Nowak v. Morgan Stanley, FINRA ID No. 21-02127 (Tampa, FL, Nov. 2, 2022)
As widely reported in the media, Morgan Stanley has been ordered to pay two investors over $11 million arising out of use of a covered call strategy.
Financial services media widely reported recently that Morgan Stanley had been ordered by a FINRA All-Public Panel to reimburse the Claimant (individually and in his capacity as trustee) $11.7 million for losses arising out of Morgan Stanley’s covered call strategy. See, for example, Morgan Stanley Ordered to Pay $11.5 Million Over Covered Call Strategy, InvestmentNews (Dec. 2, 2022). We analyze below the Panel’s decision.
In the Statement of Claim, Claimants asserted the following causes of action: “respondeat superior; negligence; breach of fiduciary duty; failure to supervise; breach of FINRA rules; breach of contract; fraud; unauthorized trading and breach of FINRA Rules 2010, 2020, and 3260; and violation of the Florida Securities and Investor Protection Act. The causes of action relate to Respondent’s alleged covered call writing strategy resulting in large positions of technology stocks in Claimants’ accounts, including but not limited to, Nvidia Corporation (‘NVDA’), Tesla Motors (‘TSLA’), Apple Computers (‘AAPL’), Salesforce (‘CRM’), Microsoft Corporation (‘MSFT’), and other stocks being called away from Claimants’ Trust Account.”
In the Statement of Answer: “Respondent requested a denial of Claimants’ claims in their entirety and of the relief sought in the Statement of Claim, and that this matter be expunged from Unnamed Party Craig Sherman Thistlethwaite’s (‘Thistlethwaite’) Central Registration Depository (‘CRD’) records.”
At the hearing, Claimants requested: “lost opportunity damages due to the unauthorized sale of NVDA shares after December 14, 2018, in the amount of $14,334,224.39; lost opportunity damages due to the unsuitable sale of NVDA shares after December 14, 2018, in the amount of $16,344,936.18; the sale and buy-back of 40,000 NVDA shares in the amount of $2,010,088.53; damages for the unauthorized transactions of opening NVDA option contracts in the amount of $5,623,610.55; damages for the unauthorized transactions of opening AAPL option contracts in the amount of $201,982.44; damages for the unauthorized transactions of opening CRM option contracts in the amount of $228,492.60; damages for the unauthorized transactions of opening MSFT option contracts in the amount of $46,934.49; lost opportunity damages due to the unauthorized sale of securities in the amount of $275,815.52; lost opportunity damages due to the sale of 20,000 shares of NVDA on August 17, 2021, in the amount of $15,227,967.68; and Florida Statutes section 517.211 Statutory Interest at the rate of 4.25%.”
The unanimous Panel finds Morgan Stanley liable for: $11,500,000 in compensatory damages; $157,656.81 in costs; and $400 (“which represents reimbursement of the non-refundable portion of the filing fee previously paid by Claimants to FINRA Dispute Resolution Services”). As for counsel fees: “Having proved a violation of Section 517.301, Florida Statutes, Claimant is the prevailing party. The Panel leaves it to a court of competent jurisdiction to determine whether to award attorneys’ fees.” Hearing session fees are assessed $2,300 jointly and severally to Claimants, and $26,450 to Respondent. The request for an expungement recommendation on behalf of the unnamed broker is denied.
(ed: According to a December 1 AdvisorHub story: “A Morgan Stanley spokesperson said the firm ‘strongly disagrees with the award’ and is evaluating its options, including whether it could ask a court to overturn the decision.” As of January 15, no motion or petition to vacate had been posted on the FINRA Website.)
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