Morgan Stanley's newly expanded arbitration system is drawing criticism for tilting the playing field against advisors, curtailing rights and cloaking disputes in a cloud of secrecy, attorneys and industry insiders claim.
The dispute between the two sides hinges in part on who sets the rules for not only resolving disputes, but even what disputes can be heard.
The wirehouse says its program, for which it outsources some functions to a third-party company called JAMS, is swift, unbiased and professionally run. Critics, however, say that the system privileges the firm, and some advisors privately say it's a move to get unfair advantages over them.
"It speaks a lot to what goes on in the industry," says one wirehouse advisor who recently left Morgan and asked not to be named.
Morgan told advisors and other employees via email last month that it was expanding its internal dispute resolution program, known as CARE, and that they had until Oct. 2 to opt out.
Some disputes between Morgan and its advisors that currently go to FINRA arbitration will continue to do so, but other disputes, such as potential claims of discrimination or wrongful termination, will now be resolved through the company's CARE program.
Morgan's email notice neglected to inform its employees that they were being asked to surrender their right to pursue discrimination claims in court and to participate in any class action, whether in arbitration or in court, former Morgan advisor Kathy Frazier charges in a recently filed discrimination lawsuit.
Her attorney, Suzanne Elaine Bish, says that advisors at Morgan are losing critical rights.
"For the first time Morgan Stanley advisors and other employees will be precluded from raising claims of discrimination or other civil rights claims in courts – having their claims tried before a jury of their peers," says Bish, who works at Stowell & Friedman.
In the case, Frazier also accuses the firm of racial discrimination practices against African American advisors, which result in an unfair distribution of resources and business opportunities. In addition to other requested relief, Frazier asked that the court stop Morgan from implementing mandatory arbitration.
Jim Wiggins, a Morgan spokesman, denied Frazier's criticisms, saying that "the only people disadvantaged by this program are the class action lawyers looking to maximize attorneys’ fees through protracted litigation."
COSTLY CLASS ACTIONS
"The primary issue is not that an individual might have to arbitrate, but whether one can bring a class action," says Mark A. Neubauer, an attorney law firm Carlton Fields Jorden Burt.
Neubauer says that litigating class action lawsuits can be particularly costly for companies.
"It's not like a typical lawsuit where you can collect the money back if you prevail," he says, adding that companies sometimes choose to settle cases that they know they can win because doing so will cost less than paying the litigation costs.
Wiggins says that Morgan's CARE program has been available on a volunteer basis for about a decade, and that it "benefits all parties by offering an impartial, confidential, cost effective and timely mechanism for resolving employment disputes."
PUTTING A PRICE ON RIGHTS
Experts agree that pursuing action through the civil court system can be costly as well as time-consuming.
"By arbitrating, you get more efficient resolution of disputes. The court rules are cumbersome and expensive, and can be cut through in arbitration to the benefit of both sides," says Ronald Colombo, a law professor at Hofstra University.
However, there are significant disadvantages for employees in arbitration as well, attorneys say.
"I'd love to deposition half of Morgan Stanley's upper management, but I would not have that opportunity in arbitration because there aren't depositions permitted," says Michael Arias, an attorney and former wirehouse branch manager.
There is also no precedent set in arbitration as in civil court, meaning that arbitrators do not have to stick by rulings made in previous cases – even in ones that are nearly identical.
And the downside of the privacy that comes with arbitration is that little information is made public; advisors will be deprived of vital information from past cases to guide them as they pursue their own claims or defend themselves against firms, attorneys say.
"If I know there are previous successful cases against a particular employer, I can tailor my client’s case to avoid the prior pitfalls and accentuate the prior successful arguments. With private [arbitration], only the employer has that information," says Elisabeth Seieroe Maurer, a Ridgefield, Conn.-based attorney.
Andrew Stoltmann, a Chicago-based lawyer, says that transparency is an essential component of the legal process, but suggests that more firms may follow Morgan's lead.
The wirehouse, he says, "wants to keep its behavior as quiet as possible."
Attorneys as well as current and former Morgan employees also question whether bias may come into play, as it is the firm that has essentially picked and paid the arbitrators to hear disputes: Will they bite the hand that feeds them?
OPT IN, OPT OUT
Wiggins, Morgan's spokesman, declined to comment on how many advisors chose to opt out before the Oct. 2 deadline.
Several advisors said that it would be easy to miss an email like that.
"If you weren't paying attention, then you're in a whole different ball game," says the recently departed Morgan advisor.
Another advisor, currently at the wirehouse, said that he wasn't sure his colleagues fully understood the implications of what Morgan was doing. Advisors who missed the opportunity to opt out may find it difficult to pursue claims outside of Morgan's system.
"You could only do that if you could fight the arbitration agreement itself," says Brittany Weiner, a New York-based lawyer at Imbesi Law.
Weiner says it would be necessary to find grounds to charge that the agreement was unconscionable or unfair.
"They're not left with no option, but it's certainly a different option than going to court," she says.
Pointing to the trade-offs that come with arbitration, Colombo, the law professor, says: "There is something to be said about the federal rules. You might not like them always, but you know what you mean."
- Ameriprise Hit With $20M Suit From Former Clients
- Scottrade Breach: Gut Check for Advisors
- Fiduciary Supporters Strike Back