While the fallout from bad bets on Puerto Rico bonds continues to ripple throughout the financial services industry, one wirehouse suffered the equivalent of a paper cut.

Morgan Stanley was recently ordered to pay $95,000 to redress the losses a client incurred from investing in Puerto Rican debt, down from an original claim for damages of more than $157,000. A FINRA arbitration panel also determined that the wirehouse's recommendations were unsuitable and had the case noted on a Morgan broker's CRD record.

While the award may not seem like a significant blow to the wirehouse, it may be too soon to tell whether Morgan dodged the worst of the Puerto Rican debt crisis.

"Morgan Stanley is disappointed with the panel's decision, but has paid the award," a spokesman said in a statement. "The firm believes it has made appropriate disclosures regarding Puerto Rico. The arbitration involved a bond purchased in 2008."

So far, Morgan competitor UBS has been among the most impacted by Puerto Rican bond losses. The firm, which does a high volume of business on the island, estimates claims involving investments in Puerto Rico bonds total more than $1 billion.

UBS and Santander have both reached multi-million settlements with U.S. securities regulators involving supervision failures relating to the sale of Puerto Rico investments.
Danielle Tierney, a senior analyst at Aite Group, a research and consulting firm, anticipates that the litigation will slow in the months to come, both because of the multi-million dollar settlements with firms like UBS and Santander, and because prudent brokers have removed Puerto Rico bonds from their suitability lists.

"I would expect to see a few more cases, but honestly it sort of seems like they've got the major ones," Tierney says.

Attorney Seth Lipner, who represented the client in the Morgan case, says brokers ran into trouble by relying on only the credit ratings to recommend the island common wealth's bonds.

Lipner, a principal at Deutsche & Lipner in Garden City, N.Y., says he is following up on several alleged claims implicating multiple firms. He estimates that clients lost between 20% and 40% of their investments in Puerto Rico, depending on the bonds they purchased.

He also says his case against Morgan may be the first awarded to a client on the U.S. mainland.

A three-person arbitration panel awarded Lipner's client, Morrisa Schiffman, $95,632.90 in compensatory damages, down from the more than $157,000 they had been seeking.

The panel also denied the request of the broker, David Bindenglass, to have the matter expunged from his CRD record.

The prospects for recouping losses are dwindling as time passes and Puerto Rico's situation worsens, Lipner says. "There is a 6-year [time frame] from purchase deadline, but any delays at this point (post-default) make cases more difficult," he says.

Read more: