Morgan Stanley wins $10M clawback from advisor with checkered record

A former Morgan Stanley advisor who was discharged for excessive trading owes the firm more than $10 million on a recruiting loan he took when joining.

Michael Frank Paesano, who was with Morgan Stanley in New York for five years starting in 2011, must pay $10.52 million, plus additional interest, after being fired in late 2016. Paesano, who has 26 disclosures on his BrokerCheck page, was accused multiple times of excessively trading in client accounts, committing fraud through outside business investments and recommending unsuitable investments, among other violations.

Morgan Stanley reached settlements in most of these disputes, agreeing to pay fines that sometimes stretched into the millions. The firm, for instance, agreed to pay $1.2 million in 2019 over allegations that Paesano and two other advisors had committed fraud, breach of contract, breach of their fiduciary duties and other violations. 

A Morgan Stanley spokesperson declined to comment. Paesano's lawyer, David Robbins of Kaufmann Gildin & Robbins, did not respond to a request for comment.

READ MORE:
What recruiting loan balances say about big wealth managers
Fight over promissory notes intensifies with Morgan Stanley's $5M clawback
After leaving Merrill, broker owes nearly $1M for failing to repay recruiting loans
Ex-Morgan adviser wins $365K reprieve in clawback tug of war

The order Paesano is under to pay back Morgan Stanley was handed down by an arbitration panel overseen by the Financial Industry Regulatory Authority, the broker-dealer industry's self-regulator. The total consists of $5.7 million — the unpaid balance on a recruiting loan — as well as $2.5 million in interest, $2.4 million in attorneys' fees and costs and just over $15,000 for the unpaid balance on a corporate credit card. Paesano also has to pay $902.59 every day until he has satisfied the full award amount.

The recruiting loan Paesano was ordered to pay back was of the type that firms often offer advisors they've brought in from rival firms. These promissory notes — as they're technically called — are typically forgiven if a recruited advisor sticks around for a set number of years, often seven to 12. But they have to be paid back if someone leaves early.

Morgan Stanley has been among the big wealth management firms aggressively pursuing its right to recoup unvested balances on advisors' promissory notes. In May, it won an arbitration order clawing back more than $5 million from an employee who had left to join a firm in Puerto Rico. The month before, it convinced a FINRA panel to order James Czerniak,who left the firm after six years in 2023 to join Osaic Wealth, to pay back roughly $650,000 on a promissory note and related expenses.

Michael Edmiston, a former president of the Public Investors Advocate Bar Association and a securities lawyer at Jonathan W. Evans & Associates in Studio City, California, said in Paesano's case, such a high figure is likely to prove difficult to actually recover. The advisor in this case, he said, may have very well already spent the money he received from recruiting loans.

"More likely than not, this will force him to give serious consideration to declaring bankruptcy to get the judgment discharged," Edmiston said. "But the firms also bring these cases as messaging to all the other chickens in the coop not to leave."

Paesano had responded to Morgan Stanley's claim for repayment of his promissory note with his own demands for more than $49 million in compensation. That request sought $10.8 million in unpaid earnings for the past two years, $20.3 million future earnings, $12 million for his financial advisory business, $1.1 million as an equity award and money to cover costs related to attorneys' fees, taxes and health insurance. The claim was denied in its entirety.

Paesano joined the wealth management industry in 1987, according to FINRA's BrokerCheck page. He had stints at a long string of firms and was at UBS for six years before going to Morgan Stanley in 2011.

His time at UBS produced a fair number of disclosures. In August 2009, for instance, UBS agreed to pay $400,000 to settle allegations that he had overconcentrated a client in certain securities and caused losses. Paesano responded BrokerCheck by saying he had "no control with respect to the resolution of the matter, and thus the settlement does not reflect any acknowledgement or admission by me of any liability or any misconduct whatsoever."

Paesano is no longer a broker registered with FINRA or an advisor registered with the Securities and Exchange Commission. Rick Rummage, an industry recruiter and the CEO of The Rummage Group, said many times firms will stop zealously trying to extract promissory note repayments from wealth managers who have left the industry.

In many cases, the question becomes whether an advisor who is no longer working can even afford to pay back what they've been told they owe.

"Once they leave the industry, the chances of getting their money back drop significantly," Rummage said. "So many times, they tend to back off."