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Regulation and Compliance > Federal Regulation > SEC

Former Morgan Stanley Broker Says Firm Destroyed Evidence

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“They wanted to shut him down.” That’s how Stephen Todd Walker’s attorney characterized Morgan Stanley’s intent after firing the Chairman’s Club member in May 2010, then shredding thousands of pages of the advisor’s records and client statements ahead of his Financial Industry Regulatory Authority arbitration.

Violating a litigation hold issued by the firm’s in-house counsel for all relevant evidence to be preserved, Walker’s Philadelphia branch manager conducted, on a Saturday, “a massive shredding party” of contents from Walker’s 120 custom-made filing cabinets, Walker’s attorney Sidney S. Liebesman told ThinkAdvisor in an interview.

That spoliation — intentional destruction — of hundreds of boxes of Walker’s files substantially weakened his claim against Morgan: wrongful interference with his business relationships and defamation. It had the same negative effect on Walker’s defense to the firm’s claim for him to pay the balance due on his signing bonus promissory notes.

After an epic seven-year fight, on Nov. 1, 2017, a FINRA arbitration panel ordered the 24-year FA to pay Morgan more than $1.9 million and for the firm to pay Walker $510,000.

Now the Philadelphia-based advisor — known as Todd Walker — has gone to court to nullify the award on the grounds that he was denied a fundamentally fair arbitration hearing because the panel ignored that extensive document shredding.

His motion to vacate, filed in U.S. District Court for the Eastern District of Pennsylvania on Jan. 30, 2018, focuses on Morgan’s allegedly tampering with clients he had while working at the wirehouse for nine years.

The arbitration stretched out for four years, following three years of pre-arb hearings. If successful in nullifying the award, Walker and the wirehouse would begin a brand-new arbitration.

Morgan Stanley declined to comment for this article.

At Morgan, Walker, 51, had a big book of ultra-high net worth individual and institutional accounts, many of them brought with him from previous employer, Alex. Brown. A dually licensed advisor and expert on alternative investments, Walker is now with RBC Capital Markets, following four years at Oppenheimer & Co. after termination by Morgan.

The FA alleges that Morgan made false representations to his clients following the firing and that the Form U4 it filed about him was false. As a result, he contends, a portion of his clients stayed with the wirehouse after he exited. Consequently, Walker’s income has diminished, according to Liebesman, who was a prosecutor in the Enron Corp. scandal.

As for Morgan’s shredding, despite its in-house lawyer’s directing Walker’s former branch manager — via issuance of a litigation hold — not to despoil the advisor’s business papers, the manager and a subordinate shredded about 250 bankers boxes full of files, along with client statements contained in binders. Only 75 boxes were left intact, Liebesman says.

Among the critical documents destroyed was a list of clients Walker originally acquired at Alex. Brown, from which Morgan heavily recruited him in 2001. The FA’s employment contract with Morgan stated explicitly that he was permitted to keep those clients should he be terminated for any reason.

Immediately after his dismissal in 2010, Walker filed for a restraining order against Morgan. The firm then went to court for the balance the advisor owed on his promissory notes. At one point, three different arbitration cases were in play; eventually, they were consolidated into one. The lengthy arb ran from April 22, 2014, through Sept. 25, 2017.

ThinkAdvisor recently interviewed Liebesman, a partner at Montgomery McCracken Walker [no relation] & Rhoads about the yesterday, today and tomorrow of the Stephen Todd Walker case. Here are highlights of our conversation:

THINKADVISOR: The motion to vacate says that Mr. Walker’s arbitration was “egregious.” Exactly what was egregious?

SIDNEY LIEBESMAN: After being terminated, his branch manager, Daniel Thompson, came into the office with a subordinate, on a Saturday, and conducted a massive shredding of Mr. Walker’s documents, including records and research — about 250 bankers boxes of files in addition to binders with clients statements — and on Monday, he ordered a truck to haul them away.

Is that routine when an advisor is fired?

No. It’s not routine. It’s obnoxious. It was completely improper, especially in light of the fact that Morgan Stanley’s in-house counsel eight days earlier had issued to Mr. Thompson a litigation hold directing Morgan Stanley to retain and preserve all of Mr. Walker’s documents and data whether in hard copy or electronic form. In no way should any document have been touched.

So, in spite of the litigation hold, Mr. Thompson shredded those documents?

Yes. That’s what’s so obscene about this. It’s gutsy, to say the least, for the head of the Philadelphia office of a major financial institution to come in after hours eight days after getting a litigation hold directed to him and shred the documents.

Did his superiors know about the shredding?

Morgan Stanley learned about the shredding, but it doesn’t seem that they did anything about it.

Before Mr. Walker’s arbitration, he notified the FINRA panel that Morgan Stanley destroyed his documents. But they ignored that act, you say.

The panel failed to consider this and other serious and admitted willful acts on the part of Morgan Stanley. They said they were going to address the shredding at the end of the arbitration. They had four years of evidence and 78 days of hearings, but they ended up not addressing it at all. They failed to consider the intentional destruction of Mr. Walker’s documents.

Was such spoliation by Morgan Stanley unusual for the firm?

No. Morgan Stanley has a history of destroying documents and not producing emails [in lawsuits]. They were fined by the SEC about $15 million for not producing emails [for the SEC’s IPPO and Research Analyst Investigations] and in [billionaire investor] Ron Perelman fraud case, [MS ordered to pay $1.58 billion] because they [concealed emails in discovery]. There are other examples. It’s a sort of culture at Morgan Stanley to disregard a litigation hold — and it’s completely improper.

What did the spoliation of Mr. Walker’s documents mean to getting his side of the story out and defending himself in the arbitration?

Among other things, it inhibited his ability to show the panel exactly the extent to which he had a [clientele of ultra-high net worth individuals and institutional clients] with [a certain] level of assets that he managed. All the documents would have supported his claim of his legitimate, ongoing, substantive relationships with his clients, some of whom were improperly interfered with by Morgan Stanley [after his termination].

How did the firm interfere?

Morgan Stanley made false representations about Mr. Walker’s handling of their accounts so they would stay with Morgan Stanley and not go wherever he went.

How did that affect his livelihood?

The interference resulted in some of the clients staying with Morgan Stanley. They had successfully and improperly interfered with his relationships with many of Mr. Walker’s clients, both individuals and institutions. So his book of business was, improperly and unfairly, significantly diminished. That translates into a lower income and lower quality of life: You make less money. Mr. Walker is married and has three young children.

Why, in the motion to vacate, do you call his termination “a sham”?

He had a personality conflict with Mr. Thompson, his branch manager, that I think developed as a result of Smith Barney’s [2009] merger with Morgan Stanley. They didn’t get along. Mr. Walker had good relationships with the folks at Smith Barney, and Mr. Thompson was a Morgan Stanley guy. His termination was an effort on Mr. Thompson’s part to get rid of Mr. Walker.

His employment agreement said that he was permitted to solicit his clients from Alex. Brown should his employment with Morgan Stanley be terminated for any reason. Did Morgan Stanley deny that?

No. I think that may have played a role in Mr. Walker’s being awarded half a million dollars by the arbitration panel.

Did Mr. Walker contact those clients after he was fired?

I would think he reached out and tried to maintain contact with them, but they all didn’t go with him because of what Morgan Stanley was saying about him. I’m [not certain] that he tried to reach them, but I think he did.

FINRA BrokerCheck indicates three disclosures for Mr. Walker.

Those were disputes that were manufactured by Morgan Stanley. They’re the ones behind those. Morgan Stanley manufactured those baseless complaints to further its position in the arbitration. Todd was an important person, and they wanted to shut him down. After his relationship with Morgan Stanley ended, they kept pushing him further away from his [client] relationships, telling [clients] things that weren’t accurate and getting them to file those complaints.

As partial justification for firing him, Morgan Stanley alleged that Mr. Walker misrepresented to Barron’s his AUM at $2.6 billion when it was $208 million and that he improperly used the firm’s interns to help him publish a book.

Mr. Walker would say that none of that’s true. It was trumped up by Morgan Stanley.

What was the sequence of legal proceedings that brought about the arbitration?

Mr. Walker believed that his termination was wrongful. It goes back to those trumped-up charges. He retained counsel [attorney Gary Green] and filed a lawsuit against Morgan Stanley in Philadelphia state court. Within days, he got a temporary restraining order prohibiting them from interfering with his relationships with his clients. The next day Morgan Stanley moved the case to federal court and asserted their cross-claim [that Walker owed a balance on his promissory notes]. The judge said, “I’m sending you to FINRA for arbitration.” That took four years.

Why so long?

Morgan Stanley spent a lot of time and energy on this. There was a lot to cover. Morgan Stanley acted as the Goliath that they are. They go into these arbitrations knowing they have the upper hand. The panels favor the industry. The panelists want to be selected again and get paid. So, who do they appease — the industry or the employees that are going to be there only once in their lifetime?

You’ve contacted the SEC about the shredding. What was their response?

You’d think that as soon as they heard there was a shredding, Morgan Stanley’s in-house lawyers would have disclosed, since among the documents shredded were brokerage statements and trading records. But I don’t think the SEC knew about the shredding. When they called me this morning, after receiving my letter of a couple of days ago, that’s what they seemed to be most interested in — not the employment stuff but that Morgan Stanley shredded client documents.

What action might the SEC take?

They may do nothing, or they may inquire as to what exactly was shredded, by whom and when and why. There are regulations that require the preservation of client documents for a period of time. If Morgan Stanley violated those regulations, I would hope and assume that the SEC would do something about it. You can’t reward this type of conduct.

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