Shipped off to the Middle East for involuntary active duty in the U.S. Naval Reserve, Lt. Cmdr. Harvey R. Klyce has just begun a year-long tour in a war zone. But on top of that, as a Wells Fargo financial advisor, Klyce is fighting another war, one that pits him against his former employer, Morgan Stanley.
In a phone interview from Bahrain, in the Persian Gulf, the Annapolis grad with an honored career in the military told ThinkAdvisor about his battle with Morgan Stanley, one from which he is unlikely to emerge victorious.
The firm says that Klyce, 49, a six-year advisor with an ultra-high net worth clientele, owes the balance on his forgivable promissory note. For his part, Klyce says that Morgan defrauded him in recruitment and violated the military leave law. FINRA arbitration and California state court, denying his motion to vacate the panel’s decision, say he must pay Morgan $535,000, including $175,000 in attorney fees.
Klyce’s options: Pay Morgan Stanley; appeal to federal court; or file for bankruptcy, a move that will prevent the Financial Industry Regulatory Authority from revoking his brokerage licensees. The third seems the only realistic recourse since, after maxing out his credit cards to pay his own lawyer’s fees, the FA has “run out of money,” he says.
Incensed, Klyce is calling for an Securities and Exchange Commission investigation into FINRA, whose intra-industry dispute resolution process, he charges, is “…a kangaroo court” run by the big firms whom arbitration panels favor.
A FINRA spokesperson, commenting on Klyce’s case by email, said: “FINRA strives to provide the fairest and most efficient forum for all parties — investors, firms and brokers — to resolve disputes.”
Morgan Stanley declined to comment for this article.
While on military leave, Klyce, a father of five young children, is temporarily protected from debt collection, including Morgan’s judgement against him, by the Servicemembers Civil Relief Act.
Last month, the advisor, with Wells Fargo in San Francisco, wrote to SEC Commissioner Hester Peirce asking for an investigation into Morgan Stanley’s “unlawful actions” in his arbitration. He wrote that “FINRA has done nothing to police Morgan Stanley” and that the firm “should not be allowed to destroy evidence and hide behind FINRA.”
The MBA had been heavily recruited by Morgan Stanley, and he left J.P. Morgan Securities — where he began his career as an FA only two years before, in 2011 — to join the firm. But Morgan Stanley, he says, broke all the promises it made that enticed him to switch firms.
Following a decade in telecommunications in California and the Middle East, where he founded a venture capital firm in Bahrain, Klyce, a California native, returned to the U.S. post-financial crisis and began a new career as a financial advisor with J.P. Morgan in San Francisco. There, specializing in clients with $5 million or more, he earned a salary plus commissions.
Two years later, he moved to Morgan Stanley with a comparable compensation package of $300,000 structured around a forgivable loan and promises that he could pursue his Middle East relationships as prospective Morgan clients, he says. At J.P. Morgan, he was unable to do so, as its international business was conducted from New York only, Klyce maintains.
(Related: Why Are So Many Advisors Leaving Wirehouses?)
Now with Morgan Stanley, he was shocked when the firm failed to permit him to prospect international clients. Further, his payout was about half of what the firm had promised, and no accommodation was made for his Naval Reserve obligation, he alleges. Because his income was far smaller than expected and shrinking, a year-and-a-half in Klyce resigned to seek a job to support his family and pursue his Middle East contacts.
Joining Credit Suisse, he transitioned to Wells Fargo Advisors not long thereafter under a recruiting agreement the two firms arrived at in 2015.
Meanwhile, Morgan Stanley had taken Klyce to arbitration for his promissory note balance. He counterclaimed false inducement, among other claims.
Last year, the panel ruled in favor of the bank. When Klyce filed a motion to void that decision with a counterclaim for up to $9 million, on Jan. 31, 2018, a California court confirmed the FINRA award.
Klyce contends that during the arbitration, Morgan destroyed and withheld evidence, alleged acts that the FINRA panel disregarded, he says.
A graduate of the U.S. Naval Academy, Klyce was an officer on active duty from 1990 to 1998 and has been awarded two air medals for personal achievement while in flight. He directed electronic warfare operations in the Bosnian War; from London, presided over execution of more than 300 military operations with 15 former Eastern bloc countries; and wrote electronic reconnaissance operations’ political and military policy for North Africa and the Middle East.
In civilian life, Klyce started his own venture capital company in Abu Dhabi, raising funds in the Middle East to invest in tech companies.
ThinkAdvisor interviewed the advisor by phone shortly after he reported to Bahrain for active duty. On military leave from Wells Fargo, he sounded defeated yet outraged at what he termed an unfair FINRA arbitration and was worried about deleterious effects a bankruptcy will have on his future as a financial advisor. Here are excerpts from our conversation:
THINKADVISOR: You lost an arbitration and a motion to vacate it in court. What’s your situation now?
HARVEY KLYCE: I’m in a war zone in a uniform. If I don’t reach agreement with Morgan Stanley on a payment plan or file Chapter 7 bankruptcy, FINRA pulls my licenses. I’m trying to find a lawyer to file Chapter 7 or to negotiate some settlement with Morgan Stanley. But the comment I got from their lawyers was: “after someone challenges us, we never settle.”
What will you do?
It looks like my only option is bankruptcy. But that means when I come back to San Francisco in a year, my ability to do this business is changed because I have to disclose that to every new client I bring into Wells Fargo. There are no good answers for me.
You could appeal in federal court.
To do that, I need to have at least $50,000. I’ve already spent about $20,000 fighting Morgan Stanley. I’ve run out of money.
The Servicemembers Credit Relief Act protects you from collection while on active duty in a war zone, doesn’t it?
Yes, but it’s very difficult to coordinate things being so far away. I’m hoping Morgan Stanley will give me enough time to try to figure something out before they unilaterally come after me. But I think they can put a motion in place in the courts to garnish my wages without my knowledge or rebuttal.
What’s your best-case scenario for the future?
The best case scenario is for the SEC to investigate FINRA because they’ll find that my case isn’t the only such case. I think it’s institutionalized behavior. Countless advisors have been driven into bankruptcy and had their lives ruined by it. I have a list of 395 advisors that had arbitration disputes with Morgan Stanley, and 97% had very similar outcomes to mine. It’s difficult to believe that all of those [FAs] were wrong.
Your opinion of FINRA’s dispute resolution process is pretty low.
When I watch an arbitration panel paid by the banks decide my disagreement with Morgan Stanley, there’s an appearance of collusion. I’m not saying it is collusion. But it definitely has the appearance of it, especially since there’s no way to get anybody to talk to me about the points [I raised].
What do you mean?
No one in this whole process has explained to me why what I’m saying in my case is wrong. All [Morgan Stanley] said is that it was a promissory note. We don’t care what we do to you. Pay us money.
When the parties jointly request it, FINRA requires arbitrators to include a written explanation describing the basis for the award.
We did have an agreement ahead of the arbitration that FINRA would provide an explained decision. But they didn’t do that. Their answer to me was just “case closed” and that Morgan Stanley didn’t agree to it in a letter until after the arbitration.
When Morgan took you to arbitration to pay the balance on your promissory note, what was your main counterclaim?
False inducement, that Morgan Stanley promised me things that they didn’t do.
What did you allege in your motion to vacate the arbitration award? That there was spoliation of evidence: Morgan Stanley never provided any of the email records about my attempts to do international business. They failed to provide documents on the revenues of clients I had introduced them to. And on the evening that the panel went off to reach a decision, I got a note saying that the panel’s chairman had lost all the evidence from the past week’s worth of hearings. But he said they’d started to deliberate the case with none of that evidence. About three days later it was found with Morgan Stanley’s law firm.
What did you think of that?
FINRA is a bit of a kangaroo court because Morgan Stanley has figured out they can do whatever they want with evidence: They can hide it, withhold it, destroy it — and FINRA lets them. Then, when you appeal, the courts won’t overturn the arbitration.
What’s your biggest frustration now?
I’d like someone to explain to me how it’s possible for Morgan Stanley to put a compensation package on the table tied to certain work conditions and then not produce those conditions — but still hold you accountable. It was admitted in the arbitration that they promised me things they didn’t give me, which is false inducement. Yet FINRA had no regard for that. FINRA knows certain things were violated, but they don’t care.
Why did you leave J.P. Morgan in the first place?
Morgan Stanley recruited me aggressively and promised me a certain income based on a list of international clients I provided to them. They structured a compensation plan with a promissory note that was approximately the same amount of money that I was making at J.P. Morgan [without pursuing international business].
What was your payout to be?
They had agreed to a 41% payout; but [in fact] they paid me at the standard grid rate, which was about 28%. In the arbitration, they said that was an oversight. I call it material breach of contract.
What did they promise you concerning international clients?
I had spent 12 years living overseas. I provided them with a list of wealthy clients in the Middle East with whom I had relationships raising capital for a venture capital firm I founded. I wanted to pursue those to raise money at Morgan Stanley. They told me I could do that. But I wasn’t allowed to.
Because Morgan Stanley had a local team in the Middle East that didn’t want me in their backyard. But the firm didn’t tell me that when they hired me. I gave them 15 names; and they said, “Great.” But they never cleared the names. They just told me it would be OK.
Any other promises you say they broke?
They convinced me that I’d be joining a team and that I’d have management support. All that didn’t happen either.
How was your compensation structured?
I didn’t totally understand at the time — my bad — that I had to bring a certain amount of assets into the firm by a certain date. I asked for an extension of that time-frame — my gates — because I had to go away and serve in the military reserves. They never answered me about the extension; they just ignored it. But in the arbitration, they said, “Well, of course we would have.”
What ultimately happened during your time at the firm?
After about 18 months, during which they wouldn’t let me execute my business plan, I spent the money they’d given me on living [expenses]. My salary was very soon dropping to $40,000 a year. I’ve got a wife and five kids. We would have been homeless in two months. So I had to leave.
Did the firm ever tell you that you weren’t bringing in enough assets?
They did. I said I came there with the intention of going after a list of international assets, but they wouldn’t let me do that. I spent six months trying to get that approval. If they had let me do that, we both would have made a lot of money because I had access to capital.
So you left Morgan and joined Credit Suisse. How was that experience?
I got the same compensation package I had at J.P. Morgan — salary plus commissions. I started to put things in progress with my international contacts and had some success. When Credit Suisse [moved] their wealth management business in North America to Wells Fargo, I transitioned as part of that agreement.
Are you still able to do international business?
I think that because of a change in regulations, Wells Fargo doesn’t want me to do it anymore. So now I’m just stuck in the [advisory] business.
Do you think the problems you had with Morgan occurred because you were so new to and naïve about the industry?
Morgan Stanley is very predatory in their hiring practices for new financial advisors. [When I joined them], I had been in the business for only two years and worked in a private bank, which is structurally different. But I took Morgan Stanley at their word about what they would allow me to do.
Did you get something in writing at the time you agreed to join them?
When I asked about that, the answer I got was: “In this industry, we don’t put things in writing [beforehand]. We’ll have to get that done after you start.” So it’s my fault. I didn’t ever expect that they would recruit me and lie to me. My experience at Morgan Stanley says that you’d better record it and have it in writing three times notarized. But then they’ll still deny it.
With hindsight, what are you thinking?
I could have stayed at J.P. Morgan, where I was making $225,000 a year salary. I never expected that you could be recruited by people who tell you things that aren’t true. As a Naval officer [my experience is that] when people look me in the eye, shake my hand and make promises, they actually do what they say they’re going to do. So I believed Morgan Stanley.
I’ve figured out that they hire you with falsehoods because they think they have nothing to lose: If you fail, they’ll just take your house. It’s known in the industry that Morgan Stanley makes promises they don’t intend to keep. And nobody ever beats FINRA in arbitrations [Note: In advisor disputes, some arbitrations find the firms liable], and the courts just won’t overturn FINRA. It is what it is — I didn’t win the legal fight.
— Related on ThinkAdvisor: