FINRA headquarters in New York.

Never did Laurie Facsina expect, no doubt, to spend the last seven years locked in legal battle with the wirehouse she so enthusiastically joined in 2009 as a financial advisor managing more than $65 million in client assts.

But that’s what happened when, within months, the Twinsburg, Ohio, FA sued Morgan Stanley for gender discrimination and a year later, was ordered by the Financial Industry Regulatory Authority to pay the firm $419,000 in a promissory note case. Facsina appealed the arbitration award in district court but lost.

Now the FA has taken her appeal all the way to the U.S. Court of Appeals for the 6th Circuit in Cincinnati, Ohio.

Few advisors appeal a FINRA intra-industry promissory-note ruling because the odds of winning are slim to none.  However, Facsina’s case is different from most: She’d been hired as an experienced FA; but 30 days later, she was demoted to trainee status. A forgivable loan of $280,000 was what she received in settlement of her discrimination suit.

According to public records, Facsina alleges that Morgan Stanley’s FINRA arbitration claim was “to punish her for making known the rampant gender discrimination that was endemic at [Morgan Stanley Smith Barney].” She is asking the federal court to reverse FINRA’s ruling and the district court judgment.

A Morgan Stanley spokesperson says, in a statement: “There is no merit to [Facsina’s] legal claim, and Morgan Stanley will continue to press her to honor her contractual obligation of repaying, which she entered into freely and which has been consistently upheld in multiple proceedings.”

Facsina declined to comment for this article because her settlement agreement with Morgan Stanley prohibits her from discussing the agreement. FINRA had no comment.

The Promissory Note

Documents filed by Facsina state that the district court ignored a crucial “venue” issue when it affirmed the arbitration decision in the claim brought jointly by Morgan Stanley Smith Barney and its subsidiary Morgan Stanley Smith Barney FA Notes Holdings. That is, Morgan Stanley didn’t own the note; its subsidiary did but is not a FINRA member. Therefore neither had standing, or right, to take the matter to FINRA arbitration, she claims. (Only registered FINRA members may use the arbitration forum, FINRA rules stipulate.)

Moreover, Facsina’s settlement states that unless approved by all parties, no portion of the agreement – including the promissory note – is assignable. Facsina never gave consent for the note to be assigned to MSSB FA Notes Holdings.

“This is no different from the fraudulent mortgage foreclosures of JPMorgan, Citibank and Bank of America when they foreclosed on mortgage notes they didn’t own,” says Mark D. Mensack, an ex-Morgan Stanley advisor whose firm, Prudent Champion Inc., offers independent fiduciary consulting, especially to Morgan FAs caught up in FINRA arbitrations. He provided such services to Facsina following the FINRA panel’s decision.

In 2010, Mensack filed a whistleblower suit against Morgan Stanley, resigned from the firm, was taken to arbitration over his promissory-note bonus — and lost the case. To prevent FINRA from suspending his license, he was forced to declare bankruptcy. “My hope,” says Mensack, based in Cherry Hill, New Jersey, “is that with Laurie’s case, the court will recognize that Morgan Stanley has manipulated the Federal Arbitration Act to their advantage. Either the Act should be changed or Morgan Stanley should be punished so this won’t happen to other advisors in the future.”

An ‘Uphill Battle’

Meantime, Facsina is awaiting the decision of three judges who will rule on her appeal.

“She has an uphill battle,” says securities attorney Shirley Hayton, partner with Gartenberg Gelfand Hayton, in Los Angeles. Hayton won a 2013 arbitration in which Edward Jones sued advisor John Lindsey for $5 million. FINRA dismissed the case.

“[Facsina] has a FINRA ruling against her, and a district court has affirmed that ruling. The federal appeals court would [likely] give deference to the finding of the district court,” Hayton says.

Citing fraud, Facsina is asking the appeals court to reverse those two judgments, as well as to “reopen all previously terminated fraudulent cases involving Morgan Stanley, make [referrals] to the … State Bar Association of Michigan to investigate MS’ counsel for perpetrating a fraud on the courts”… and to investigate “MSSB’s continuing to bring fraudulent note cases against brokers in the FINRA forum rather than using the proper court system.”

According to Mensack’s research of promissory note cases from June 2009 through August 2015 — as shown on FINRA Arbitration Awards Online — of 382 Morgan cases against advisors, the firm won 330 of them and the advisors won only 12.  Of these, more than 160 were cases in which MSSB FA Notes Holdings, not Morgan Stanley, the broker-dealer, owned the notes.

“I believe that Laurie’s is the only [MS] Notes case that has gone to federal court. But it appears that [hundreds of] advisors have been victims of this fraud where Morgan Stanley weaseled the cases into FINRA arbitration,” says Mensack, formerly a U.S. Army officer and later an ethics professor at the U.S. Military Academy at West Point, New York.

Charges of Deception

Facsina charges Morgan with “deception” and filing a “fraudulent Statement of Claim” with FINRA. She alleges that the firm “employed sleight-of-hand” in “offload[ing] capital requirements” by transferring its advisor promissory notes to MSSB FA Notes Holdings and accuses Morgan of trying to “rig a claim under FINRA rules by naming the true holder of the promissory note as another claimant … The true holder … has been kept hidden from the brokers and their attorneys for years now,” and this “tactic” has “defeated literally hundreds of brokers,” the filing states.

The overwhelming majority of industry cases heard in the FINRA forum are promissory note cases pivoting on these contracts between firm and advisor. Advisors are likely more often apt to prevail in other types of industry cases, especially those brought by FAs who may claim, for example, wrongful termination, breach of contract or wrongful withholding of compensation. In 2013, for example, Goldman Sachs was ordered to pay two advisors $5,241,700 in compensatory damages. Facsina claims that the arbitration panel refused to allow her to introduce evidence showing that “the center of the controversy” was not “an ordinary promissory note” – she owed $245,000 plus interest – but “the only consideration given in [her] releasing claims as to gender discrimination.”

That suit stemmed from the settlement of a big class action – Augst-Johnson vs. Morgan Stanley – in which the firm agreed to recruit more female advisors. Instead, the firm reclassified a number of female FAs as trainees, according to Mensack; and Facsina was one of them.

FINRA’s BrokerCheck database indicates that she began her career as a registered broker at Merrill Lynch in 1999, joined UBS in 2003 and two years later moved to Associated Securities Corp. as an independent FA. She joined Morgan in 2009. The following year, after she’d handed in her resignation, she went indie again, this time with LPL Financial as her BD.

The public documents state that as a result of fighting Morgan for several years now, her life “has been ruined personally, professionally and financially.” The battle has caused Facsina to “bleed to death financially”; and she is almost certainly facing bankruptcy, could have her license suspended and is dealing with the near-collapse of her marriage.

BD Lawyer Responds: Most Counterclaims Are ‘Crap’

When the panel found in favor of Morgan, Facsina had three options: pay the award, go bankrupt or file a motion to vacate, or annul, the ruling. The award included $152,000 in costs and attorneys’ fees. She moved to vacate but lost.

“The arbitration process is designed to be final, not to be appealed,” says Alan Wolper, partner with Ulmer & Berne, in Chicago, a law firm that defends BDs, including Morgan Stanley, in arbitrations. 

Speaking in general and not about Facsina’s case, Wolper says: “If you lose and file a motion to vacate, you’re not going to win unless there was something egregious, like, if the panel failed to entertain relevant evidence. If you thought the panel didn’t pay attention to your counterclaim, you’re not going to get anywhere.”

Facsina’s counterclaim was breach of contract and unlawful discrimination based on gender. Even after her settlement, Morgan continued to discriminate, Mensack alleges, based on conversations he has held with Facsina.

Advisors’ counterclaims often focus on fraudulent inducement in recruiting practices.

“I’ve spoken with several [MS] advisors who provided incontrovertible evidence of fraudulent inducement but who still lost,” Mensack says. This was one of Mensack’s chief arguments in his own arbitration concerning the promissory note he signed upon joining Morgan from Janney Montgomery Scott. He was previously with Legg Mason, where in 2002 he paid $71,000 of a client arbitration award; Legg Mason paid the other half.

“Most of the counterclaims I get and respond to in promissory note cases are stupid. They’re just crap,” Wolper says. “And that’s why statistics show that the vast majority of the time, the broker-dealer wins.” ‘Kangaroo Court’

But others say that FINRA’s dispute resolution forum is not a fair one. “Advisors who fight Morgan Stanley end up in FINRA arbitration, which is a kangaroo court where the deck is stacked against them and you’re denied due process of law,” Mensack says. “FINRA is a private corporation with quasi-government authority and [as such] is immune from prosecution. That’s an affront to every veteran who has ever served this country.”

Mensack continues, “I can provide evidence proving that Morgan Stanley witnesses lied under oath and fabricated evidence. But FINRA didn’t care. And I’ve heard from both advisors and plenty of attorneys that represented them that the arbitration panel doesn’t want to rule against Wall Street because they [think] that they won’t be hired again. If they do file against [the large firms], they minimize the award.

“The notion that FINRA arbitration has any sort of equal standing with civil court is absurd,” Mensack says.

Not so, contends Wolper. FINRA dispute resolution certainly “is not in the pocket of the big firms.” “To suggest that the outcomes of promissory note cases are being painted by the big firms is crazy and ludicrous. Arbitration panels don’t give any particular deference to big firms. That the [BDs] win [the majority of cases] is a reflection of the fact that promissory note cases are extremely easy to win. It’s just a matter of a straight contract.”

Indeed, Mensack says, a forgivable-loan signing bonus “can be an effective tool for advisors.” “But when good faith and a fair deal don’t apply, then it turns into a deal with the devil.”

The FINRA forum is “a broken system,” says attorney Hayton.  “It’s problematic that the big wirehouses fund FINRA. FINRA isn’t accountable to anybody. The [Securities and Exchange Commission] is supposed to supervise and oversee it but doesn’t really do that. The FINRA system is terrible. I tell clients that with a FINRA panel, they’re rolling the dice.”

Charging that “FINRA has its own little justice system,” Mensack recalls a House Financial Services Committee staff member telling him: “If we try to go after FINRA, we wouldn’t have the time or money to do anything else.

“This means to me that since FINRA is immune from prosecution, it’s just too powerful,” Mensack says.

“And that this organization can take away your livelihood without due process of law,” he adds, “means you’d better have a backup plan.”

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