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August 05, 2014 at 07:53 AM
His name became mud with Morgan Stanley Smith Barney when the firm discovered that James C. Eastman, an esteemed, top advisor to ultra-high net worth clients, was planning to leave. After eight years with the wirehouse, heading the No. 1 producing team in his branch, the wealth advisor was fired.
All the good suddenly forgotten, only the bad and the ugly play out here against a backdrop of the financial crisis, Morgan Stanley’s acquisition of Smith Barney and what Eastman says is the firm’s punishing treatment of independent-oriented advisors who “don’t want to just sit around and sell stuff.”
Unsurprisingly, Morgan Stanley took the advisor to arbitration by the Financial Industry Regulatory Authority, demanding that he pay two promissory note balances. But this is where Eastman’s story takes an unexpected, remarkable twist: FINRA ruled that, because Morgan Stanley brokerage wasn’t the notes’ owner, it had no right to bring claims and dismissed the BD from the case. Once the Morgan Stanley (MS) company that did hold the notes was brought in, Eastman’s debt was reduced by half.
Yet that’s far from the end of this advisor’s struggle. Five years into his battle with Morgan Stanley, he is now in Chapter 7 bankruptcy.
Fighting for justice, Eastman this past spring brought two whistleblower claims against the firm through the Securities and Exchange Commission. That was as Morgan Stanley sought in court to force Eastman to pay its legal fees. He offered a settlement in the high six-figure range. But the wirehouse said no deal unless he dropped the two pending whistleblower claims. Incensed, Eastman refused, opting instead to file for bankruptcy to protect not only his finances but the whistleblower claims.
“The issue here is straightforward,” a Morgan Stanley spokesperson comments. “All of Mr. Eastman’s claims were rejected in a proper arbitration process, which found him liable for certain contractual obligations he entered into freely with Morgan Stanley. We don’t intend to debate this matter further in the press.”
A Naples, Florida-based financial advisor since 1987, first with Robert W. Baird and before that an Ernst & Ernst CPA personal finance specialist, Eastman in 2001 joined Smith Barney, where he was a director of family wealth management. The Bentley University grad from Fryeburg, Maine, ran a team with more than $200 million in assets under management.
For the last four years, he has been building his own firm, Regional Family Offices, which he describes as the nation’s first member-based family office; it focuses on collaboration among financial planners, CPAs, attorneys and other finance professionals. A frequent public speaker, Eastman enlightens audiences on the difference between advisors who hold to a fiduciary standard and those whose focus is sales.
With outrage and dismay, Eastman recently told ThinkAdvisor what he has suffered as a breakaway broker.
ThinkAdvisor: How did you come to work for Morgan Stanley?
James C. Eastman: I recruited myself into Smith Barney. In hindsight, it was the worst decision I ever made. I was an at-will employee, meaning they can fire you for any or no reason; and you can leave for any or no reason. What it actually means is: We can terminate you for any reason or no reason. But if we get any hint that you want to leave, you’re through. I can’t imagine a firm doing this to a guy they made a fortune off. They got more than half of [what I made] for eight years.
Why did you choose to stay that long?
I was making a ton of money. But in 2008, things started getting difficult. People were questioning the viability of the firm. The merger with Morgan Stanley was announced. We were losing trust and confidence in the firm’s management, so I started exploring and got serious about two opportunities: one at a CPA; the other at Charles Schwab.
You were talking with both?
Yes. But Schwab warned us that if the firm found out, we’d be in big trouble. In my naivete, I found it impossible to [fathom] treating a top producer who had a clean record that way. My assistant said, “We have to be careful. If they find anything at all, they’ll monitor your phones and emails. We have to come up with code names.” So in the office around the other brokers, we used code, but not in emails.
And the firm learned of your plans.
I didn’t know it, but they were looking at every one of my emails. They intercepted two: one from the CPA saying, “It was great to meet with you yesterday…This is a perfect match. We have a place ready for you.” Schwab sent an email to my home. Unfortunately, because I didn’t work with emails at home, I made the error of forwarding it to myself at the office.
How did Smith Barney react when they found out you were planning to leave?
They started to “paint” my [Form] U5. That’s when a firm wants to dig up or create something to put on your U5 as a reportable offense to give them ammunition when, after you leave, they try to retain your clients — who they feel are their clients.
What did they come up with?
They found a transaction that had been preapproved by my branch manager, but they accused me of violating the branch manager’s operating manual policy.
Please elaborate.
I had a $1 million research account of my own money, in which I used quantitative analysis techniques I had created, to test all sorts of securities. The account held ETFs and other new investment [vehicles]. I advised my clients that I was testing these techniques with my own money before I put them in their portfolios. This worked fine for two to four years.
Then what happened?
In the middle of 2009, FINRA came out with a rule saying inverse and leveraged ETFs may be inappropriate for unsophisticated investors in retail accounts. I totally agreed. I wasn’t using a lot of leveraged ones; we used more of the inverse funds in client portfolios to minimize risk. What then?
The branch manager, Ed, came in one day: “The firm has banned all inverse and leveraged ETFs based on FINRA’s rule. You have to sell them.” I said, “Can’t you apply for an exception? I’m a professional money manager with fee-based accounts. All my clients are very sophisticated, wealthy retirees. Is the firm going to cut any slack for people who aren’t abusing these funds?” He said he would apply for an exception but never did. They just forced me out of them, and I sold all that were in the clients’ accounts.
Did the firm already know you were leaving?
Yes — but I didn’t know they knew. I asked Ed: “I have to keep conducting this research because it’s important to my ongoing educational efforts. Would it be considered a broker account held outside the firm if my adult son opened an account in his name?” He said, “No, it wouldn’t.” So I loaned money to Devin, who wasn’t living at home, and he opened an account to test my techniques and execute the trades.
Okay. What then?
It was the very next month, October 2009, that the firm saw those two emails from the CPA and Schwab. Unannounced, they brought in a compliance woman from New York.
What for?
She said, “Tell me about this account and your research” – all kinds of things they already knew. “Tell me about the loan to Devin.” They were obviously fishing. Ed was sitting right beside me. I told her I loaned the money to Devin – through the Smith Barney checking system — and that Ed had approved the account. “Do you have a problem with that?” She said she was just gathering information.
But things got worse?
A couple of weeks later, they asked to see a copy of the loan. I said to Ed, “This smells bad. I’m not going to provide anything more. If you want me to close the account, tell me and I will.” He didn’t say anything. He knew I was leaving. Our planned departure date was May of the next year.
You were a top advisor. Why didn’t the firm say, “What can we do so you’ll reconsider and stay?”?
With the merger, Ed lost his job; and a brand new branch manager came in. If you’re that guy, you think, “I’m running the risk of losing my top producing team, and I don’t want that to happen on my watch. So put us on the winning side.”
Did you speak with Ed further before he lost his job?
I asked him: “Are there any examples of a quality advisor who decides [they’re] not a good match with the firm and tries to part company in a professional manner?” The firm’s investigation was already underway. He looked right in my eyes and said, “You’re the top producer. You’re the most valued member of this team. The firm will do anything it can to keep you.” But at the same time, they were trying to dig up dirt on me. They just lied right to my face! Disgusting behavior. What did they find?
According to the branch manger’s manual, if a broker lends money for an account to an adult child living at home, it could be considered the broker’s account outside the firm. Although Devin wasn’t living at home, he used our home address to receive statements. So the firm mistakenly thought he was living at home.
