(Corrects that recording of the arbitration hearing was audio not video in 13th paragraph.)
In a typical civil courtroom proceeding, if recorded testimony is lost or tampered with, one can expect the case to be dismissed and an investigation begun.
It seems hard to imagine that the case would proceed in court without such missing evidence, especially if it could be interpreted as exculpatory and if a verdict rendered against a defendant could destroy his career and force him into bankruptcy.
But, as I have previously written, the arbitration process forced on bankers and customers who have a dispute with a Wall Street firm is about as far as you can get from a court of law. Indeed, mandatory arbitration with the Financial Industry Regulatory Authority may be the single largest ongoing abdication of legal rights -- affecting millions of people -- that exists in this country.
Typical courtroom rules of evidence and procedure do not apply in a FINRA proceeding, which is typically adjudicated by three arbitrators who work for the organization, which itself gets more than $1 billion a year from Wall Street’s biggest firms.
In other words, in FINRA arbitration, the judge and jury work for Wall Street, which is always on one side of the case or the other. Doesn’t seem fair or American, does it?
Retirement Fund Mischief
Take the case of Mark Mensack, a 49-year-old, former financial advisor at Morgan Stanley with a wife, three children and, at least for now, a house in Cherry Hill, New Jersey. Mensack worked at a Morgan Stanley office from August 2008 to November 2009. Six months after he got there, he claimed he found wrongdoing involving what he called a “pay-to-play scheme” in $4 billion of 401(k) assets that Morgan Stanley administered.
In accordance with Morgan Stanley’s code of conduct, Mensack reported his ethical and legal concerns through the management ranks and, eventually, to the board of directors. “Morgan Stanley prohibits retaliation for reports or complaints that are made in good faith regarding the misconduct of others,” reads the code of conduct.
But, Mensack tells me, the head of the firm’s 401(k) department threatened him in an e-mail for pursuing these alleged violations. When the matter reached Gary Lynch, the firm’s general counsel at the time and a former chief enforcement officer at the Securities Exchange Commission, his response was “reasonable minds can differ,” Mensack wrote me in an e-mail. The response from a different executive was, “There is no bright line rule addressing this issue.”
After he reported the wrongdoing, Mensack claims, Morgan Stanley “began retaliating against me such that it was impossible for me and my team to conduct ethical and legal 401(k) business” -- in effect, a constructive dismissal.
Not placated and no longer at Morgan Stanley, in March 2010 Mensack filed a whistleblower suit in New Jersey Superior Court against the firm because he believed its 401(k) sales program violated regulations of the SEC, FINRA and the Employee Retirement Income Security Act.
A month later, Morgan Stanley filed a “breach of contract” arbitration claim against Mensack, seeking return of the $750,000 sign-on bonus that the firm had given him as part of a three-year recruiting package to lure him away from his previous employer. Also, since Mensack had been a Wall Street employee, Morgan Stanley argued successfully that the whistleblower case should be moved from the New Jersey court to the FINRA arbitration process.
Mensack’s arbitration proceeding with Morgan Stanley occurred between June 6 and June 9, in Philadelphia, and consisted of seven three-hour recorded sessions. As often happens in a FINRA proceeding, Mensack lost his case. The arbitrators found for Morgan Stanley and ordered him to repay his $750,000 signing bonus plus another $450,000 in Morgan Stanley’s legal fees and FINRA’s fees, or a total of $1.2 million.
In August, Mensack’s attorney requested an audio copy of the arbitration hearing in order to review the testimony as part of considering an appeal of the arbitrators’ ruling, which is rarely successful. When Mensack and his attorney reviewed the recording, they expected to hear 18 hours of on-the-record testimony. Instead, it contained only 10 hours of testimony. The other eight hours had vanished.
“These eight hours include nearly all of Morgan Stanley’s incriminating testimony,” Mensack wrote me in an e-mail. “Perhaps the most incriminating redacted testimony is from Bill Ryan, Morgan Stanley’s Chief ERISA attorney, when he substantiates my claim that Morgan Stanley’s Alliance Partner 401(k) Sales Program violates the ERISA Prohibited Transaction rules.”
In September, according to Mensack, FINRA threatened to revoke his broker licenses -- he has both a Series 7 and Series 63 certification -- unless either he paid the $1.2 million, filed a motion to vacate the arbitration decision or filed for bankruptcy. He didn’t have the $1.2 million to repay, he said, and if he lost his licenses he could no longer earn a living as a broker -- he by then had a job with with Piedmont Investment Advisors LLC. And so in late September 2011, Mensack filed a Chapter 7 bankruptcy proceeding. As a result of this filing, FINRA stopped trying to take away his certifications. But now he might lose his home.
In October, after several letters seeking information about what happened to the missing testimony, FINRA’s ombudsman informed Mensack’s lawyer that the eight hours of recordings were “never recorded due to mechanical or human error.”
Apology of Sorts
On Jan. 13, Katherine Bayer, FINRA’s regional director in the Northeast, finally got back to Mensack with an apology, of sorts. After explaining that arbitrators use a digital recorder and that the “quality of these recordings tends to be excellent,” she did confirm that “unfortunately, portions of testimony returned to us by the panel are missing from the recordings for the June hearing sessions. I apologize for this and for any perceived miscommunications from the FINRA staff about the status of the recordings.” She concluded that she understood Mensack’s “disappointment with the arbitrators’ decision” but “FINRA has no authority to reverse the award.”
For its part, Morgan Stanley is completely unmoved by Mensack’s claims. “He had a full opportunity to present them, represented by counsel, in an extensive formal hearing,” a spokeswoman for the firm explained to Dow Jones Newswire. “The arbitration panel gave them fair consideration and rejected them in their entirety. She accused Mensack of “attempting to prosecute his case in the media.”
This is FINRA and Wall Street at their very worst. Instead of the smug self-satisfaction on display by both FINRA and Morgan Stanley, the only just outcome here is for the award in the arbitration to be vacated and for Mensack to be able to pursue his whistleblower claim in New Jersey Superior Court as he originally wished. Anything short will go to prove that the FINRA arbitration process is an utter sham.
(William D. Cohan, a former investment banker and the author of “Money and Power: How Goldman Sachs Came to Rule the World,” is a Bloomberg View columnist. The opinions expressed are his own.)
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