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FINRA Finds Morgan Stanley Misled Advisor About Firm Capabilities in Promissory Note Case

On February 22, 2016, a Financial Industry Regulatory Authority (“FINRA”) panel (the “Panel”) rendered an award (the “Award”) dismissing Morgan Stanley Smith Barney, LLC and Morgan Stanley Smith Barney FA Notes Holding, LLC’s (collectively “Morgan Stanley”) promissory note claim against one of its registered representatives, Brandon Neal (“Neal”), and granting Neal’s counterclaims, finding that Morgan Stanley misrepresented the firm’s ability to handle certain businesses when soliciting Neal’s employment and awarding him $300,000 in compensatory damages plus interest.

Morgan Stanley initially brought an arbitration claim against Neal in 2014 for failure to repay a promissory note that was issued in 2012 (the “Note”), and became due upon Neal’s termination on January 10, 2014.  Morgan Stanley sought $215,722 in compensatory damages, in addition to $100,688.46 in interest, attorneys’ fees, and other costs.

Neal denied Morgan Stanley’s claims and filed the following counterclaims against Morgan Stanley: breach of implied covenant of good faith and fair dealing; fraud and misrepresentation; and negligent misrepresentation.  According to the Award, Neal alleged that Morgan Stanley “made several false representations to [Neal] in order to tempt him to leave his then-current employer [JPMorgan] and work for Morgan Stanley.”  In addition, Neal alleged that “had [Morgan Stanley] not made these representations, he would not have left [JP Morgan], nor executed a promissory note with [Morgan Stanley].”  According to statements made to the Wall Street Journal by Neal’s attorney, Neal was involved in an investment strategy of “borrowing against qualified replacement property bonds acquired from sales of stock to an employee stock ownership plan”.  Neal’s attorney also stated that “internal emails from Morgan Stanley showed the firm ‘had no intention of allowing [Neal] to bring this kind of business over.’”  Neal sought $1,301,385 in compensatory damages.

The Panel denied all of Morgan Stanley’s claims in their entirety, instead holding Morgan Stanley liable for $300,000 in compensatory damages plus interest.  Mr. Neal currently is employed at Investment Professionals Inc.

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