Morgan Stanley owes a brokerage client $1.8 million over allegations that it had recommended an overconcentration in a financial services company's stock.
So ruled an arbitration panel administered by the Financial Industry Regulatory Authority, the brokerage industry's self-regulator, on Friday.
WisdomTree is a provider of exchange traded funds and exchange traded products with nearly $94 billion in assets under management as of June 30 in the U.S. and Europe. It reported $54 million in net income for its second quarter and its stock has risen by nearly 28% this year.
Matthew Plant, a lawyer at the New York-based firm Lax & Neville who represented Busch in the case, said his client started investing in WisdomTree in 2011 at the recommendation of Todd Wachsman, a Morgan Stanley broker who happens to be her nephew. Plant said Busch's concentration in WisdomTree increased steadily over time until it accounted for almost her entire portfolio.
From 2011 to 2020, the average price of WisdomTree's stock went from slightly more than $5 a share to about $3.50, hitting a high point of nearly $18 a share in mid-2015.
Plant said Busch would have done better if her portfolio had been more diversified. The S&P 500 index of stocks nearly tripled in value between 2010 and 2020.
"Panel arbitrators usually didn't provide any reason for their decisions or their monetary awards," Plant said. "But guessing what they did here, based on the net out-of-pocket claim, it's clear they awarded this based on lost opportunity as well as what a properly invested portfolio would have returned over that same time period."
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In pressing her case against Morgan Stanley, Busch accused the Wall Street giant of breach of fiduciary duty, unjust enrichment, failure to supervise and other violations. Morgan Stanley denied all the claims.
"Morgan Stanley is disappointed with the Award as the client was advised multiple times by the Firm about the concentrated position at issue," Susan Siering, a Morgan Stanley spokesperson, said in an email.
WisdomTree did not respond to requests for comment.
Plant said Busch was retired for most of the time her portfolio was being concentrated in WisdomTree stock. He said that Wachsman did not have discretionary control over Busch's account, meaning he could trade in it only with her approval.
"I think when there is a familiar relationship, more trust is placed in the broker than maybe in an arm's length relationship," Plant said.
Chase Carlson, the founder of the Miami-based firm Carlson Law, said arbitration panels are acting within their rights if they award damages after finding that a portfolio's performance was held back by unsuitable investments. Carlson, who did not work on the Busch case but specializes in investment fraud litigation, said, "The FINRA arbitrator's guide expressly gives arbitrators permission to award well-managed damages to investors."
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As part of the arbitration proceedings, Morgan Stanley also sought to have information about the dispute removed from the online records of both Todd Wachsman and David Wacshman, Busch's brother-in-law and also a broker at the firm. That request was denied by the arbitration panel.
According to FINRA's online BrokerCheck database, Todd Wachsman has 19 years in the industry. He started at Citigroup in 2004 and joined Morgan Stanley in 2009. The only disclosure on his record is a customer complaint relating to the alleged overconcentration in WisdomTree stock.
David Wachsman, according to BrokerCheck, has been in the industry for 31 years. He started at Lehman Brothers in 1992, moved to Citigroup the following year and joined Morgan Stanley in 2009. His only disclosure is also on the Wisdom Tree-related complaint.
