Morgan Stanley Goes After Former Emploiyee Who Joined LPL

May 4, 2016

Julius Caesar famously said "Veni, Vidi, Vici": I came, I saw, I conquered. Less famously quoted is the lament of many registered representatives: I came, I left, and I got trashed by my former employer. Yeah, you're right, that latter phrasing isn't the stuff of a quotation for the ages. Some of those who bewail their fate after departing from a former employer have no one to blame but themselves; but others clearly seem to have gotten caught up in the machinery of Wall Street that can grind stockbrokers into chopped meat. Regardless of where your sympathies lie, today's Blog presents a recent battle between Morgan Stanley Smith Barney and one of its former registered reps who departed for the purportedly sunnier climes of LPL. The manner of his departure is the grist for the FINRA Arbitration mill.

Case In Point

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in May 2014 and as amended thereafter, Claimants Morgan Stanley Smith Barney ("MSSB") alleged breaches of contract, duty of loyalty, and promissory note; intentional and negligent interference with business relationship; and violation of the Washington Uniform Trade Secrets Act. The allegations were in connection with Respondent Maloy's prior employment with MSSB

Claimants sought "loss of commission revenue from clients that were allegedly wrongfully taken by LPL and Maloy, and damages sufficient to compensate MSSB for LPL and Maloy's use of MSSB's confidential information that LPL and Maloy allegedly took from MSSB, said amount to be determined at the hearing." Further, Claimants sought the valued of unreturned personal property, attorneys' fee, interest, and the outstanding principal of $175,857 on the Note plus interest.  In the Matter of the FINRA Arbitration Between Morgan Stanley Smith Barney LLC and Morgan Stanley Smith Barney FA Notes Holdings LLC, Claimants, vs. LPL Financial LLC and Scott Douglas Maloy, Respondents (FINRA Arbitration 14-01448, April 26, 2016).

Respondents LPL and Maloy generally denied the allegations and asserted various affirmative defenses.

District Court

Under the heading of "OTHER ISSUES CONSIDERED AND DECIDED," the FINRA Arbitration Decision asserts, in pertinent part:

On May 22, 2014, counsel for MSSB advised FINRA Dispute Resolution that the U.S. District Court denied MSSB's request for a preliminary/permanent injunction.

On September 22, 2015, Claimants' counsel submitted a motion for award/judgment on Claimants' claim against Maloy for breach of promissory note. On October 7, 2015, Claimants' counsel submitted a request that the Panel decide Claimants' motion on the papers. No oppositions were received.

On November 3, 2015, the Panel issued a ruling that any outstanding issue will be determined at the evidentiary hearing. On the same day, counsel for LPL advised that since LPL is not a party to the promissory note claims, it will not be present at the hearing.

On November 18, 2015, Claimants' counsel advised FINRA Dispute Resolution that the following claims are dismissed with prejudice: breach of contract; intentional interference with MSSB's business relationships; negligent interference with MSSB's business relationships; breach of duty of loyalty; and violation of the Washington Uniform Trade Secrets Act. The only remaining claim is against Maloy for breach of promissory note.


The FINRA Arbitration Panel found Respondent Maloy liable to and ordered him to pay Claimants the principal due on the Note of $175,857.00 plus $30,127.05 interest. In an unusual move, the Panel recommended that the "parties discuss a payment plan for Maloy."

Bill Singer's Comment

Oddly, the FINRA Arbitration Decision fails to specify which "U.S. District Court" denied the requested injunction. Under such circumstances, I would have anticipated a citation to the actual docket number and case title or, at a minimum, some specification as to the identity of the US District Court. In an effort to better inform his readers, Bill Singer, publisher of the Blog went the extra distance and researched the federal court meanderings of the MSSB and Maloy dispute. The indefatigable Mr. Singer ascertained that the referenced district court was none other than the Western District of Washington ("WDWA").

Below you will find references to the WDWA lawsuit. I urge all serious industry participants to read the source materials because they provide a detailed behind-the-scenes view of how many post-employment disputes play out on Wall Street. You will learn about the bases for seeking and granting a TRO and, thereafter, permanent injunctions. You will gain a better understand of the mechanics that are involved in notifying a soon-to-be-former-employer of your plans to depart, and you will learn what steps you might take that could blow your best plans out of the water. Finally, you can read the Court's language setting forth the parameters of the TRO and, as such, prepare yourself for the nature of such initial restrictions upon your ability to do business at your new employer.


In Morgan Stanley Smith Barney LLC, a Delaware Limited Liability Company, Plaintiff, v. Scott Maloy, Defendant (Order Granting Plaintiff's Motion for Temporary Restraining Order and Expedited Discovery and Ordering Defendant to Show Cause, WDWA, 14-CV-05388 / May 13, 2014), WDWA granted to Plaintiff MSSB a temporary restraining order ("TRO") against Defendant Maloy. The TRO enjoined and restrained Maloy from:

  1. Soliciting any business from any client or customer whom Defendant served during his employment with Morgan Stanley, or any other customer or client of Morgan Stanley whose name became known to Defendant while in the employ of Morgan Stanley;
  2. Contacting for business purposes, whether in person, through others, by telephone or in writing (including, but not limited to, email, text-message, instant message, and any other electronic form of communication), any client or customer of Morgan Stanley whom Defendant served during his employment with Morgan Stanley or whose name became known to Defendant while employed by Morgan Stanley; and
  3. Using, disclosing, or transmitting for any purpose (including but not limited to the solicitation of said clients or customers), any information contained in the records of Morgan Stanley, including but not limited to the names, addresses, and financial information of said clients or customers.

Maloy's Employment With Morgan Stanley.

From approximately April 2008, until his resignation on May 2, 2014, Defendant was employed as a financial advisor in Morgan Stanley's Tacoma, Washington branch office. Declaration of Timothy Truebenbach ("Truebenbach Decl."), Dkt. # 5, ¶¶ 3 and 4. 1 As a condition of his employment by Morgan Stanley, Defendant signed a Special Compensation Agreement (the "Agreement"). Id., Dkt. #5, ¶¶ 3, 4 & Ex. A.2 . . .

. . .

The Departure Of Maloy From Morgan Stanley.

On May 2, 2014, Defendant resigned from Morgan Stanley without advance notice and commenced employment with LPL. Truebenbach Decl., Dkt. #5, ¶ 4. In connection with his departure, Defendant has engaged in egregious conduct in violation of his contractual, statutory, and common law obligations to Morgan Stanley and in violation of the industry Protocol for Broker Recruiting.

After Defendant's resignation, Morgan Stanley learned that the hard copy files for Morgan Stanley clients whom Defendant serviced are now missing from Defendant's former office. Declaration of Carles Appling ("Appling Decl."), Dkt. # 4, ¶¶ 2 and 3, Ex. A; Truebenbach Decl., ¶ 8. Photographs of the credenza in Defendant's former office where client files were maintained make clear that the client files are missing. Id., Dkt. #4, ¶¶ 2 and 3, Ex. A. Defendant did not have permission to remove, destroy, or discard hard copy client files which were used to service Morgan Stanley clients. Truebenbach Decl., Dkt. #5, ¶ 8. Confidential and proprietary client information such as contact information, financial information, account numbers, and social security numbers were maintained in client files kept by Defendant. Id. Financial advisors at Morgan Stanley's Tacoma office maintain hard copy client files in accordance with Morgan Stanley policy and books and records requirements imposed by FINRA. Truebenbach Decl., Dkt. #5, ¶¶ 7 and 8, Ex. C. Further, it is against Morgan Stanley policy and Defendant's contractual obligations for Defendant to retain client files including hard copy client files following his resignation. Id., Dkt. #5, ¶¶ 3 and 8, Ex. A at paragraph 4. Since the issuance of the TRO on May 13, 2014, the hard copy files of Morgan

Stanley clients whom Defendant serviced remain missing. Defendant also has taken client contact information with him to his new employer, LPL, for the purpose of soliciting Morgan Stanley clients for which he is liable to Morgan Stanley. Id., Dkt. #5, ¶¶ 5, 6, and 9, Ex. D.

Morgan Stanley became aware of the misconduct described above in the few days following Defendant's resignation, and it is reasonable to believe there have been other forms of misconduct not yet discovered. Based on this evidence, the Court issued a TRO to preserve the status quo and prevent further misconduct by Defendant. Now, a preliminary injunction is necessary to continue to preserve the status quo, to prevent further misconduct by Defendant, and to prevent any further irreparable harm to Morgan Stanley. Unless a preliminary injunction is issued, Defendant is likely to continue his illegal conduct and cause Morgan Stanley to suffer severe and irreparable injury.

Pages 2 - 5 of the Opening Brief

The Memo in Opposition

Finally, Defendant Maloy gets his chance to better explain his position in Morgan Stanley Smith Barney LLC, a Delaware Limited Liability Company, Plaintiff, v. Scott Maloy, Defendant (Defendant's Memo in Opposition to Motion for Injunction, WDWA, 14-CV-05388 / May 20, 2014): 

Scott Maloy joined Morgan Stanley Smith Barney ("Morgan Stanley") after working for A.G. Edwards for many years. Maloy signed a Special Compensation Agreement ("the Contract") when he joined Morgan Stanley in 2008 that specifically excluded his existing clients from a one-year non-solicitation clause that applied only to clients that he developed at Morgan Stanley. When Maloy left Morgan Stanley, 90% of his clients were clients he brought to Morgan Stanley from A.G. Edwards, who were expressly excluded from the Contract's non-solicitation clause. The remaining 10% of Maloy's clients were subject to the non-solicitation provision, but they were also subject to the Protocol for Broker Recruiting (the "Protocol"), because Morgan Stanley and Maloy's new company, LPL, are both signatories to the Protocol. Under the Protocol, firms agree to waive enforcement of non-solicitation clauses, so long as the departing representative takes nothing more than a list with customer names and contact information as expressly allowed by the Protocol. That is exactly what Maloy did.

Upon leaving Morgan Stanley, in accord with the Protocol , Maloy gave his branch manager a copy of the list he was taking and it included only the client information permitted by the Protocol. Maloy took no other client information with him. Maloy was already permitted to solicit 90% of his clients under the terms of his Morgan Stanley Contract, and he was now permitted to solicit the remaining 10% pursuant to the Protocol. In short, Maloy followed the rules, and the rules clearly and unequivocally allow him to solicit all of his clients after he left Morgan Stanley.

Unfortunately for him, Maloy also attempted to follow Morgan Stanley's rules and instructions with respect to destruction of duplicative paper files in advance of an office remodel, which has resulted in Morgan Stanley attempting to play a cynical game of "gotcha" in this matter. In connection with an office remodel and longstanding instructions to maintain client files electronically so that the office could be "paperless," Maloy put many duplicative paper files in shredding bins as he vacated his office for the remodel. Morgan Stanley now pretends to be shocked that the paper files that it told him to shred no longer exist, and has seized on the empty file cabinet in his office as the basis to unilaterally rescind its contractual agreement that Maloy can solicit 90% of his clients (that he brought from A.G. Edwards), and seek to deny Maloy the protections of the Protocol that allow him to soliciting the remaining 10% of his clients.

Pages 1 -2 of the Memo in Opposition