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Regulation and Compliance > Federal Regulation > FINRA

Morgan’s Mandatory Arb Program ‘Stinks to High Holy Hell,’ Lawyer Says

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Morgan Stanley is no stranger to defending itself in class action lawsuits – it has indeed paid many millions to settle more than a few brought by the firm’s financial advisors, among others.

Now, in fallout from its controversial internal mandatory arbitration program, called CARE, the wirehouse is enmeshed in yet another contentious class action.

Under CARE (Convenient Access to Resolutions for Employees), Morgan employees waive the right to pursue civil rights grievances and other claims in court or to initiate or participate in class actions against the firm.

The program mandates such claims – including breach of contract, breach of fiduciary duty, statutory discrimination based on gender or race, and wrongful termination – into private arbitration conducted by JAMS, a for-profit company. CARE does not affect financial advisors’ access to FINRA arbitration on matters that fall under the self-regulator’s jurisdiction.

To be sure, CARE has no shortage of detractors. “It stinks to high holy hell,” says Bill Singer, a New York-based securities lawyer and former NASD attorney who was also a New York administrative judge, in an interview with ThinkAdvisor. “This is among the worst overreaches that Wall Street has committed in many, many years. It allows the firm to keep its dirty laundry out of the public eye in proceedings that they can, essentially, hermetically seal — and the public learns nothing about them.”

Voluntary for more than a decade, CARE made arbitration mandatory for employees who opted into the program as of October 2, 2015. Staffers were advised of this change, and of CARE’s expansion company-wide, via a negative-consent e-mail – some observers have called it less than candid – on September 2, 2015. If you didn’t opt out in 30 days, you were in.

The day before the opt-out deadline, financial advisor Kathy Frazier, who left Morgan in 2013 after being “constructively dismissed” – i.e., terminated – and is now with UBS, according to FINRA BrokerCheck, sued Morgan over the CARE program. Frazier filed suit on behalf of current and former employees.

“CARE is an effort by Morgan Stanley to continue its rampant discrimination in private and without…accountability in court,” Frazier’s claim says.

(Related: Ex-Morgan Advisor, Ami Forte, Grapples With Fallout of Affair With Client)

A Morgan spokesperson reiterated to ThinkAdvisor a statement the wirehouse issued at the time Frazier filed her action: “We categorically reject the notion that prompt individual arbitration and resolution of disputes in front of professional unbiased arbitrators, which is encouraged by federal law, discriminates against employees.”

This past September, Frazier filed a motion to stay, or stop, the case until such time as the Supreme Court rules on the question of whether firms can have employees waive the right to bring class-action or collective-action claims. Federal district courts are split on the issue.

But the judge said he saw “no justification” to wait for a potential Supreme Court resolution and ordered Morgan to file an opening brief by October 19, 2016, and Frazier to submit an opposition brief by November 18. Morgan’s reply brief is due by December 5.

There is currently a movement in the U.S. to pass a law that would limit or prevent firms, in general, from imposing mandatory arbitration.

The CARE program, detailed in a 22-page guide that Morgan made available via an online link in its negative-consent e-mail, fails to represent a negotiated contract, some attorneys contend, since its terms are imposed by one party only – the firm – and no monetary consideration is provided to employees.

“They’re trying to unilaterally reduce or limit the scope of employees’ rights without benefits, such as a bonus. For a firm to say they’re unilaterally reducing your rights unless you opt out – that is, speak now or forever hold your peace – is probably not enforceable in many states,” says securities attorney Scott Matasar of Matasar Jacobs, in Cleveland, Ohio.

Notes Hugh Berkson, former president of the Public Investors Arbitration Bar Association (PIABA) and principal of McCarthy, Lebit, Crystal & Liffman, in Cleveland: “It should be at the discretion of the claimant whether to go to court or to arbitration. Period.”

And Singer stresses: “It’s a constitutional right to be able to take your dispute to court. Morgan Stanley is one of the most important players in the financial services community. So to give them the right to prevent employees from going to court is scary.”

Immediately after Frazier filed her suit, Morgan spokesperson James Wiggins stated that CARE “benefits all parties by offering an impartial, cost-effective and timely mechanism for resolving employment disputes.”

Other financial services firms, such as Charles Schwab and Merrill Lynch, have in the past launched versions of such programs. But “FINRA has looked very dimly on them,” says Christopher Vernon of Vernon Litigation Group, based in Naples, Florida. He represents clients in complex mediations and arbitrations, particularly securities arbitrations.

(Related: How to Answer When FINRA Knocks on Your Door)

In fact, “FINRA is adamantly opposed to third-party arbitration, which it views as a violation of its rules and an erosion of its authority,” according to Mark Elzweig, whose eponymous executive recruiting firm is in New York.

CARE and other potential protocols like it, however, put FINRA in a difficult spot, Singer says. “FINRA is facing an existential threat because its actions will be carefully scrutinized to see whether they’re going to prevent this. Otherwise, they’ll be cast in the role of a hypocrite. I fully understand why Morgan Stanley has mandatory arbitration; but I simply ask, why do the regulators tolerate it?”

FINRA declined to comment for this article.

Earlier this year, a campaign by attorney groups influenced FINRA to take some action: Credit Suisse was forcing its former brokers’ deferred compensation claims into JAMS or the American Arbitration Association rather than bringing them to FINRA’s dispute resolution forum. Though the advisors filed with FINRA, courts stopped the claims from moving ahead, says Brian Neville, partner in Lax & Neville, a law firm specializing in financial services litigation and who represented Credit Suisse brokers.

Neville and other lawyers wrote to FINRA emphasizing that Credit Suisse was breaching FINRA rules. The series of letters resulted in FINRA’s issuing a strong regulatory notice (#16-25) on July 22, 2016. The 12-page reminder stated that “FINRA rules do not permit member firms to require associated persons to waive their right to arbitration under FINRA’s rules in a predispute agreement.”

The notice went on to warn: “…a member firm’s failure to comply with FINRA’s rule relating to [such] agreements…or failure to submit a dispute to FINRA arbitration…would violate FINRA rules, and member firms may be subject to disciplinary action.”

Berkson notes that concerning Credit Suisse’s private arbitration and Morgan’s CARE: “FINRA stepped up quickly and said in no uncertain terms that these shenanigans were not acceptable. I don’t believe we’ll see Morgan Stanley or other firms trying this routine again. The CARE program is dead.”

Some securities attorneys maintain that private arbitration is criticized unfairly. “I know that people think it’s slanted to the employer. Though mandatory arbitration and class action waivers are painted as one-sided, they’re really not. It’s more effective, and the employer pays the cost. So how is the employee hurt?” says Mark Neubauer of Carlton Fields, a Los Angeles attorney who focuses on corporate litigation. “Voluntary arbitration isn’t effective because people will first run to see if they can get a lawyer – [therefore] only the weakest cases will make the system.”

According to Neubauer, mandatory arbitration is on the rise because “employers have been paying ransom in class actions and [no longer want to] be held hostage by plaintiffs’ lawyers.”

Meantime, customer class actions against FAs or brokerages are expected as a consequence of the DOL fiduciary standard rule, which permits clients to pursue their claims in court as an alternative to arbitration.

(Related: Ex-Morgan Advisor, Ami Forte, Grapples With Fallout of Affair With Client)

Private arbitration inevitably leads to conflicts of interest, critics contend. “You have to be an idiot not to anticipate that [Morgan’s using JAMS] is going to pose a conflict because that forum isn’t going to want to lose their business if it becomes significant – and maybe they’ll need to do an IPO one day, and Morgan Stanley can help them,” Singer speculates.

Further, advisors who opted out of CARE could encounter career damage.

“When a firm requires third-party arbitration as a matter of policy, it’s a red flag, from their standpoint, if an employee chooses not to comply. Advisors who do this would draw negative attention to themselves,” Elzweig says.

Adds Singer: “If you don’t want to opt in, you’re not going to be viewed as a team player. When it’s time for promotions or bonuses, it will be [noted] that you didn’t go along.”

But policies such as CARE can be damaging to the firms as well, Vernon cautions. “If you start taking away employees’ constitutional right to a judge and jury, what you’ve got is a caldron where you’re treating your employees like crap. Eventually, you’re going to end up either with a broken model or a model that attracts only the worst kind of individual – one who flourishes in an environment where it’s all about the money.”

Right now, for most other big employer firms, the issue of internal mandatory arbitration seems to be a waiting game.

“Firms are going to sit back and see whether Morgan Stanley is able to make this kind of program stick through a negative-consent letter or if it’s eventually successfully challenged in court,” Matasar says. “An employee is going to claim they were coerced into the CARE program through an improper negative-consent letter. Negative consent is appropriate in a lot of different settings but not necessarily in this one.”

The ultimate victims of Morgan Stanley’s program may be consumers. “The real danger is that CARE has a chilling effect on employees who would want to speak up and be whistleblowers,” Singer says. “They’ll be afraid to come forward because if their job is ever at issue, they can’t go to court in a dispute.”

He continues. “We just saw 5,000 idiots working at Wells Fargo who never opened their mouths about the fact that they were opening up all those accounts. If Wells Fargo [employees] were subject to a CARE program, many more than that would be hesitant not to go along with that type of misconduct because they’d be afraid they would find themselves having to sue their employer in a forum they believe is compromised.”

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