary hearing. After due deliberation, the Panel granted Claimants' request for discovery sanctions.


The FINRA Arbitration Panel found Respondent Morgan Stanely liable and ordered the firm to pay to:

  • Respondent Paladino: $2,000,000.00 in compensatory damages
  • Respondent Vitale:$2,600,000.00 in compensatory damages

Further, Respondent was ordered to pay to the Claimants:

  • $354,816.54 in attorneys' fees pursuant to California Civil Code Section 1717;
  • $200.00 as reimbursement for Claimants' initial claim filing fee; and
  • $10,000.00 for discovery sanctions.

Bill Singer's Comment

In keeping with the top secret, hush-hush, need-to-know protocols under which FINRA's arbitrations are conducted and the ensuing decisions issued, this case discloses far less to us than what I deem necessary and appropriate - however, that's an oft-repeated criticism in this blog.  For industry colleagues of  Paladino and Vitale at other major firms such as Merrill Lynch, Wells Fargo, JP Morgan, and UBS, this decision may hold out some hope for pay-back if the severance between former employee and employer does not go smoothly.

What we can assume is that Claimants were two relatively high-powered Morgan Stanley Smith Barney registered persons with likely a few hundred million in assets under management and their departure from the firm was undertaken amidst much gnashing of teeth.

In response to the Claimants' request for some $6.6 million in damages, the outcome was about $5 million. Although you would have to personally ask Claimant Vitale and Claimant Paladino whether they are happy with the Award, my guess is that they would deem the result a victory.  Moreover, Respondent Morgan Stanley likely did not help itself out by engaging in what the Panel likely saw as gamesmanship during Discovery.