Brokers swipe back at Morgan Stanley in recruiting dispute

When Christopher R. Armstrong left Charles Schwab nearly five years ago to join Morgan Stanley, he says, he was assured by his new employer he could bring his clients with him as long as he stuck to a certain script.

Yet although the language he used to reach out to former customers was prescribed, he and his fellow ex-Schwab broker Randall B. Kiefner were fired not even a month later. That's according to a lawsuit filed against Morgan Stanley on Feb. 6 in federal court in New Jersey.

Now the pair are questioning in court why they should still have to pay a multimillion arbitration award to Schwab. Specifically at issue in this latest twist in the long-running recruiting dispute is a Financial Industry Regulatory Authority panel's decision in November finding that Armstrong and Kiefner still owe Schwab nearly $3 million over the botched recruiting deal. That money, the arbitrators ruled, has been left unpaid from a previous FINRA panel decision calling on Morgan Stanley and the two brokers to collectively hand over $3.03 million in compensatory damages and $1.2 million in attorney fees and costs to Schwab.

The FINRA panel in November found that Morgan Stanley had paid its portion of the award but the two brokers had not. Now, the arbitrators decided, it's Armstrong and Kiefner's turn to step up.

A Morgan Stanley spokesperson maintained that was the right decision.

"The panel properly adjudicated Mr. Armstrong's liability resulting from his conduct and his motion to vacate that outcome is without merit," the spokesperson said.

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Panel orders ex-Morgan Stanley brokers to pay Schwab

Armstrong and Kiefner's attempt to have the panel's decision vacated rests on some technical arguments. Specifically, the pair and their lawyers argue that a defendant like Morgan Stanley has no right under common law to force another defendant to pay an arbitration award.

"Mr. Armstrong showed the Second Panel that by seeking to apportion equal one-third shares of liability amongst the three parties, Morgan Stanley equated its responsibility with his and Mr. Kiefner's," Armstrong's motion states.

Attempts to reach Armstrong and Kiefner's lawyers were unsuccessful.

Although Armstrong and Kiefner are under an order to pay Schwab nearly $3 million, the money won't ultimately come out of their pockets. It's instead to be taken out of the roughly $4 million that the first FINRA panel they appeared before ruled they should receive from Morgan Stanley over their botched hiring from Schwab.

Rather than pay that amount to Armstrong and Kiefner, Morgan Stanley has held it in escrow pending the resolution of the dispute with Schwab. If the pair eventually do have to pay Schwab, Armstrong will still be left with $810,500 from Morgan and Kiefner with $333,789, plus roughly $700,000 in attorney's fees.

Stick to the script

The convoluted case began on a Friday in March 2019 when Armstrong and Kiefner left Schwab and started working for Morgan Stanley the same day. At Schwab, the two had entered into a contract requiring them to give at least four weeks' advance notice of any plans to resign.

Morgan Stanley, according to the latest lawsuit, assured them that that provision was unenforceable. The firm also said, according to the suit, that the two could take customer identification information from Schwab and use it to try to drum up new business for Morgan Stanley.

Armstrong and Kiefner were asked to follow two scripts when trying to reach out to former clients. The first was merely to announce the pair had left Schwab, according to the suit. The second, marked attorney-client privilege, "contemplated active solicitation of the customers to follow them" to Morgan Stanley, according to the suit.

Neither Morgan Stanley nor Charles Schwab is a member of the "broker protocol," a legally binding pact among advisors and brokers that sets rules of the road to prevent lawsuits over recruiting deals. Members of the protocol have agreed that it's acceptable for departing advisors to take with them client names, addresses, phone numbers, email addresses and account titles. All other documents must stay with the original firm.

Tangled web

Armstrong and Kiefner's new lawsuit is just the latest legal action to arise from the tangled case. Schwab fired the first shot on April 5, 2019, with a suit accusing Morgan Stanley of "predatory approach to growth in the securities industry." Armstrong and Kiefner were fired from Morgan Stanley six days later, and the suit was settled later the same month.

Separately, Armstrong is suing the law firm Shumaker, Loop and Kendrick and one of its lawyers, Michael Taaffe. That legal team was brought in by Morgan Stanley shortly before Armstrong and Kiefner were hired to advise them on what they legally could and couldn't do when leaving Schwab. 

According to the suit, the pair initially believed the firm was offering them independent legal advice. They're accusing Shumaker, Loop and Kendrick, as well as Taaffe, of failing to divulge their history of working with Morgan Stanley on previous cases.

Jim Eccleston, a lawyer representing Armstrong in that dispute, said in an email that the case has moved into its expert discovery phase.

"We have tendered expert reports for damages, liability and attorney ethics violations, as well as document alteration by defendants," Eccleston said.

Kiefner has meanwhile found himself in legal hot water of an entirely different sort. He was arrested in April on 21 charges of possession of child pornography. He pleaded guilty on Dec. 4, and the Florida Department of Corrections lists him as scheduled for release in 2030.