Close Close

Regulation and Compliance > Federal Regulation > FINRA

Ex-Morgan Broker Loses Fight With FINRA Over ‘Forgivable’ Notes

Your article was successfully shared with the contacts you provided.

Life handed advisor Nicholas Ragone a bushel of lemons when he lost 80% of his business in one fell swoop and Morgan Stanley consequently cut his payout sharply, threatening repeatedly to fire him. To make matters worse, the firm demanded that he pay $100,000 on his upfront bonus promissory notes when he left the firm four years later, even though his seven-year contract was up.

That was just for starters. When he failed to remit, the wirehouse took Ragone to arbitration, where, in April 2014, a Financial Industry Regulatory Authority panel ordered him to pay the firm $150,000. He hasn’t given them a penny. As a result, FINRA has suspended him.

“I didn’t do anything wrong. Morgan Stanley did something wrong, but I’m the one being mistreated and persecuted,” laments Ragone, 54, in an interview with ThinkAdvisor.

The Brooklyn native charges that Morgan Stanley “acted illegally” while he was in their employ and is guilty of “fraudulent misrepresentation” and of lying to the FINRA arbitration panel. Further, he claims the panel was “corrupt and biased” in ruling him liable for breach of promissory note and dismissing entirely his counterclaim of fraud and breach of contract, among other allegations.

“The arbitration panelists were afraid to ask questions and offend Morgan Stanley. In arbitration cases, FINRA colludes with the firms,” Ragone says. “They’re in the pocket of the major brokerage firms.”

The acrimonious dispute pivots on $400,000 worth of promissory notes that Ragone signed during his time with the firm; upon joining, he also signed a bonus agreement.

“Morgan Stanley represented to the arbitration panel that my deal was not a forgivable loan, which was a lie. Of course it was a forgivable loan and not a regular loan. No person in their right mind would leave one firm to go to another and borrow money with interest,” he says.

By way of its ruling, the panel found that Ragone was in default, he says, because his bonus was not a forgivable loan, though FINRA arbitration panels are not obliged to provide reasons for their decisions.

For its part, Morgan Stanley says, in a statement: “Morgan Stanley expects its employees and former employees to comply with their obligations to the firm and, specifically, Mr. Ragone to comply with the FINRA arbitration award, which determined that he must repay the loan he received.”

A FINRA spokesperson declined to discuss the case on the record, stating: “We do not comment on arbitration awards.”

Ragone, a veteran advisor who previously worked at Smith Barney, Prudential Financial and Lehman Bros., now operates a small RIA, Villicus Capital Group, in Melville, New York.

This isn’t the first time he has run into trouble concerning an upfront bonus. He left Smith Barney to join Morgan Stanley in 2005 with an $18,000 balance on his promissory note because he hadn’t fulfilled the term of his contract.

“We had a legal battle that ended up costing me $65,000,” he says, ruefully.

Now, having paid $50,000 in fees to an attorney to represent him in the current case, he is suffering financial hardship and no shortage of psychological stress.

“For over two years, I haven’t been able to focus on building my business since at any moment, Morgan Stanley could take most of my liquidity,” he says.

The advisor blames the firm for the loss of more than three-quarters of his book of business in 2008. His biggest client – acquired before joining Morgan Stanley and representing about 80% of his assets under management – was an accounting firm that referred numerous high-net-worth clients to him. He and the CPAs enjoyed a revenue-sharing agreement.

But in 2008, the accountants moved 90% of the clients from Ragone’s management mainly because Morgan Stanley had been consistently negligent in attending to critical administrative matters, the firm’s principal wrote in a letter to Ragone.

Then came another big problem: Because his production dropped precipitously, the FA no longer had excess income to satisfy the tax liability on his promissory notes. So for the final four years of his seven-year contract, Morgan Stanley, without his knowledge, applied the bonus side of his deal to pay the taxes, which indicated he was no longer paying off the notes and negated his forgivable loan, he says.

Only shortly before he resigned did he discover that the wirehouse was paying the promissory-note taxes.

“What they did about my taxes is illegal. They transferred to themselves an obligation I had to the government, and they did it secretly. They didn’t make me aware of that balance and kept the clock ticking with interest for four years,” fumes the advisor, who says that he had the money in an account to pay the taxes all along.

As for the arbitration, he calls it “a kangaroo court.”

“The panelists figured that if they ruled against me, I’d pay the money, go away and leave it be. But that definitely is not the case,” the advisor says, noting that he has contacted the New York State Attorney General and is considering filing a whistleblower’s suit.

“This looks like a case of somebody who got a bonus, didn’t perform because he lost his account – which was overly important – and [Morgan Stanley] tried to take money from wherever they could,” says recruiter Mark Elzweig, whose eponymous executive search firm is in New York City.

According to fellow breakaway broker John Lindsey, CEO-founder of Lindsey & Lindsey Wealth Management, in Westlake Village, Calif., who won an Edward Jones arbitration case against him in 2013, “The taxes were [Ragone’s] responsibility. But rather than risk not paying them and the government going after them, Morgan Stanley just tacked them onto the back of his loan and made it a regular loan instead of a forgivable loan.”

But, Lindsey adds, “unless they discussed this with him ahead of time, it would not be a good-faith agreement. How could it be if they made a unilateral decision? It isn’t unusual for the firms to protect themselves to the disadvantage of the brokers. They brutalize them.”

Ragone could have easily paid those taxes, he contends, if only Morgan had used funds he maintained in a brokerage account. The restricted stock unit portion of his bonus stipulates that the firm could have done that even without his consent, he says.

“This guy is grasping at straws. They can’t take money for taxes out of his brokerage account,” says Erwin Shustak, a securities attorney who heads the litigation and arbitration department of Shustak & Partners, based in San Diego, Calif. He has had 39 years’ experience with arbitrations, both representing clients and as a panelist.

To be sure, Ragone admits that he failed to monitor the tax liability on his notes, which related to two back-end bonuses as well as the upfront money.

“With losing all those accounts and my income being very low, the last thing I had on my mind was a potential tax obligation. In fact, I thought I could very well get a tax refund. My accountants didn’t know the particulars of my deals or obligations; they only dealt with documents, like 1099’s, that Morgan Stanley provided.”

Ragone’s AUM totaled $26 million when the firm recruited him from Smith Barney. At Morgan, he produced “four times” the amount of his bonuses, he says; but upon departing the firm seven years and six months after joining, his AUM had plummeted to between $10 million and $12 million.

Indeed, after losing most of his book, Ragone was deeply discontented working at the firm’s Melville branch office.

“It was horrible,” he recalls. “Morgan Stanley treated me like crap and made my life miserable. They destroyed my business and on top of that, cut my payout down to 25%. They threatened repeatedly that if I didn’t get my production up, they were going to let me go.”

But, he says, “I was angry and had no ambition to rebuild my business dramatically so that Morgan could get more revenue. I was just biding my time, waiting to get out of there without penalty regarding my deal.”

The devil, however, lurks in the details. And the advisor had nothing in writing stating explicitly that the loans he received were forgivable, even though the branch manager testified at the arbitration that is what he told Ragone when he hired him.

“The structure of the deal – a bonus agreement and a promissory note – made it a forgivable loan. That’s standard in the industry,” Ragone stresses.

Most advisors agree that a promissory note is a forgivable loan. But “an upfront bonus is not always forgivable,” according to Lindsey.

On the tax issue, neither had Ragone obtained a signed document indicating who would pay that liability. Again, he received only a verbal explanation from the branch manager; but nothing was ever mentioned about going into the bonus side to pay the taxes, he says.

“I’ve seen this numerous times: Brokers don’t read the documents after things are agreed verbally. At an arbitration, it’s ‘he said-she said’; and the paperwork breaks the tie,” notes securities attorney Dale Ledbetter, partner-founder of Ledbetter & Associates, in Fort Lauderdale, Florida, who notched 30-plus years in financial services.

Shustak concurs that whatever is in black and white rules: “It doesn’t matter what you thought, or what you thought you heard. Notes and documents are controlling,” he says. “This advisor knows he signed notes. He knows that forgiveness of a note is taxable, and yet he didn’t keep track of his own situation. Sounds like the man is in the wrong business.”

As evidence that the loan he received associated with his bonus agreement was forgivable, Ragone points to internal Morgan Stanley documents pertinent to his employment, including a spreadsheet with columns headed, “Principal Forgiven” and “Principal Unforgiven,” along with an e-mail received before signing his contract that labels the promissory-note payment “an upfront bonus.”

Independent broker-dealer principal Michael J. Hartzman, president of Bristol Financial in Plainview, New York, views the kerfuffle from this angle: “Morgan Stanley argued that the rep didn’t live up to his end of the bargain – that when he lost his book, whatever they had paid him for now had no value. But from a recruiting point of view,” he adds, “I’m surprised that they took this position – I think it would make the next 10 advisors very reluctant to join the firm.”

In light of Ragone’s dispute, another independent BD cautions FAs to look before they leap. “It’s imperative that advisors have a full understanding of what they’re signing,” says Rich Babjak, president of World Equity Group, in Arlington Heights, Illinois. “It’s a little bit of shame on this rep if he didn’t have [his contract] reviewed by his own legal counsel. It doesn’t sound like he really understood that [need].”

As for the validity of Ragone’s accusation that FINRA is “corrupt,” it’s a matter of opinion.

“FINRA doesn’t always get it right, but I don’t believe they’re corrupt,” Hartzman says.

Lindsey insists otherwise. “FINRA is corrupt. FINRA has allowed this type of abuse to continue for decades now. They favor the wirehouses because they’re the ones that foot the largest portion of the bill for their self-regulatory body. The only reason the wirehouses win [90%-plus] of arbitrations regarding contracts is that the system is exceptionally one-sided. There’s no way mathematically that this can be viewed as being even close to fair.”

Chiefly because of his bitter experience, Ragone claims that FINRA routinely “colludes” with the big firms.

That depends on how you define “collude,” Ledbetter says. “On a particular case, do they get together and whisper? No. But in cases that involve a major brokerage firm against an employee, the firms wins 98% of the time. Would you call that collusion? The arbitrators know that if they issue an award against the brokerage firm, they’ll never sit on another arbitration again.”

The Ragone case should be a heads-up to would-be breakaway brokers, Babjak urges. “If any reps are looking at signing a deal like [Ragone’s], this is a big warning. They have to be really careful about what they’re giving up to be locked in for that upfront money.”

Where does all this leave Ragone? He’s still outraged: “Morgan Stanley wants to make an example out of people that leave so other advisors will see that they can’t do it without problems. But making the case that my deal was something it wasn’t,” he says, “is ludicrous and ridiculous.”

— Related on ThinkAdvisor:


© 2023 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.