Public Customer As Bad Guy In Morgan Stanley Case

February 5, 2013

A picture taken on February 8, 2011 in Rennes,...

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in November 2011, Claimant trustees asserted causes of action, among which were, breaches of contract and of fiduciary duty, negligence, unjust enrichment, in connection with investments in Lehman Brothers and Six Flags bonds, and Bank of America and Fannie Maepreferred stocks.  Claimant sought $236,000, costs fees, rescission, and disgorgement.In the Matter of the FINRA Arbitration Between Edward Papell and Jan Papell, Trustees of the Papell Family Trust v/a/d 8/12/1997,Claimant, vs. Morgan Stanley Smith Barney, Respondent (FINRA Arbitration 11-04489, January 25, 2013).

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

The FINRA Arbitration Panel unanimously granted Respondent's Motion to Dismiss pursuant to FINRA Rules 12511 and 12212, based upon findings that Claimant, through their attorney failed to:

  • comply with the FINRA Discovery Guide on a timely basis;
  • provide any discovery documents by the agreed discovery cutoff date;
  • comply with Order by the Chair to " . . . provide a full response to the Discovery Guide and the Respondent's discovery requests by November 8, 2012;"
  • comply with Order by the Chair to " . . . certify by November 8, 2012 that all responsive documents and information located from a diligent search have been produced…;"
  • give timely notice of attorney's change of address to FINRA and Respondent's attorney.

Moreover, In an Order by the Chair dated October 18, 2012, Claimant was "advised that, if they do not comply in full with this Order, their claim may be dismissed as a sanction under Rule 12511."  Further, in both the Opposition Brief and hearing, Claimant provided information and responses that were "inconsistent, disingenuous, and lacked credibility and specificity in their arguments and responses to specific questions raised by the Panel."

In additions to the above findings involving the Claimant, the Arbitration Panel made the following findings that Respondent, through their attorney:

  • provided to Claimant appropriate discovery documents on a timely basis;
  • provided all notices, requests for documents and motions to the Claimant's representative in accordance with FINRA s rules;
  • has suffered harm and incurred significant expense because of Claimant's failures to comply with FINRA's discovery rules and other inappropriate conduct;
  • cannot reasonably proceed with the currently scheduled hearing date since the requested documents have not been produced or made available; and
  • would incur significant additional expense if the case were continued.


The FINRA Arbitration Panel granted Respondent's Motion to Dismiss with prejudice and found Claimant liable and ordered payment to Respondent of $2,500 to partially cover additional fees, costs and expenses incurred caused by the conduct of the Claimant and/or Claimant's representative.

Bill Singer‘s Comment

You know, for starters, if you're going to file an arbitration case against a brokerage firm, it may be a really good idea not to piss off the arbitrators by not timely engaging in discovery, which, if we're gonna be honest here, is something that brokerage firms often do when defending against these cases. So, sure, litigation is a lot like schoolyard games and ya got yer bullies and the good boys and the bad boys and all sorts of childish stuff. Notwithstanding, there are only so many warnings that the teacher is going to give you about returning Charlie's hat before you find yourself in detention.

It's not everyday that we see a FINRA Arbitration Panel unanimously grant a respondent brokerage firm's Motion To Dismiss against a claimant public customer. Particularly not since the onset of the Great Recession and all the horrific headlines about the meanies on Wall Street. Effectively denying a public customer his or her day in court (or arbitration) is not good form. It's not something that arbitrators feel comfortable doing. As such, in this case, it seems that the Claimant really, really, really made a bad impression on the arbitrators.