Morgan Stanley must pay $5 million over broken promises

NEW YORK (Reuters) - Overselling a job opportunity to a coveted recruit might be commonplace, especially in the money-talks brokerage world. But firms can pay a price if managers fail to follow through on promises they make when wooing a new hire.

An arbitration panel ruled that Morgan Stanley Smith Barney must pay $5 million to two brokers for making false promises when recruiting them from rival brokerage UBS.

The award, dated Tuesday, is the latest decision in a spate of cases involving unmet promises that advisers claim were made to win them over, only to turn a blind eye to those agreements when they started work.

"Rarely do you have a case where everything that the claimant says is completely corroborated by Morgan Stanley's own...documents," said California-based lawyer Erwin Shustak, who represented the brokers.

Morgan Stanley Smith Barney said in a statement on Wednesday, "We believe this decision is wrong and not supported by the facts."

Asked if it would appeal the ruling, Morgan Stanley said it was reviewing its options.

Advisers John Paladino and Todd Vitale, who are still with the firm, said Morgan Stanley made fraudulent misrepresentations, among other claims, when they were recruited in August 2008 - just months before the company's wealth unit merged with Citigroup's Smith Barney in January 2009 to create the largest U.S. brokerage.

Under the terms of the recruiting deal, which were documented in internal memos, Morgan Stanley promised Vitale that he would become a salaried manager within six months of joining the firm. Paladino, who joined the firm at a time when he was generating $250,000 in annual revenue, would then inherit Vitale's book, valued at roughly $450,000 in annual production.

Four years later, Vitale had yet to be granted that management position and Paladino had yet to inherit his book. Further, Paladino had his monthly pay cut because of the small size of his book, which would not have happened had the promises been kept.

The panel awarded compensatory damages to both brokers - $2.6 million to Vitale and $2 million to Paladino - and another roughly $355,000 in attorney fees. The amount was more than the claimants had expected, according to Shustak. Expert testimony initially calculated damages at $3.3 million.

Shustak said he believes the reason the panel ruled in favor of the brokers after the two-weeklong hearing was because of the "extensive documentation" and Vitale's "own meticulous records," including internal memos from senior management, as well as e-mails and day-planner notes confirming the brokers' claims.

A WIDER ISSUE?

The problem is not limited to Morgan Stanley Smith Barney, industry lawyers say.

Recruiters often make verbal promises to advisers that do not appear in the contract, said Laurence Moy, a New York-based lawyer for Outten & Golden LLP who advises brokers on employment issues.

The practice is so common that brokerages try to protect themselves from those oral representations, he said. Moy is aware of "repeated" situations in which brokerages "talk out of both sides of their mouths," he said.

It is not unheard of for brokers to receive offer letters that outline their compensation, while warning them not to rely on promises other than those in the letter, Moy said.

That may partly be because managers are working to hire numerous brokers at the same time and may not remember everything that has been said. The manager who was involved in recruiting Vitale and Paladino, for example, testified that he was involved in recruiting upward of 40 brokers at any one time, according to Shustak.

"It's a difficult situation for the individual, especially in this hiring environment," Moy said. "They're stuck with this paperwork that's designed to create an out for the firm while encouraging the individual to take the job."

The problem is most acute with promises about compensation, but also crops up in other ways, such as by telling brokers they will ultimately become a managing director.

Larger producers typically have an easier time negotiating some verbal promises into the written contract, Moy said. Smaller producers are generally more vulnerable because they have less leverage, he said.

(Reporting By Ashley Lau and Suzanne Barlyn; Editing by Jennifer Merritt and Leslie Gevirtz)

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