Morgan Stanley Wins Promissory Note Case Against Former Broker

January 31, 2013

In a Financial Industry Regulatory Authority ("FINRA") ArbitrationStatement of Claim filed in January 2012, Claimants sought to recover on promissory notes dated July 25, 2008, November 17, 2009, and September 9, 2010, which were executed by Respondent Towne during his employment.  Claimants sought a total of $341,445 plus interest, fees, and expenses. In the Matter of the FINRA Arbitration Between Morgan Stanley Smith Barney, LLC and Morgan Stanley Smith Barney FA Notes Holdings,LLC, Claimants, vs. Russell E. Towne, Respondent (FINRA Arbitration 12-00111, January 20, 2013).

Respondent generally denied the allegations and asserted various affirmative defenses.

On January 7, 2013, Claimants filed a Motion to Strike Respondent's Pre-Hearing Brief and To Exclude Belatedly Disclosed Information and Documents. At the January 8, 2013 hearing, Respondent's legal counsel notified the sole FINRA Arbitrator and the parties by email that he and Respondent would not appear at the hearing, prompting the Arbitrator to deem Claimant's motion as moot in the absence of Respondent's response thereto or his attendance at the hearing.

Bill Singer's Comment

All of which now serves to answer that most frequent of questions posed to me by potential clients in Respondent's situation: What happens if I don't pay back the principal due on the promissory note (or employee forgivable loan) and simply tell ‘em to go to hell?

The FINRA Arbitrator found Respondent liable and ordered him to pay to Claimants

  • $279,705.00 on the 2008 Note plus 3.5% interest from January 16, 2013 until paid;
  • $27,692.00 on the 2009 Note plus 2.75% interest from January 16, 2013 until paid;
  • $34,048.00 on the 2010 Note plus 2% interest from January 16, 2013 until paid;
  • $27,555.00 in pre-judgment interest on all three Notes;
  • $30,353.00 in attorneys' fees;
  • $1,511.02 in recoverable costs;
  • $500.00 for the FINRA filing fee.

Doing the rough math, Claimants were awarded the $341,445 in Notes' principal that they sought. Without factoring in the ongoing interest charges, the total tab to Respondent inclusive of principal, fees, and costs is $401,364.

See these "Street Sweeper" columns about EFLs and promissory note cases: