Ex-Broker Wins Another Round Against Morgan Stanley
Finra arbitrators last week denied a former corporate executive’s million-dollar claim for damages from Morgan Stanley over failed oil-and-gas investments, but the fired broker who allegedly recommended the investments ended up with the victory.
A three-person panel of pubic arbitrators in Minneapolis ordered Morgan Stanley last week to pay $140,414 of legal fees and costs to Randall Lee Johnson, the former broker who was discharged in early 2013 after a 41-year brokerage career.
Johnson, who was dropped in May from the complaint that was filed in 2017 by former Land O’Lakes chairman and chief executive John Gherty and his wife, argued that Morgan Stanley was obligated to defend and indemnify him under Minnesota wage statutes because his recommendations were “made within the course and scope of his employment,” according to the award decision.
Morgan Stanley’s in-house lawyer had offered to represent Johnson, but not to indemnify him nor to pay his outside legal costs, said Steven M. Phillips, the Minneapolis lawyer who represented the broker.
“I think the arbitrators thought our client had done the hard labor and defense against this claim, and that they (Morgan Stanley) were riding on our coattails,” said Phillips, a shareholder of the law firm Anthony Ostlund Baer & Louwagie P.A. in Minneapolis.
The arbitrators did not explain the reasons for their decisions, but also ordered Morgan Stanley to pay Johnson $10,000 in punitive damages in addition to legal fees and costs. Johnson had requested a penalty “in an amount sufficient to send a message to Morgan Stanley and to deter future abuses,” according to the award decision.
“Morgan Stanley is pleased that the panel dismissed the Ghertys’ claims for $1.2 million,” firm spokeswoman Christine Jockle said in an e-mail. “Morgan Stanley continues to believe that it was not obliged to advance attorneys’ fees for the Johnsons under the facts of the case.”
Phillips had previously represented Johnson and his son Christopher in a promissory-note complaint that Morgan Stanley filed in September 2013. It sought $1.87 million from the father and $2.7 million from the son for failing to repay the balances on forgivable loans they received after joining in 2008 from UBS Financial Services.
Arbitrators in the notes case denied the claim against the father, and ordered Morgan Stanley to repay him $1.17 million from accounts that it had frozen. His son was ordered to pay $1.5 million of the firm’s $2.7 million claim. (Christopher Phillips was suspended by Finra in April 2017 for failing to pay the award, according to his BrokerCheck history.)
The bad blood between Morgan Stanley and Randy Johnson over the promissory note arbitration likely influenced arbitrators in last week’s decision to award him legal fees, his lawyer said.
“We certainly highlighted the conflict, which didn’t make their offer to defend him with their own employee [in-house lawyer Joseph Sack] a very palatable offer,” said Phillips.
In the forgivable loan arbitration, Randall Johnson alleged that Morgan Stanley improperly fired him ten months before his planned retirement date. Morgan Stanley accused him of disseminating non-firm research on a “low-priced security” and for failing to disclose a family account that was trading the security, according to his BrokerCheck history.
The arbitrators’ award last week covered the $140,000 of fees and costs Johnson incurred before the Ghertys withdrew their claim against him. They denied his claim for another $49,000 in fees and interest for post-withdrawal presentations and arguments.
The Ghertys brought their initial claims against the firm and the broker for allegedly advising them to invest in Voyager Oil & Gas, Southern Plain Resources and Northern Oil & Gas, among other energy investments, without informing them before and after Johnson’s termination that Morgan Stanley did not cover the investments and that Johnson had conflicts on some recommendations.
John “Jack” Gherty was a sophisticated investor and active trader with accounts at a discount brokerage firm, according to Phillips.
Matthew Boos, a lawyer who represented the Ghertys, did not return a call for comment.