The Preemptive EFL Gambit Starts Anew On 2019 FINRA Arbitration Chessboard

January 8, 2019

Ah yes, it's a new year and we start all over again. You dust off the chessboard. I'll get the box of white and black chess pieces. Let's start another game for 2019 and take a look at the old Preemptive EFL Gambit, in which a former employee (playing as White) who has a balance due on his loans aggressively goes on the attack, which forces the former employer (playing as Black) to initially defend his exposed position but then launch a counter-attack. If you don't understand all the ensuing moves and the endgame, don't worry -- there will be plenty of repeat matches with the same opening throughout 2019.

Case In Point

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in April 2016, and as amended, associated person Claimant Gefen ultimately asserted  breach of employment agreement; wrongful discharge; intentional infliction of emotional distress; fraudulent inducement; unjust enrichment; conversion; defamation; tortious interference; and violation of the Standard of Commercial Honor and Principles of Trade in connection with his termination of employment and outstanding promissory notes dated January 26, 2013 ("Note A"), March 4, 2013 ("Note B"), and February 13, 2015 ("Note C"). Claimant asserted that Respondent Morgan Stanley Smith Barney ("MSSB") had slandered and defamed him, and, further, said conduct excused his performance under the Notes. Claimant sought at least $5 million in damages including back and front pay, punitive damages, costs, and fees. Claimant also sought the expungement of the Uniform Termination Notice For Securities Industry Registration ("Form U5") filed by Respondent MSSB. In the Matter of the FINRA Arbitration Between Ivan R. Gefen, Claimant, vs. Morgan Stanley Smith Barney LLC and Morgan Stanley Smith Barney FA Notes Holdings LLC,, Respondents (FINRA Arbitration 18-01223, January 4, 2019).

MSSB Counterclaims

Respondents MSSB generally denied the allegations, asserted various affirmative defenses, and filed a Counterclaim asserting breach of promissory note arising from Claimant Gefen's alleged failure to repay the sums due on the Notes. Counter-claimants sought $1,310,588.85 on Note A, $402,731.63 on Note B, and $542,399.97 on Note C [total sought for the three Notes was $2,255,720.40], plus interest. Further, Counter-claimants sought specific performance of the Addendum to the Loan Commitment Agreement, or, in the alternative, damages stemming from Claimant's retention of client contact information and/or solicitation of clients he serviced plus costs and fees. 


The FINRA Arbitration Panel denied Claimant Gefen's claims and his request for expungement.

The FINRA Arbitration Panel Panel found Claimant Gefen liable and ordered him to pay to Respondents $2,584,838.60 in damages inclusive of pre-award interest, plus statutory interest until the full Award is paid. The Panel further awarded attorneys' fees as will be determined by a court of competent jurisdiction.

The following were assessed by FINRA or the Arbitration Panel:

Claimant Gefen:
  • $2,250 in initial FINRA claim filing fee;
  • $600 discovery-related motion fees; and
  • $1,950 hearing session fees.
Respondents MSSB:
  • $3,400 Counterclaim filing fee;
  • $3,600 member surcharge;
  • $6,800 member process fee;
  • $600 discovery-related motion fees; and
  • $21,450 hearing session fees.
Bill Singer's Comment

In today's Blog we come across the fairly common example of what appears to be a "preemptive" promissory notes or Employee Forgivable Loan ("EFL") FINRA arbitration. Of course, I can't say for certain that Claimant Gefen launched his lawsuit with the intent of waging a preemptive battle against MSSB, but given the appearance of that litigation gambit, I'm simply going to accept the logic of something that looks and quacks like a duck being one. That being said, it may not be -- it could be a goose.

Apparently, MSSB gave three EFLs to Gefen/ When the arbitration began in 2016, the former employer asserted that there was $2,255,720.40 plus interest, costs, and fees owing on the unpaid balances. The former employer roughly doubled what was owed and demanded over $5 million in damages plus interest, costs, and fees. Given the FINRA arbitrators' Award, you'd have to conclude that MSSB came out the winner because it was awarded basically every penny in damages plus interest and to-be-determined legal fees. Geffen couldn't even get the consolation prize of an expungement.

What, then, was (or often is) the point of a former rep in Gefen's position firing the first salvo in a preemptive arbitration attack? 

For one thing, it was likely inevitable that MSSB would sue to recover some $2.26 million-plus in EFL balances. It may also be that Gefen was legitimately outraged by his former employer's conduct during and after his employment, and it's often sound legal advice to land the first blow and go through a protracted lawsuit as the aggrieved party in the role of Plaintiff/Claimant. Further, note that Gefen filed his Statement of Claim in April 2016, that here we are, January 2019, and the dispute is only now adjudicated -- unless there are appeals that will further extend the process. Assuming that Geffen intends to honor the Award and pay-up promptly, he did buy himself something like 33 months of delay from April 2016 to January 2019. Sometimes that delay gets factored into all sorts of calculations about not having to pay upfront and essentially getting a loan with a likely affordable rate of interest and using the threat of extended litigation as leverage to extract a better settlement offer and . . . well, use your imagination. 

Online FINRA BrokerCheck records as of January 8, 2019, disclose that Gefen was first registered in 1984, and had been registered with Morgan Stanley from January 2013 to March 2016. BrokerCheck discloses the following items:

"Customer Dispute - Award/Judgment": 1 joint/several award for $158,000 in 1990;
"Customer Dispute - Settled": 5 settlements from  1992 - 2017
"Customer Dispute - Closed-No Action / Withdrawn / Dismissed/Denied" 4 matters from 2000 - 2008

Sadly missing from the FINRA Arbitration Decision is any discussion of why MSSB paid a princely sum in EFL moolah to Gefen in 2013 and again in 2015. Similarly missing is any discussion as to what caused the rupture of the employment relationship.