Morgan Stanley must pay a retired dentist more than $11 million in damages over his allegations that a broker made hundreds of unauthorized trades as part of a complex options strategy.
Anthony E. Nowak won $11.66 million in compensatory damages and costs, with the ability to secure the payment of attorney fees in court as the "prevailing party" under provisions of Florida law governing investment fraud,
Options remain a
Nowak and his longtime financial advisor, Craig Sherman Thistlethwaite, would "speak often or multiple times a week, talking about, as it turned out, everything but trades," client attorney Robert Savage of Savage Villoch Law said in an interview. Nowak, who has relocated to Florida after a longtime career as a dentist in Toledo, Ohio, and his attorney's team identified more than 500 unauthorized trades between 2016 and 2021, Savage said.
"It's a sad story, and it's just an unfortunate scenario that, as shown by this case, does happen in the brokerage industry," he said. "My client's just a great guy. He trusted his best friend with his investments, and he found out too late that it wasn't all as it seemed."
Thistlethwaite, who wasn't a named defendant in the case, didn't respond to a phone call seeking comment on the allegations at the Perrysburg, Ohio-based office of The Fox Thistlethwaite Group at Morgan Stanley. The wirehouse had denied Nowak's allegations and requested the expungement of the complaint, according to the award. The panel ruled in favor of Morgan Stanley when Nowak's attorneys sought sanctions against the firm based on the allegation it failed to retain certain text messages between Thistlethwaite and Nowak. The arbitrators ordered the firm to pay the significant award and most of the hearing costs, though.
"The firm strongly disagrees with the award and is evaluating its options," spokeswoman Christine Jockle said in an email.
In terms of lessons for advisors and other wealth management professionals stemming from the case, the need for documentation stood out to Stacy Sizemore, the chief compliance officer of registered investment advisor platform tru Independence. The firm compiles an "investment policy statement" signed by the advisor and client and listing their goals and risk tolerance, which is used "to plan and implement the investment program most suitable for them," Sizemore said in an email. It also trains and reminds advisors of their obligation to use only compliant means of communicating with clients that store the messages and enable advisors to add them to their electronic files. The firm takes specific steps for potential options investments as well.
"When an advisor I work with wants to trade options for a client, I ensure, before I will approve, that the advisor is very knowledgeable about options and the high risk involved and that they have spoken with the client about their comfort with options as a part of their portfolio," Sizemore said. "This isn't the end of my involvement though — my team of compliance officers are routinely reviewing trading and accounts to watch for unauthorized trading and mitigate risks in utilizing different strategies."
Nowak's case accumulated much more evidence after the discovery phase, when Morgan Stanley's records showed a lack of any phone calls or other communications on days when the trade blotter displayed transactions, according to Savage. The allegation surrounding text messages touched on a sensitive area for many wealth management firms, considering that
Thistlethwaite was carrying out the covered call strategy primarily through transactions involving shares of Nvidia, Tesla, Apple Computers, Salesforce and Microsoft, according to the award. Nowak accused Morgan Stanley of fraud, unauthorized trading, negligence, failure to supervise, a violation of the Florida Securities and Investor Protection Act and breaches of contract and FINRA rules, among other claims. Nowak ultimately sought several tens of millions of dollars in "lost opportunity" damages based on unsuitable and unauthorized transactions.
The panel rejected Morgan Stanley's request to expunge Thistlethwaite's record and ordered Morgan Stanley to pay $11.5 million in compensatory damages, $157,656 in costs and the client's filing fee of $400 to Nowak and his trust, according to the award.
"He's very happy," Savage said. "The money was simply gone, and we were able to recover a significant portion for him."
