Don’t forget to repay promissory notes. This advisor owes Morgan Stanley $1.4M

Morgan Stanley is set to collect nearly $1.4 million from a former employee after a FINRA arbitration order held up in federal court.

Former advisor Rachael Konz’s petition to vacate the award was denied by a federal judge in New York. Morgan Stanley received a favorable judgment in the amount of $1,387,351.14 plus interest after its cross-petition was granted — just over the 1.2 million awarded in the original dispute resolution.

The dispute involved two promissory notes entered into when Konz started working at the wirehouse in 2013. When she left the bank for Merrill Lynch in 2016, Konz never repaid the notes, according to the FINRA award. She is still registered with Merrill per FINRA BrokerCheck records.

In her petition, Konz argued that the three-member FINRA panel overseeing her case violated the regulator’s own rules because one of the arbiters should have been disqualified due to conflict of interest. Arbiter Paul Mabry III was employed by a law firm that worked with other financial institutions — including some that dealt with promissory notes. That should have excluded him from serving as a “public arbitrator” in this case, the petition argues.

Yong Lim

The wirehouse argued Konz agreed to the panel before the award, only disputing it after the decision went against her. “An initial pre-hearing conference was held and the parties accepted the composition of the panel, including arbitrator Mabry,” according to court documents filed by Morgan Stanley.

Jonathan Berg, a lawyer representing Morgan Stanley, did not return a request for comment. The firm declined to comment.

Joshua D. Brinen, an attorney representing Konz, says they will likely appeal. “The courts will need to force FINRA to be more proactive in arbitrator selection and not just be an administrative body that throws names into a hat,” Brinen says in an email.

Brinen has filed similar petitions in at least four other legal disputes involving powerful firms in the wealth management industry, including Wells Fargo, Morgan Stanley and Raymond James. In all those cases, the advisors are seeking to vacate arbitration awards won by their former employers on the basis that FINRA never properly notified them of the details regarding the proceedings.