Former Morgan Stanley Smith Barney Employee Wins Promissory Note Arbitration

August 21, 2012

A knockout can be characterized by temporary u...

MSSB probably shouldn't have stepped into this ring -- it took a ten-count

Around July 30, 2010, Richard Swetish's employment with  Morgan Stanley Smith Barney ("MSSB") ended, thus activating the repayment obligation of any unpaid balance on his August 6, 2004, promissory note.  As these things go, the parties felt very differently about whether money was owed.

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in April 2011, Claimant MSSB sought $68,239.00 in compensatory damages plus interest, costs, and fees arising from an alleged breach of the promissory note's repayment provisions. At the close of the hearing, Claimant revised its damages to:

  • $44,091.67 compensatory;
  • $15,840 in attorneys' fees; and
  • $5,050 in costs.

In the Matter of the FINRA Arbitration Between Morgan Stanley Smith Barney, LLC,Claimant/Counter-Respondent, vs. Richard P. Swetish, Respondent/Counter-Claimant (FINRA Arbitration 11-01644, August 17, 2012).

Respondent Swetish generally denied the allegations, asserted various affirmative defenses, and filed aCounterclaim in which he asserted that Claimant MSSB failed to provide reliable support and necessary technology for him to grow and maintain clients, resulting in lost accounts and income. Respondent sought $600,000 in compensatory damages plus interest, fees and costs.


The FINRA Arbitration Panel denied with prejudice Claimant MSSB's claims.

Separately, the Panel found Claimant MSSB liable for and ordered it to pay to Respondent Swetish:

  • $15,446.00 in compensatory damages at 6% per annum interest from August 31, 2010 until the award is paid in full; and
  • $3,000 in attorneys' fees

Bill Singers Comment

That explosion you heard was MSSB getting hoisted on its own petard - an increasingly common mishap in these case brought by former Wall Streetemployers. Now, mind you, the overwhelming majority of these cases either settle or result in a ruling in the former employer's favor; however, I've noticed in the past year or so that some former employees are turning the tables. UBS, Morgan Stanley, Merrill Lynch, Wells Fargo, and others have all suffered reverses.

Here, MSSB was seeking something under $70,000 and wound up on the hook for about $18,000 - that's an $88,000 turnaround from a plus to a minus.  You have to wonder just what MSSB thought was the strengths of its case and weaknesses of Swetish's defenses and counterclaims.  Moreover, it would be fun to learn whether MSSB turned down a settlement offer from Swetish, and what that amount was.

The lesson here is a well-known one: Wall Street's major firms can't really afford to lose one of these promissory note/employee forgivable loan cases.  The expectation is that these are slam dunks and that the in-house legal staff appreciates the need to accept a reasonable offer of settlement.  Consequently, for the 99 out of 100 of these cases that the employers win, no one is really surprised.  Like I said, it's expected.

However, lose just one case and it becomes the chatter around every water cooler and in many emails.  Even if registered representatives get the losing firm's name wrong or accept as truth versions of the case that are pure fantasy, it doesn't matter - the harm is done.  It's another vertebrae added to the legendary "backbone" that some defendants grow when their former brokerage employer comes after them for these unpaid balances.

As the legend of Swetish grows, it will fuel the fires of other registered reps that one of them beat a major firm based upon the defense of  a lack reliable support and necessary technology, that those shortcomings inhibited the stockbroker's ability to build a book of business and retain clients, and that the firm's failures drove clients away and diminished commissions.