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Securities Arbitration Overturned in Rare Case

Tuesday, September, 25, 2012


In a rare California court decision, a $5 million securities arbitration ruling was overturned on September 18, 2012.

The overturned ruling was an award that two brokers had won against Morgan Stanley Smith Barney. The firm is a subsidiary of Morgan Stanley, formed after that company merged with Citigroup's Smith Barney.

Financial Arbitration Normally Secure

Arbitration is usually a binding process and is unable to be affected by courts. That doesn't prevent the interested parties from trying, however, when they don't get the outcome they want.

For better or for worse, though, most of these attempts simply do not succeed. In order for a binding arbitration decision to be overruled by a court, it is usually necessary to prove dishonesty, maliciousness, or vested interested on the part of the arbitrator or arbitration panel.

What Happened in the MSSB Commercial Arbitration?

In this case, the brokerage firm argued that one member of the three-member arbitration panel might have it out for the firm. That's because, a few years before, the firm "recruited away" the son-in-law that he worked with!

The member failed to mention that to the brokerage firm before the process started. And luckily for them, they have managed to avoid a $5 million ruling.

Recruiting—The Reason Behind the Legal Arbitration

Ironically enough, the whole reason that the firm had to go into securities arbitration in the first place was that two brokers claimed that the firm lured them in with false promises that were never fulfilled.

What is likely to become of those brokers--and the firm--now? Will they be able to go another round of arbitration with a different panel?

That remains to be seen. Until then, you can bet that managers at Morgan Stanley Smith Barney are grinning from ear to ear.