Morgan Stanley Sues Ex-Broker to Collect Million-Dollar Arb Award

4 Mar    Investing News

Morgan Stanley has gone to court to collect a promissory note judgment from a former broker who it says transferred all of his assets to family members and companies he controlled to avoid having to pay the debt.

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“In a flagrant scheme to frustrate, hinder, delay and impede enforcement of the judgment, [Christopher R.] Johnson has fraudulently conveyed all of of his assets in a series of transactions with his wife, his sister, his brother-in-law, his cousin and several companies owned and controlled by him and his family members (all of which are named as defendants herein) to make it appear as if he is judgment proof,” according to the lawsuit filed last week in U.S. District Court in Minnesota.

Fraudulent conveyance lawsuits are not unusual in bankruptcies, but lawyers said the Morgan Stanley litigation stands out because it stems from a standard promissory note case decided in Financial Industry Regulatory Authority arbitration.

The wirehouse sued Johnson on the recommendation of a receiver who Judge Paul Magnuson appointed to investigate the broker’s alleged transactions and to collect the assets, according to the lawsuit.

The judge in August 2017 had confirmed a December 2016 arbitration finding that Johnson was liable for $1.5 million owed on five notes he had signed over three years. Morgan Stanley collected just $95,000 of the loan after trying to garnish funds from the principal company he controlled and that was giving him hundreds of thousands of dollars of loans, the lawsuit said.

“It’s a highly unusual case because of the appointment of a receiver,” said David R. Chase, a Fort Lauderdale, Fla. lawyer who has represented brokers in forgivable loan cases. “That’s a standard tool of the court, but it’s the first time I’ve heard of this in a prom note case.”

The receiver determined that a lawsuit against Johnson family members and “their alter ego companies” was the only feasible way to collect, according to the lawsuit.

Neither Johnson nor his wife could be reached for comment. Minneapolis lawyer Steven Phillips, who represented the broker in the underlying arbitration case, did not return a request for comment.

“Morgan Stanley expects its employees and former employees to comply with their obligations to the firm,” a spokeswoman for the wirehouse wrote in an e-mail.

Morgan Stanley in the underlying arbitration claim also sued another broker, Randall Johnson, to collect a $1.87 million balance he allegedly owed on five promissory notes. Those claims were denied, and the arbitration panel ordered Morgan Stanley to pay him $1.16 million from accounts that it had frozen after he was terminated.

The arbitration orders did not explain the relationship between the Johnsons, but Randall worked as a broker for 41 years and Christopher for 17 years. Each joined Morgan Stanley from UBS in late 2008, and both were terminated about four years later by Morgan Stanley for, among other things, failing to disclose to the wirehouse family-related outside accounts.

Christopher Johnson also was suspended indefinitely from the brokerage industry by Finra in 2017 for failing to comply with the arbitration award, according to his BrokerCheck record.

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