By Harry A. Jacobowitz, Esq.
A former financial advisor at Morgan Stanley Smith Barney LLC (“MSSB”) has filed a complaint in federal court with implications for the enforceability of promissory notes for MSSB loans to California-based brokers. The case also involves the arbitrability of the dispute and the legal effect of FINRA Awards ordering the repayment of those loans.
The complaint filed in the U.S. District Court for the Northern District of California by V. Thane Stenner against Morgan Stanley Smith Barney FA Notes LLC (“MSSBFAN”) and “Does 1 through 10” alleges that his promissory note originated by MSSBFAN when he went to work for MSSB in California was illegal under California law and therefore unenforceable. The complaint also alleges that the dispute cannot be compelled to arbitrate.
Stenner’s Promissory Note
According to the complaint: Stenner received a loan from MSSBFAN for $8,823,040 and signed a promissory note in April 2017, when he went to work for MSSB in Palo Alto and San Francisco, California. Stenner received bonuses each year that he met his performance targets while working for MSSB, but these were applied to repayment of the loan (as is typical for promissory notes such as this). Unknown to Stenner, MSSBFAN assigned Stenner’s promissory note to MSSB and Morgan Stanley Smith Barney Financing LLC (MSSBF), which coerced him into repaying the loan in 2020 and 2021 through various means, including but not limited to accelerating the loan, freezing his securities assets, threatening to report the loan default to credit agencies and filing an “expedited” arbitration against him before FINRA.
The Gravamen of the Complaint
The Complaint explains: “Plaintiff will prove that MSSBFAN unlawfully engaged in the business of originating, servicing, and collecting on loans because MSSBFAN: a. Never held a valid license to originate, service and collect on loans from the California regulator, the California Department of Financial Protection and Innovation (“CA DFP”); and b. Never held a valid license as a foreign business entity from the Secretary of State for California” (emphasis in the original). In fact, MSSBFAN signed a Consent Order to that effect dated October 19, 2020, in which it agreed to pay $1,000,000 in monetary penalties to CA DFP and was ordered to cease and desist its illegal activity.
The Complaint also alleges that the assignments to MSSB and MSSBF (which were necessary because MSSBFAN dissolved itself): “are void and unenforceable because MSSBFAN did not cure the violations and was not registered or licensed to enter contracts or assignments” and “the Defendants failed to disclose and willfully concealed from Plaintiff the unlawful and unlicensed activities to avoid waiver of the loan penalties applied to borrowers….” Stenner seeks declaratory relief, cancelling of the loan and return of all principal and interest already paid, including the bonuses applied to the loan (which he contends should be treated as unpaid wages) or, in the alternative: “economic damages representing the total value of the promissory notes plus interest plus non-economic damages, punitive damages, attorneys’ fees, costs and other relief.”
Stenner asserts that his action cannot be compelled to arbitration because:
“MSSBFAN, having been dissolved, renders a pre-dispute arbitration clause unenforceable. This action is not subject to pre-dispute arbitration before FINRA because FINRA Rule 13200(a) permits FINRA arbitration only between members and or associated persons. MSSBFAN is not, and was never, a FINRA member or associated person. Plaintiff does not consent to arbitrate at FINRA. This action is also not subject to arbitration before JAMS because there is no arbitration clause between Plaintiff and MSSBFAN. This action is not subject to pre-dispute arbitration before JAMS or FINRA because Defendants will try to impose waiver of rights buried in an unsigned document called ‘CARE: Guidebook’ that was created to impose unenforceable waiver of rights on employees. … An illegal contract that is subject to void or revocation rights, renders the arbitration agreement unenforceable.” Moreover, his prior arbitration has no res judicata or collateral effect on this action because, among other reasons: “MSSBFAN’s promissory notes prohibited Plaintiff from asserting counterclaims in the expedited arbitration thereby preserving all of his rights asserted herein.”
(ed: *Email us at Help@SecArbAlert.com for a copy of the Complaint. **We have found no FINRA Award based on this promissory note or, indeed, any involving Mr. Stenner. ***The complaint expressed Plaintiff’s intention to amend his complaint at a later time to name other co-conspirators in the purported “web of affiliates, subsidiaries, officers and persons” associated with MSSBFAN (hence the “Does 1 through 10” in the caption), even though it’s clear he already knows the identity of some of those future defendants. Our educated guess is that he doesn’t want to name MSSB yet, because FINRA rules do require him to arbitrate with that entity. ****You can find articles on the complaint here and here. *****This Squib was prepared by Harry A. Jacobowitz, President of HAJ Research and Writing LLC. Mr. Jacobowitz, a member of the Pennsylvania bar, and his firm perform legal research and writing for attorneys and handle substantive searches of SAC’s Award database. He can be contacted at email@example.com.)