Mark Mensack was excited to go to work at Morgan Stanley (MS) in August 2008. A bit over a year later, he would be walking out the door
Mensack initially went to his superiors at MS telling them that he had reservations about the additional compensation the firm was receiving from certain 401k vendors. Among his concerns were that companies who were coming to MS for investment advice were being directed to 401k products that paid to be in MS's Alliance Partner program. Mensack took his concerns about the practice to his supervisor and then to the general counsel .... MS held the company line and responded to Mensack's concerns stating "Reasonable minds could differ." Mensack then left the firm and filed a whistleblower lawsuit in New Jersey Superior Court claiming that he was retaliated against for speaking out on compensation practices (pay to play) that he felt was wrong, illegal. MS responded to the claim by saying the case did not belong in NJ State court stating that Mensack's issues should go to binding arbitration through Financial Industry Regulatory Authority, Inc. (FINRA), despite the fact that his employment contract explicitly precluded arbitration for statutory employment issues (whistleblowing being one of those). The New Jersey court agreed with MS and dismissed Mensack's case.
By the time the case landed at FINRA, MS wanted $800,000 from a note (recruiting bonus) it had paid to Mensack upon accepting employment, along with attorney fees ($400,000) for taking the arbitration case to FINRA. MS claimed Mensack had not lived up to his commitment at the firm. Mensack's position was that the role he was promised at the firm did not match reality and, as a result of speaking up about his disagreements with the firm's practices, he was retaliated against thus necessitating him to leave. He wanted $5 million for the trouble. Upon conclusion of the arbitration, Mensack felt confident, but the decision was not what he had hoped, he lost and was ordered to pay $1.2 million to MS.
Mensack was upset with the loss because he and his attorney felt that they had proven that they had clearly won the case on the grounds that he was brought to MS with false promises, had proven that MS witnesses had provided false testimony and that MS had fabricated key pieces of evidence against him during the proceedings. He then planned his appeal, knowing that the odds of overturning the decision were low. One of the first things he needed from FINRA was an audio recording, standard procedure, of the 21 hours of proceedings from the arbitration so he could review his options with an attorney. He eventually received the recordings from FINRA, except 8 hours of it was missing .... 8 hours, Mensack claims, which had to do with the very topics he thought he had proven during the arbitration.
Mensack's case has been in the news before, but mostly through the musings of bloggers who write on the industry. Finance is a strange world and FINRA's oversight of the industry has been called into question before. Some believe that FINRA, whose revenue comes from investment firms and individuals involved in finance on Wall Street, are influenced by the dominant investment institutions. One can rightfully assume that large banks, like MS and others, make up the majority of the revenues for the private corporation. It is akin to an automotive regulatory firm made up of automakers, with the Big 3 making up the majority of the dues paid. So how do you think a panel who is getting paid by the majority rules? Many have wondered this before.
Perhaps no one is more outspoken about FINRA than Bloomberg's William Cohan. Cohan routinely writes on FINRA's decisions, including Mensack's. Our own Forbes writer Seth Lipner wrote an excellent piece in 2009 to shed some light on who exactly makes up FINRA's arbitrator panels that decides these cases. While some think that FINRA is unfairly rigged against investors and individual brokers, particularly those who lose in arbitration, the big firms seem to have a good batting average of winning. In one case in North Carolina last year, a former Wells Fargo broker had, like Mensack, received a sign on bonus that the bank wanted back after his resignation. FINRA agreed with Wells Fargo, surprise, and ruled the broker must pay the note amount plus legal fees of Wells Fargo. However, the broker took his case to U.S. District Court, an unusual move since arbitration is supposed to be binding, stating that he was railroaded. An attorney representing Wells Fargo told the judge about the numerous cases she had represented on behalf of banks at FINRA arbitration:
"I've never lost one and I've never not gotten attorney's fees. I always win these cases."
Judge Max Cogburn was taken aback by the comment and replied, "Now there's a level playing field." In the end, Judge Cogburn told the broker that he agreed with FINRA's decision to have the broker repay the note but he waived the requirement to have to pay attorney's fees. A partial victory, however, the decision and the case makes one wonder how someone gets a fair shake.
While FINRA has cases where it has helped investors, self regulators certainly have been criticized for how they have handled whistleblowers who claimed wrongdoing at their own firms. Take the case of Leyla Basagoitia, who was sued by her employer in 2003 for a bonus she received upon taking employment with the firm only to be fired two years later. The case was heard by FINRA predecessor, NASD. Basagoitia countered that she was retaliated against for not promoting products that she believed were illegal (sounds familiar). In fact, she went so far as to call her employer a Ponzi scheme. NASD ruled against Basagoitia and ordered her to pay the bonus back. Her firm? Stanford Financial, whose CEO Allen Stanford was arrested in 2009 for running, well, a Ponzi scheme. Stanford was convicted and is currently serving 110 years prison term.
Thirty days after learning of his arbitration loss, FINRA threatened to suspend Mensack's license if he did not pay the $1.2 million, file a motion to vacate or file for bankruptcy within three weeks. Although Mensack felt a motion to vacate was warranted, without a complete copy of the record (missing recordings) he could not get an attorney to take his case. So not having $1.2 million handy to pay MS, he filed for bankruptcy in September 2011 in a move to protect his professional licenses. A New Jersey bankruptcy court, now in control of Mensack's estate, had to first approve his attorney's application to represent him in the new federal whistleblower case. In May 2012, MS objected to that application arguing that the court should block Mensack from moving forward with the latest lawsuit, a tactic which worked for a few months. It was not until October 2012 that the bankruptcy court over-ruled MS's objection so that Mensack could proceed with the new litigation against MS, FINRA and other individuals. In a strange twist, should Mensack win some award from this lawsuit, it would go to pay the $1.2 million that FINRA awarded to MS during arbitration. Oh, how we love our justice system.
For Mensack, the Army veteran, whose final assignment in the military was teaching Ethics at the U.S. Military Academy in West Point, NY, he is banking on having his case heard, and fully recorded, this time around. MS on the other hand is feeling pretty confident. In a quote to the Chicago Tribune, an MS representative said of Mensack's case that it was, "baseless" and further said in a statement that Mensack "had a full opportunity to present (the claims), represented by counsel, in an extensive hearing."
