Morgan Stanley is no stranger to defending itself in class action lawsuits – it has indeed paid many millions to settle more than a few brought by the firm's financial advisors, among others.
Now, in fallout from its controversial internal mandatory arbitration program, called CARE, the wirehouse is enmeshed in yet another contentious class action.
Under CARE (Convenient Access to Resolutions for Employees), Morgan employees waive the right to pursue civil rights grievances and other claims in court or to initiate or participate in class actions against the firm.
The program mandates such claims – including breach of contract, breach of fiduciary duty, statutory discrimination based on gender or race, and wrongful termination – into private arbitration conducted by JAMS, a for-profit company. CARE does not affect financial advisors' access to FINRA arbitration on matters that fall under the self-regulator's jurisdiction.
To be sure, CARE has no shortage of detractors. "It stinks to high holy hell," says Bill Singer, a New York-based securities lawyer and former NASD attorney who was also a New York administrative judge, in an interview with ThinkAdvisor. "This is among the worst overreaches that Wall Street has committed in many, many years. It allows the firm to keep its dirty laundry out of the public eye in proceedings that they can, essentially, hermetically seal — and the public learns nothing about them."
Voluntary for more than a decade, CARE made arbitration mandatory for employees who opted into the program as of October 2, 2015. Staffers were advised of this change, and of CARE's expansion company-wide, via a negative-consent e-mail – some observers have called it less than candid – on September 2, 2015. If you didn't opt out in 30 days, you were in.
The day before the opt-out deadline, financial advisor Kathy Frazier, who left Morgan in 2013 after being "constructively dismissed" – i.e., terminated – and is now with UBS, according to FINRA BrokerCheck, sued Morgan over the CARE program. Frazier filed suit on behalf of current and former employees.
"CARE is an effort by Morgan Stanley to continue its rampant discrimination in private and without…accountability in court," Frazier's claim says.
A Morgan spokesperson reiterated to ThinkAdvisor a statement the wirehouse issued at the time Frazier filed her action: "We categorically reject the notion that prompt individual arbitration and resolution of disputes in front of professional unbiased arbitrators, which is encouraged by federal law, discriminates against employees."
This past September, Frazier filed a motion to stay, or stop, the case until such time as the Supreme Court rules on the question of whether firms can have employees waive the right to bring class-action or collective-action claims. Federal district courts are split on the issue.
But the judge said he saw "no justification" to wait for a potential Supreme Court resolution and ordered Morgan to file an opening brief by October 19, 2016, and Frazier to submit an opposition brief by November 18. Morgan's reply brief is due by December 5.
There is currently a movement in the U.S. to pass a law that would limit or prevent firms, in general, from imposing mandatory arbitration.
The CARE program, detailed in a 22-page guide that Morgan made available via an online link in its negative-consent e-mail, fails to represent a negotiated contract, some attorneys contend, since its terms are imposed by one party only – the firm – and no monetary consideration is provided to employees.
"They're trying to unilaterally reduce or limit the scope of employees' rights without benefits, such as a bonus. For a firm to say they're unilaterally reducing your rights unless you opt out – that is, speak now or forever hold your peace – is probably not enforceable in many states," says securities attorney Scott Matasar of Matasar Jacobs, in Cleveland, Ohio.
Notes Hugh Berkson, former president of the Public Investors Arbitration Bar Association (PIABA) and principal of McCarthy, Lebit, Crystal & Liffman, in Cleveland: "It should be at the discretion of the claimant whether to go to court or to arbitration. Period."
And Singer stresses: "It's a constitutional right to be able to take your dispute to court. Morgan Stanley is one of the most important players in the financial services community. So to give them the right to prevent employees from going to court is scary."
Immediately after Frazier filed her suit, Morgan spokesperson James Wiggins stated that CARE "benefits all parties by offering an impartial, cost-effective and timely mechanism for resolving employment disputes."
Other financial services firms, such as Charles Schwab and Merrill Lynch, have in the past launched versions of such programs. But "FINRA has looked very dimly on them," says Christopher Vernon of Vernon Litigation Group, based in Naples, Florida. He represents clients in complex mediations and arbitrations, particularly securities arbitrations.
(Related: How to Answer When FINRA Knocks on Your Door)
In fact, "FINRA is adamantly opposed to third-party arbitration, which it views as a violation of its rules and an erosion of its authority," according to Mark Elzweig, whose eponymous executive recruiting firm is in New York.
