Broker Challenges Arbitrators Ordering $1.4 Million Payment to Morgan Stanley
A California broker who was ordered to pay Morgan Stanley the million-dollar-plus balance on forgivable loans she owed when she left two years ago is asking a federal court to vacate the decision because of an allegedly improperly classified arbitrator.
Rachael Konz, who currently works at a Merrill Lynch branch in Folsom, filed a petition to vacate a unanimous three-person arbitration decision before a federal district court in New York City on Friday. Such petitions are rare, but have been increasing as the arbitration process comes under increased scrutiny by critics in Congress and the judiciary, despite a recent Supreme Court decision upholding mandatory arbitration clauses, according to industry lawyers.
One of the arbitrators in the Konz decision, which was finalized in early May, works for a law firm that derived at least $50,000 or at least 10% of its annual revenue from investors on issues relating to securities matters. Under Finra’s revised 2015 definitions of public and industry representatives, that should have disqualified him from designation as a public representative , according to Konz’s claim.
Joshua Brinen, the lawyer representing the broker, admits that it is “extremely difficult” to persuade a court to overturn the decision of a Financial Industry Regulatory Authority arbitration panel. But he is currently involved in four such challenges, one of which led to an admission from the self-regulatory group in March that it had misclassified an arbitrator who previously worked with a broker-dealer as a “public” representative.
Brinen said he could not discuss the particulars of the case, and a spokeswomen at Morgan Stanley declined to comment. A Finra spokeswoman said the self-regulatory group does not publish statistics on requests to vacate arbitration decisions or on success rates.
Bill Singer, a veteran securities industry lawyer who writes a blog that is often critical of Finra arbitration decisions, said that anecdotally he has observed a growing number of challenges to arbitration panel selection and composition since the regulatory group upgraded rules on arbitrator classifications.
“To be deemed a non-industry arbitrator you can’t even have the suspicion of having an industry affiliation,” said Singer, evoking Shakespeare’s description of Caesar’s wife. “Any attorney worth his salt is going to jump at” the chance to challenge an arbitrator who appears to have failed to properly report his or her affiliations.
In the Konz case, a San Francisco arbitration panel found on May 7, 2018, that she owed Morgan Stanley Smith Barney $1.19 million related to signing-bonus promissory notes she signed in May and September of 2013, plus attorneys’ fees of $189,201.50 and Finra forum fees of $5,975.
Under the Federal Arbitration Act, underlying decisions cannot be challenged but courts can vacate cases in limited circumstances, including fraud, evident partiality or corruption, and procedural misconduct.
Konz says in the court filing that arbitrator Paul Mabry—a land development specialist and the former chief surveyor of San Francisco County and city—should have been disqualified from serving as a public arbitrator because his law firm Hanson Bridgett, LLC, represents individuals and institutions in the securities industry, breaching Finra’s own rules of procedure.
Brinen did not respond to a request for comment.
In her arbitration counterclaim against Morgan Stanley, Konz cited counts of breach of contract, underpayment of compensation, wrongful sales practices and tortious interference with existing and prospective clients, all of which were denied by the arbitrators. The broker, who began her career at Citicorp Investment Services in 1999 and has since worked at Merrill, Morgan Stanley, and Wells Fargo Advisors, could not be reached for comment.
I find this to be very strange–she is arguing that ONE arbitrator wasn’t clearly defined as “an industry arbitrator”…..yet, there were THREE arbitrators. so, even if she got one arbitrator thrown out–the ruling would still have been 2 against her and 1 ‘no vote’….and a majority rules in these hearings. So, this sounds more like a stalling motion than anything. Maybe she doesn’t have the money?????
With respect, you need to remember that arbitration – even FINRA arbitration – is only a creature of contract, and not a function of law. Its not that they had three, they lost one, you still have two. Both sides agreed by contract to certain rules. The arbitration forum was to provide that forum consistent with those rules. The arbitration forum failed to do so. The award is improper for that reason.