Life handed advisor Nicholas Ragone a bushel of lemons when he lost 80% of his business in one fell swoop and Morgan Stanley consequently cut his payout sharply, threatening repeatedly to fire him. To make matters worse, the firm demanded that he pay $100,000 on his upfront bonus promissory notes when he left the firm four years later, even though his seven-year contract was up.
That was just for starters. When he failed to remit, the wirehouse took Ragone to arbitration, where, in April 2014, a Financial Industry Regulatory Authority panel ordered him to pay the firm $150,000. He hasn't given them a penny. As a result, FINRA has suspended him.
"I didn't do anything wrong. Morgan Stanley did something wrong, but I'm the one being mistreated and persecuted," laments Ragone, 54, in an interview with ThinkAdvisor.
The Brooklyn native charges that Morgan Stanley "acted illegally" while he was in their employ and is guilty of "fraudulent misrepresentation" and of lying to the FINRA arbitration panel. Further, he claims the panel was "corrupt and biased" in ruling him liable for breach of promissory note and dismissing entirely his counterclaim of fraud and breach of contract, among other allegations.
"The arbitration panelists were afraid to ask questions and offend Morgan Stanley. In arbitration cases, FINRA colludes with the firms," Ragone says. "They're in the pocket of the major brokerage firms."
The acrimonious dispute pivots on $400,000 worth of promissory notes that Ragone signed during his time with the firm; upon joining, he also signed a bonus agreement.
"Morgan Stanley represented to the arbitration panel that my deal was not a forgivable loan, which was a lie. Of course it was a forgivable loan and not a regular loan. No person in their right mind would leave one firm to go to another and borrow money with interest," he says.
By way of its ruling, the panel found that Ragone was in default, he says, because his bonus was not a forgivable loan, though FINRA arbitration panels are not obliged to provide reasons for their decisions.
For its part, Morgan Stanley says, in a statement: "Morgan Stanley expects its employees and former employees to comply with their obligations to the firm and, specifically, Mr. Ragone to comply with the FINRA arbitration award, which determined that he must repay the loan he received."
A FINRA spokesperson declined to discuss the case on the record, stating: "We do not comment on arbitration awards."
Ragone, a veteran advisor who previously worked at Smith Barney, Prudential Financial and Lehman Bros., now operates a small RIA, Villicus Capital Group, in Melville, New York.
This isn't the first time he has run into trouble concerning an upfront bonus. He left Smith Barney to join Morgan Stanley in 2005 with an $18,000 balance on his promissory note because he hadn't fulfilled the term of his contract.
"We had a legal battle that ended up costing me $65,000," he says, ruefully.
Now, having paid $50,000 in fees to an attorney to represent him in the current case, he is suffering financial hardship and no shortage of psychological stress.
"For over two years, I haven't been able to focus on building my business since at any moment, Morgan Stanley could take most of my liquidity," he says.
The advisor blames the firm for the loss of more than three-quarters of his book of business in 2008. His biggest client – acquired before joining Morgan Stanley and representing about 80% of his assets under management – was an accounting firm that referred numerous high-net-worth clients to him. He and the CPAs enjoyed a revenue-sharing agreement.
But in 2008, the accountants moved 90% of the clients from Ragone's management mainly because Morgan Stanley had been consistently negligent in attending to critical administrative matters, the firm's principal wrote in a letter to Ragone.
Then came another big problem: Because his production dropped precipitously, the FA no longer had excess income to satisfy the tax liability on his promissory notes. So for the final four years of his seven-year contract, Morgan Stanley, without his knowledge, applied the bonus side of his deal to pay the taxes, which indicated he was no longer paying off the notes and negated his forgivable loan, he says.
Only shortly before he resigned did he discover that the wirehouse was paying the promissory-note taxes.
"What they did about my taxes is illegal. They transferred to themselves an obligation I had to the government, and they did it secretly. They didn't make me aware of that balance and kept the clock ticking with interest for four years," fumes the advisor, who says that he had the money in an account to pay the taxes all along.
As for the arbitration, he calls it "a kangaroo court."
"The panelists figured that if they ruled against me, I'd pay the money, go away and leave it be. But that definitely is not the case," the advisor says, noting that he has contacted the New York State Attorney General and is considering filing a whistleblower's suit.
"This looks like a case of somebody who got a bonus, didn't perform because he lost his account – which was overly important – and [Morgan Stanley] tried to take money from wherever they could," says recruiter Mark Elzweig, whose eponymous executive search firm is in New York City.
According to fellow breakaway broker John Lindsey, CEO-founder of Lindsey & Lindsey Wealth Management, in Westlake Village, Calif., who won an Edward Jones arbitration case against him in 2013, "The taxes were [Ragone's] responsibility. But rather than risk not paying them and the government going after them, Morgan Stanley just tacked them onto the back of his loan and made it a regular loan instead of a forgivable loan."
But, Lindsey adds, "unless they discussed this with him ahead of time, it would not be a good-faith agreement. How could it be if they made a unilateral decision? It isn't unusual for the firms to protect themselves to the disadvantage of the brokers. They brutalize them."
