Morgan Stanley Smith Barney Ordered to Pay $5 Million to Recruited Brokers


San Diego, CA — Shustak Reynolds & Partners, P.C.,  announces that it obtained a FINRA Panel award of $5 million dollars for a team of two San Diego based financial advisors who were recruited by Morgan Stanley and falsely induced to leave their positions at UBS in the summer of 2008. The two former UBS brokers, who continue to work for Morgan Stanley’s successor, Morgan Stanley Smith Barney (“MSSB”), were promised by senior level Morgan management during the recruitment process that the more experienced member of the team would transition into a salaried management role within six months of transitioning his book to Morgan. The junior team member, in turn, was promised he would take over and be compensated for the combined book, which Morgan estimated would generate approximately $700,000.00 in annual gross commissions based upon their combined trailing twelve. (Todd Vitale and John Paladino v. Morgan Stanley Smith Barney, LLC, FINRA Case No. 11-01633.)

Brokers Todd G. Vitale and John P. Paladino, who work in MSSB’s Rancho Santa Fe office, alleged they were recklessly and negligently lured to leave their long time positions at UBS to join Morgan Stanley six months before the early 2009 joint venture between Morgan and Smith Barney. Through oral and written assurances, the firm promised Vitale he would become a salaried sales manager and then a branch manager for Morgan Stanley and promised Paladino he would take over their combined book of business. After they successfully transitioned their combined books to Morgan and earned a bonus for that successful transition, they alleged Morgan simply ignored all promises made to them during the recruitment process. Vitale never was made a sales or a branch manager and was forced to continue to work his book. Paladino, in turn, never had the opportunity to service Vitale’s clients and never earned the revenues he would have earned, as promised, on the combined book. In fact, the evidence showed Paladino’s grid payout was lowered to such a point that for the past year he barely earned anything after repaying Morgan the annual amount required to pay the taxes on the up-front, forgivable loan he received when he joined the firm. Up-front forgivable notes, based on a formula related to the broker’s “trailing twelve” months of production, are typical in the industry.

The brokers argued that just when Vitale should have been given the management roles he was promised, Morgan merged with Smith Barney in January, 2009 and the senior level managers, including Morgan’s Southern California Regional Director, John Simmons, and others were moved around, relocated and ultimately left the firm. Vitale and Paladino were left as “orphans”, ignored by new management who gave available management positions that were promised to Vitale to their own, favored candidates. The pair tried for almost three years to get Morgan to honor its commitments to no avail and ultimately they were forced to hire counsel and initiate a FINRA arbitration against MSSB while continuing to work at the firm.

They hired experienced FINRA arbitration counsel Erwin J. Shustak, Esq. of Shustak Reynolds & Partners, P.C., San Diego, San Francisco and New York City, a veteran of hundreds of FINRA arbitrations over the years. “We obviously are pleased for our clients who did a courageous thing by suing their employer for deceptive hiring practices, breach of contract and other claims and who were completely vindicated by the Panel” said Shustak. Ultimately, the Panel awarded Vitale and Paladino more than the actual compensatory damages testified to by their expert, all of their attorneys’ and expert fees, costs and expenses of arbitration and a $10,000 sanction against Morgan for discovery abuses. According to Shustak, despite an Order from the Panel that certain documents had to be turned over by a specified time before the hearings, Morgan’s counsel ignored the deadline and, when faced with a motion for sanctions, turned over some of the specified documents stamped “For Attorneys Eyes Only”, which made the documents virtually worthless and wasted precious pre-hearing time. According to Shustak “Sadly, this is not the first time Morgan and its counsel have violated the rules of discovery, and we pointed out to the Panel just a representative sampling of the many sanctions imposed by Courts and Panels on Morgan for violations of discovery rules.”

The Panel awarded Vitale $2.6 million in compensatory damages; Paladino $2 million; both $355,000.00 in attorneys and expert fees and arbitration costs and imposed a $10,000.00 discovery sanction against MSSB payable to the brokers, a total of just under $5 million ($4,965,016.54). The award of $4.6 million of compensatory damages actually was $1.3 million more than the compensatory damages the duo sought. Shustak commented “The Panel did the right thing. The large award will help our clients cover the taxes on the lost earnings, an issue we always address as advocates for registered representatives in these cases.”

The brokers were actively recruited and joined Morgan shortly after an article appeared in Wealth Management in July, 2008 titled “Morgan’s Magic”.[1] That article described Morgan’s aggressive recruiting practices and stated that Morgan was actively building up its ranks of advisors by “paying handsomely for top producers”. “The evidence showed that Morgan was determined to add top producers from the ranks of its competitors and, through aggressive recruiting, was ‘having more success than its peers at convincing advisors that it is the place to be'” said Shustak. “We believe, and were able to prove, that Morgan was so aggressive at convincing producers like our clients to jump ship and join Morgan that Morgan senior level recruiters were encouraged to say anything the potential recruits wanted to hear to pressure them into joining Morgan and transitioning their clients to the firm” he added.

Several weeks before receiving this award against MSSB, the Shustak Reynolds & Partners, P.C. firm obtained a FINRA award for another broker MSSB lured from Merrill Lynch based on what that Panel determined were negligent misrepresentations made to the broker during his recruitment.

The underlying facts in that dispute were very similar to those in the Vitale/Paladino arbitration. Smith Barney began recruiting the broker to join its downtown, San Diego office in the spring of 2009, several months before Smith Barney’s joint venture with Morgan Stanley was scheduled to close. At the time, the broker was employed by Merrill Lynch as an international financial advisor, having spent the past 13 years at the firm building a substantial book of business comprised exclusively of international clients. Those clients required unique international lending and brokerage services.

During the recruitment process, the broker gave Smith Barney representatives detailed information concerning the specific investments and loans his customers held and stressed the importance of having all of those assets and loans transfer without issue to Smith Barney and MSSB. After discussing those investments and loans with the broker, Smith Barney representatives assured the broker that his clients’ assets would transfer, without a problem, in-kind to Smith Barney and MSSB. They also assured him that after the joint venture MSSB would offer international loans and brokerage services equivalent to or better than those available at Merrill Lynch.

Based on those assurances, the broker resigned from Merrill Lynch and joined Smith Barney in mid-2009, days before the MSSB joint venture closed. He also was paid a seven figure up-front bonus in the form of a promissory note to be forgiven over time.

Immediately after joining the firm, the broker experienced severe difficulties transferring his customers’ assets to MSSB. A substantial portion of those assets “bounced back” to Merrill Lynch, and MSSB would not, despite its representations to the broker, offer the lending services the broker’s customers required. As a result, many of the broker’s clients decided to leave all or some of their assets at Merrill Lynch or moved to other competitor firms. In mid-2010, after losing approximately 80% of his assets under management, the broker resigned from MSSB and pursued another business opportunity.

The evidence proved that MSSB and its predecessor negligently misrepresented their ability to transfer the broker’s assets to the firm and their ability to offer the international lending and brokerage services the broker’s clients required. As a result, the panel unanimously found in favor of the broker on his negligent misrepresentation claim and awarded him $487,615.77. The broker’s award was offset against the remaining balance due on his up-front note. Despite concluding the firm made misrepresentations to the broker, the panel found no “compensatory” damages. As is customary, the panel did not explain the rationale for its award.

“We have seen a clear and consistent pattern on the part of many broker-dealers to say whatever it takes to induce brokers with substantial books of business to join the firm just to get the book and the clients. Once the transition has been made, however, all bets are off and the firm just ignores the promises and representations made during the recruitment process” according to Shustak. His partner, Tom Frost, who tried the earlier case, added “We introduced expert testimony from a former Smith Barney recruiter that large wirehouses are focusing resources on recruiting experienced brokers rather than hiring young trainees and bringing them up through the ranks. The new business model, post-Broker Protocol, which protects the firms from litigation for poaching brokers, is to go after competing firm’s larger producers; induce them to leave and join the new firm; and get the clients transitioned over. If the promises made during recruitment turn out to be inaccurate, the broker either can’t leave with the cloud of a large up-front forgivable note hanging over his or her head or many clients will not follow the broker if he leaves. It’s an insidious, conscious business model that we see in case after case” said Frost.

Partner Erwin J. Shustak, associate George C. Miller and senior paralegal Dominic Giovanniello handled the Vitale/Paladino case for Shustak Reynolds & Partners, P.C..

Shustak Reynolds & Partners, P.C. handles a wide range of securities and FINRA related issues and has substantial expertise and experience in the securities and brokerage business. The firm has offices in New York and San Diego and represents investors and select registered persons, broker dealers and registered investment advisors in a broad spectrum of complex securities regulatory, litigation and arbitration matters. The firm has recovered hundreds of millions of dollars for public investors and registered representatives.

Schedule a free initial consultation by calling Shustak Reynolds & Partners, P.C. toll free at 888-748-8748, or contact us online


Share This Article linkedin