Morgan Stanley Ordered to Pay Client $520K in Suitability Claim
(Updated with comment from Morgan Stanley spokeswoman.)
An arbitration panel has ordered Morgan Stanley Wealth Management to pay more than $520,000 to customers who alleged negligent supervision of a broker they said put them into unsuitably risky investments.Three Albuquerque, New Mexico-based arbitrators on Friday also refused to clean the complaint from the record of the broker, Timothy J. Prouty, who has spent his 14-year career with Morgan Stanley and predecessor Smith Barney. The broker has no other disclosure on his BrokerCheck record.
Customers Stephen R. Balok and Brenda J. Balok alleged that they accumulated losses in eight managed accounts that Prouty invested in junk bonds, options and ETFs that invested in futures, among other instruments, according to the award document.
Their lawyer, Clinton Marrs, said the couple did not actually incur losses over the ten-year period that Prouty was investing on their behalf, but that the $125,000 they earned on their million-dollar account was well below what a well-managed investment should have produced.
Arbitrators granted the customers $519,089 of compensatory damages plus interest from April 5 until payment is made, according to the award document. However, they denied the Baloks’ request for punitive and treble damages, and for attorneys’ fees, and split the costs of the 14 hearing and prehearing sessions between Morgan Stanley and the customers.
“They gave us 100% of our damages down to the penny,” Marrs said on Monday, adding that a punitive damages award was not something he really expected, and that he based his compensatory damages requests on opportunity costs to his clients. “We asked the panel to draw the line on whether the fiduciary standard [governing advisory accounts] really means anything or not.”
The seemingly unsupervised management of the accounts allowed Prouty to swing wildly from 100% investment in speculative securities to 60% cash and then bank into junk bonds, Marrs said. “So I asked the panel what does a customer bargain for and what are they entitled to expect when they hire a retail firm with the panache of Morgan Stanley’s brand, its professed expertise and the superiority of its resources.”
Morgan Stanley spokeswoman Susan Siering said the firm disagrees with the result and “does not believe that the evidence supported the Panel’s award in this case.”
She declined to comment on whether the firm would file in court to vacate the award. Prouty did not return a call for comment.
The Baloks did not address Morgan Stanley’s requests at evidentiary hearings and in closing arguments for expungement of the complaint on Prouty’s record, according to the award document. Marrs said that the firm barely addressed expungement at the eight hearing sessions last month, and included it as part of a laundry list of unsuccessful counterclaims.
As is customary, the award statement did not explain the decision of the three “public” arbitrators.
“It’s certainly a sign that the panel agreed that the disclosures…are accurate,” said James E. Heavey, a securities lawyer at Barton LLP in New York, who was not involved in the arbitration. “They believe the clients have been wronged and they’re going to maintain the record for the investing public in general.”
The Financial Industry Regulatory Authority has proposed revising its expungement rules to make it more difficult for complaints to be removed from the Central Registration Depository and publicly available BrokerCheck records. Some brokers and their lawyers have commented that expungement permits brokers to remove frivolous or otherwise incorrect complaints.
Finra has not yet forwarded its revised rule proposal to the Securities and Exchange Commission for approval.