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You Sure They Settled that FINRA Arbitration? Really? Why?

You Sure They Settled that FINRA Arbitration? Really? Why?

Just another day in the life of FINRA's arbitration forum.

In a Financial Industry Regulatory Authority Arbitration Statement of Claim filed in February 2010, Aaron Berkowitz alleged fraud, breach of contract, and negligence in connection with alleged misconduct involving unspecified securities.

Yup, those are the vague generalities with which FINRA publicly reports its arbitrations: a kitchen sink of allegations and unspecified transactions. Nonetheless, claimant Berkowitz sought $30,000 in compensatory damages plus treble damages, attorneys' fees, interest, and costs. (In the Matter of the Arbitration Between Aaron Berkowitz, Claimant, v. Morgan Stanley Smith Barney, Respondent; FINRA Arbitration 10-00749, Aug. 4, 2011).

Respondent Morgan Stanley Smith Barney generally denied the allegations, asserted various affirmative defenses, and requested an expungement of this arbitration from the Central Registration Depository records of unnamed party Donald Nowak, its associated person.

Quite the legal cocktail, no? One part accusation, one part unspecified securities, one part general denial, and one part unnamed broker.

Of course, once poured into your chilled glass, you will be surprised to learn that in February 2011, Berkowitz notified FINRA that this concoction had settled.

Bottoms up, case closed — well, almost.

In April 2011, MSSB requested the expungement of Nowak's CRD, to which Berkowitz submitted no response. Following a hearing, the FINRA arbitrator recommended the expungement.

That's great. We don't really know what the customer complained about. We can't fathom why MSSB settled. And now we learn that an individual not even named in the arbitration won the arbitrator's recommendation for an expungement — why? I dunno.

Jigsaw Arbitration Puzzle

Given how little we know about the facts in this case, you might have some fun considering the arbitrator's punch list of key considerations compelling the expungement. In essence, here are the puzzle pieces — put them together in whatever fashion makes sense for you:

  • Nowak was not named as a respondent in the customer's arbitration;
  • Berkowitz's accounts were non-discretionary;
  • At the time Berkowitz's accounts at Morgan Stanley Smith Barney were established, Nowak advised the customer that (a) He would not manage the accounts; and (b) MSSB prohibited management of accounts with specified minimum balances (which I infer was the threshold disqualification here);
  • Most of the securities in Berkowitz's accounts were transferred from his previous broker/dealer;
  • Berkowitz regularly monitored his investments online, and received monthly account statements;
  • The trades executed during the account's five-month history at Morgan Stanley Smith Barney were made by Berkowitz on an unsolicited basis;
  • The period during which Berkowitz incurred losses was the major market downturn in the latter part of 2008;
  • Nowak is not a party or signatory to (and did not contribute to) the settlement; and
  • Berkowitz's letter of March 22, 2011 exonerated Nowak from responsibility for his losses, and supports the expungement.

Summing It All Up

So, lemme see if I understand this mess. A public customer sues a brokerage firm but doesn't name the servicing stockbroker. The customer complains about trading, but he has a non-discretionary account and the unnamed broker pointedly told the customer that he could not manage his account (likely because it was too small under the firm's guidelines).

The customer appears to be complaining about positions that were transferred to MSSB from another firm and not solicited by the unnamed broker. During the five-month period about which the customer complained of losses, the stock market was in the midst of the historic 2008 crash. Finally, the customer exonerated the unnamed broker in March 2011, raising the question of just exactly who did what, when, where, how, and why. Otherwise, this arbitration is crystal clear.

Of course, I have no idea, whatsoever, about what MSSB settled with its customer Berkowitz, much less why. On the other hand, speaking of “crystal clear,” wow, I could sure use a big, dry Martini after trying to figure this out.

As a result of an editing error, an earlier version of this column incorrectly portrayed Aaron Berkowitz as the person being accused of fraud, breach of contract, and negligence. Berkowitz was the claimant.


Bill Singer is the publisher of and

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