Two Bit Explanation In $4 Million Morgan Stanley Employment Arbitration

December 13, 2016

Yet another mandatory FINRA employment arbitration comes under scrutiny. This one involves ten promissory notes worth a few million dollars issued to two former Morgan Stanley Smith Barney employees. Both of the employees get sued in an effort to collect the alleged balances due. One loses. One wins, sort of. Why? Dunno. How come? Dunno. Why does FINRA persist in this obfuscation of mandatory employment arbitration decisions? Dunno -- but I have a theory. What is your theory? Not saying. Why? Cause I don't have to. Isn't that a bit childish and silly? Dunno.

Case In Point

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in September 2013, Morgan Stanley Claimants asserted breach of promissory notes against:

  • Respondent Randall Johnson: promissory notes dated November 13, 2008, February 24, 2009, February 23, 2010, December 13, 2010, and December 16, 2011;
  • Respondent Christopher Johnson: promissory notes dated November 13, 2008, February 24, 2009, February 19, 2010, December 13, 2010, and December 16, 2011. 

Claimants alleged that the balance on the Notes became due and owing after Respondent Randall Johnson terminated his employment on January 4, 2013, and Respondent Christopher Johnson terminated his employment on October 5, 2012. Claimants sought $1,865,434.00 and $2,666,134.00 in compensatory damages against Respondents Randall Johnson and Christopher Johnson, respectively, plus interest, attorneys' fee, and costs. In the Matter of the FINRA Arbitration Between Morgan Stanley Smith Barney, LLC and Morgan Stanley Smith Barney FA Notes Holdings, LLC, Claimants, vs. Randall Johnson and Christopher Johnson, Respondents - AND - Randall Johnson, Counter-Claimant v. Morgan Stanley Smith Barney, LLC, Counter-Respondent (FINRA Arbitration 13-02892, December 6, 2016). 


Respondents generally denied the allegations and asserted various affirmative defenses. Respondent Randall Johnson sought the expungement of the reason for his termination from his Central Registration Depository files ("CRD").


Randall Johnson filed a Counterclaim asserting breach of contract, promissory estoppel, common law fraud/misrepresentation, negligence, negligent misrepresentation, conversion, unjust enrichment, defamation per se, violation of Minnesota Wage Statutes, and respondeat superior. In his Counterclaim, Randall Johnson alleged that he was improperly terminated ten months before his planned retirement date and, that as a result of this termination, he suffered substantial damages and has not been able to retain alternate employment within the securities industry. At the hearing, in addition to unspecified defamation per se damages, punitive damages, attorneys' fees, and costs, Counterclaimant Randall Johnson sought:

  •  $2,038,018.00 for forfeited payments under the Bonus Agreement plus interest;
  •  $1,166,197.00 for the return of "frozen" account funds plus interest;
  •  $519,792.00 in lost compensation plus interest;
  •  $1,968,555.00 for forfeited former financial advisor payments;
  •  $372,801.00 for forfeited long-term incentive compensation plus interest; and
  •  $35,969.00 for damages for violation of the Minnesota Wage Statute plus interest.


A FINRA Arbitration Panel:

  • denied Claimants' claims against Randall Johnson;
  • found Morgan Stanley Smith Barney, LLC liable to and ordered it to pay to Respondent Randall Johnson $1,166,197.00 as the return of "frozen" account funds; and
  • found Respondent Christopher Johnson liable to and ordered him to pay to Claimants $1,502,000 in compensatory damages
Bill Singer's Comment

Today's featured FINRA Arbitration Decision is yet another in an overly long-line of such published documents that perfectly highlights all that is wrong with Wall Street's system of mandatory employment arbitration. And, yes, that is my opinion, and, yes, I understand that many folks vehemently disagree with me. And, no, this isn't a popularity contest, and, no, I am not going to change my mind.

Let's start off with the fact that in November 2008, Claimants gave to each of the two Respondents a promissory note, and let's note that Claimants continued to issue new promissory notes to each Respondent through 2011. In fact, if you count 'em up, we got five promissory notes issued to each Respondent, for a total of ten issued promissory notes that were mainly issued during what has commonly been called the Great Recession. By late 2012/early 2013, when both Respondents were no longer employed at Respondents, the balances owed on each of the issued notes (plus costs and fees sought in collection) was about $1.9 million for Respondent Randall Johnson and $2.7 million for Respondent Christopher Johnson: about $4.6 million in total.

Hopefully we can agree that during the Great Recession, brokerage firms weren't simply shelling out big bucks to  underachievers in the form of Employee Forgivable Loans ("EFLs") or retention bonuses. Consequently, I'm guessing that the Respondents were viewed as valuable assets and that Morgan Stanley Smith Barney wanted to do whatever it could to keep the production. 

The FINRA Arbitration Decision states that Respondent Randall Johnson sought the expungement of the "reason for his termination," and that he alleged that he was improperly terminated; however, we are never told the circumstances of that termination or what constituted the basis for the disputed reason for termination. Moreover, the Decision is moot as to the circumstances of Christopher Johnson's termination, which could have been voluntary, permitted to resign, or discharged. Seems to me that when we have a major brokerage firm seeking to recover about $4.6 million in note balances that such information would be the minimal disclosure standard in a mandatory employment arbitration.

Claimants sought nearly $2 million and damages for unpaid balances, costs, and fees attendant to five notes issued to Randall Johnson. Those of us who follow these collections cases know that it is rare, exceedingly rare, for a promissory note case to make it all the way to a Panel's adjudication and result in a denial of any recovery. We're not talking an off-set of an award in favor of a respondent but, rather, an outright denial of any recovery to the employer Claimant -- and not any Claimant but Morgan Stanley Smith Barney.  Which is made all the more puzzling given that the same arbitrators awarded $1.5 million in compensatory damages to Claimants as against Respondent Christopher Johnson. Why the different outcomes -- and why not an iota of explanation for the variation? Dunno.

Finally, as to Counterclaimant Johnson's request for some $6 million in damages, costs, and fees, the FINRA Arbitration Panel awarded him$1,166,197.00, representing the return with interest of so-called frozen account funds. Why did the arbitrators grant that relief but deny some $5 million in other requests damages? Dunno. Why did the FINRA Arbitration Decision fail to offer any explanation as to the arbitrators' denial of Randall Johnson's request for the expungement of the "reason for termination" on his CRD? Dunno.

I readily concede that there are compelling reasons as to why some, most, or all aspects of any employment dispute should be kept confidential; and among the most obvious are that such disclosure could involve defamation, invasion of privacy, and other similar issues.  On the other hand, our courts are presented with the same such issues on a daily basis and are able to address those concerns through orders to seal or of confidentiality, and similar arrows in a judge's quiver. 

FINRA employment arbitration is not optional or voluntary but mandated by a self-regulatory organization that is a membership organization, whose members are exclusively employers. Employees of FINRA member firms are disenfranchised at FINRA. Making matters worse, thousands of industry employees are facing the very issues noted in today's featured Blog case against not only Morgan Stanley but other industry employers, and as a result of the default protocol of limited disclosure in FINRA's Arbitration Decisions, those same industry employees are deprived of understanding why various claims prevail and why others fail.  Ultimately, it's a fairly simple guess that somewhere, some industry employee is asking:
  • How come Randall Johnson won and Christopher Johnson lost? 
  • What steps can I take or avoid to posture my case more like Randall's? 
Sadly, the FINRA Arbitration Decision offers no answers. What we come away with is an infuriating "dunno." It's a two-bit explanation not worthy of an organization that perpetuates self regulation on Wall Street and enforces mandatory consumer and employee arbitration.