Morgan Stanley Broker Wins Expungement After Firm Settled With Customer

July 9, 2018

Among any group of litigators in any industry is an unwritten book about lawyers and law firms that we somewhat derogatorily refer to as "settlers." No . . . we're not talking about the Wild West and those who trekked by wagon train. We're talking about folks who cave in after giving you the impression that they will fight to the bitter end. If the settler is part of the Defense Bar, we often say that dealing with such a lawyer or law firm is akin to backing up a Brinks truck and loading it up. If we're referring to the Claimant Bar, we often jokingly characterize such settlers as lawyers or law firms who turn a $1 million case into a $10,000 settlement. In order to get good settlements for your clients, you need to develop the reputation of going to the mat and to verdict. You need to be known as someone who is willing to try a case to the proverbial bitter end. You don't need to win the case but you need to leave your opponent coughing up blood and with sore ribs so that your opponent is not all that crazy for a re-match. In a recent FINRA public customer arbitration, Morgan Stanley settled with public customer claimants. It may have been a cheap price to pay and a wonderful result for the brokerage firm. Then again, when you read the arbitrators' analysis of the customers' case, you sort of wonder whether Morgan Stanley just doesn't have the stomach for a game of high-stakes litigation poker. In the bare knuckle, no-holds-barred world of Wall Street, you sure as hell better earn the rep as a Street Fightin' Man!

Case In Point

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in August 2016, public customer Claimants Alberto Mizrachi Fogel and Rita Bemaras De Mizrachi asserted suitability; churning; failure to supervise; failure to treat Claimants in a just and equitable manner; breach of fiduciary duty: breach of contract; fraud, fraudulent misrepresentation and/or negligent misrepresentation; constructive fraud; and negligence, gross negligence and negligent supervision in connection with what the FINRA Arbitration Decision characterizes as the following investments in Claimants' joint account:

travel companies including Royal Carribean, Delta, Marriott, Southwest Airlines and Avis; short-term trading of equities in EMC, Ford Motor Company, Facebook, Tesla, Netflix and Google: short-term trading of speculative stocks in Molycorp, Inc., Seadrill Ltd. and Encana Corp.; Westport Innovations; Waterford International, Ltd.; Yamaha Gold; Dow Jones "SPDR" ETF puts; Wielton SA; Cobalt International Energy; U.S. Silica Holdings; and Virnetx. The causes of action also relate to the trading of options in Apple, Yahoo and iShares silver and in margin borrowing.

Claimants sought between $3.5 and $5 million compensatory damages; at least $830,000 in disgorgement of commissions and margin interest; interest, and punitive damages. In the Matter of the FINRA Arbitration Between Alberto Mizrachi Fogel and Rita Bemaras De Mizrachi, Claimants, vs. Morgan Stanley, Respondent (FINRA Arbitration 16-02012, July 2, 2018)

Respondent Morgan Stanley generally denied the allegations, asserted various affirmative defenses, and sought the expungement of the matter from unnamed party Gregory Scott Breen's Central Registration Depository record ("CRD").


On January 2, 2018, Claimants filed a Notice of Voluntary Dismissal stating that the parties had settled the case and Claimants had dismissed with prejudice all claims brought against Respondent. Unnamed party Breen did not financially contribute to the settlement.


Pursuant to FINRA Rule 2080, the arbitrators found that Claimants' claim, allegation, or information is clearly erroneous and false. In part, the FINRA Arbitration Panel offered the following rationale for recommending expungement of the matter from non-party Breen's CRD:

Fogel did extensive research on his own. He relied on newspaper and magazine articles as well as television shows in making decisions. Fogel would also take investment advise from his brother and there is no evidence indicating his brother was qualified to give such advice. Claimants wanted to sell puts and buy calls as a low cost of entry strategy based upon the brother's advice but unnamed party Breen advised against it.

Fogel also had extensive experience trading in the investments that became the subject of his complaint. In fact, Fogel made rnany trades substantially similar to the ones that are the subject of this claim through a broker in Canada and there is evidence implying he also made substantially similar trades through a broker in Mexico. Claimants' financial statement provided by Respondent shows investments in securities and options since 1997 and in commodities since 2007. Investment objectives were speculation, capital appreciation, aggressive incorne and income, with a risk tolerance of aggressive. Fogel proposed all options trading and many other trades unsolicited by unnamed party Breen. Claimants determined their own trading strategies. Claimants' complaint about inappropriate solicited trades were in fact unsolicited.

Furthermore, Claimants allegation that unnamed party Breen recommended an overconcentration in Apple has no basis in fact. Claimants pursued the same high concentration in their Canadian accounts as well as in their accounts with Respondent, and both at Claimants' instruction. In fact, Claimants pursued this strategy on their own as demonstrated by the emails over a significant period of time. Indeed, unnamed party Breen's advice to Claimants was not to continue to build the already over-concentrated position as Claimants desired. Claimants' profit on the Apple options was substantial.

In addition to the documents relied upon. the Panel finds unnamed party Breen's testimony to be credible. Unnamed party Breen testified that Fogel was a highly sophisticated speculator with as much knowledge of the markets as people in the industry, although he was not registered. Fogel spoke almost daily with unnamed party Breen and unnamed party Breen kept records of conversations over an extensive tirne-period. Fogel also traded his relatives' accounts. At times, Claimants would make highly speculative trades based on a single article. For example, Claimants bought puts in airline stock based on an article in USA Today stating that the Ebola outbreak could negatively affect the travel industry. As stated above, Claimants' determined their own trading strategies.

Bill Singer's Comment

Online FINRA BrokerCheck records as of July 6, 2018, disclose that the FINRA Arbitration settled on November 16, 2017 for $175,000.

In reading through the arbitrators' rationale for their findings, it is quickly apparent that they rejected any suggestions that the trading at issue was the prompted by Breen's recommendation or solicitation. The Panel found that Fogel did his own "extensive research" and not only "relied" upon published articles and television shows for his ideas but also from his brother. Pointedly, the Panel found that not only did Claimants utilize an options strategy "based upon the brother's advice," but the clients' stockbroker "Breen advised against it." Similarly,the arbitrators emphasized that Fogel "made many trades substantially similar" to those he questioned in the arbitration -- and, moreover, such similar trades were made through a Canadian broker (and likely also through a Mexican broker).

At this point, I want to underscore a point because Blog readers may have missed a key aspect of today's featured FINRA customer arbitration. Public customers Claimants Fogel and Mizrachi sued Morgan Stanley for up to $5 million in compensatory damages allegedly caused by trade practice misconduct. If you were to solely read the FINRA Arbitration Decision pertaining to the expungement petition, you would come away with the sense that the customers were full of crap and that there was no basis for awarding them any damages. Which is difficult to reconcile with the fact that Morgan Stanley settled with the customers for $175,000.

Why did Morgan Stanley cough up $175,000 to settle allegations which three independent arbitrators seem to have found somewhat laughable? I suspect that the firm will explain -- and with some merit -- that settling a $5 million customer claim for $175,000 is a sensible business decision and one that likely avoided incurring legal costs in excess of the settled amount. If you were to ask the Claimants, they may say that if they had been given a full opportunity to present their case during evidentiary hearings that the arbitrators would have seen the veracity of their complaints. Frankly, as with many settlements, we don't know what we don't know -- and that is often the motivation to pay out some cash in order to short circuit litigation. Be that as it may, given the unequivocal rejection of Claimants' allegations by three independent arbitrators who recommended expungement, we may legitimately wonder just what the hell Morgan Stanley was thinking when it opted to pay a six-figure settlement. In the end, Morgan Stanley made a good business decision, or the firm panicked based upon a lack of confidence in its defenses.

Download a PDF copy of Bill Singer Esq.'s analysis of FINRA's Expungement Rules

  • FINRA Rule 2080: Obtaining Customer Dispute Expungement
  • FINRA Rule 2081: Prohibited Conditions Relating to Expungement of Customer Dispute
  • FINRA Rules 12805 and 13805: Expunging Customer-Dispute Information Under Rule 2080

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