[ by Howard Haykin ]

Case Turns on a Panelist's Omission.

A California court overturned a nearly $5 million securities arbitration ruling against Morgan Stanley Smith Barney in a case filed by 2 brokers who claimed the firm broke promises it made when recruiting them. 

The ruling was overturned Monday by the Superior Court of California in San Diego on the grounds that one of the 3 arbitrators in the case failed to disclose that his daughter worked for a brokerage firm and maintains an account with Morgan Stanley.  Those points were noted by by Judge Lisa Schnall in her 4-page ruling. 

Judge Lisa Schall of the Superior Court of California in San Diego agreed with the respondent, Morgan Stanley, which argued that one of 3 securities arbitrators who heard the case failed to disclose his daughter's ties to the securities industry - an omission that could give the impression of bias.  The Judge's 4-page decision mentioned those undisclosed considerations.

A Morgan Stanley spokesperson said:  "We are extremely pleased with the court ruling that validates the facts in this matter."

Erwin Shustak, who along with George Miller of Shustak Frost & Partners, represented the brokers, said: "We think the court is wrong," adding that Messers John Paladino and Todd Vitale now have the option of asking the judge to reconsider her ruling, to appeal the ruling, to ask for another hearing, or to do all of the above. 

Its very rare for a court to decide and overturn, or vacate, an arbitration ruling. Decisions by arbitrators are typically binding, but parties can file a court case to request overturning the award. While courts are often hesitant to grant those requests, they may do so in limited circumstances such as when an arbitrator is biased.

The FINRA panel had issued its ruling in June, saying Morgan Stanley must pay $5 million to brokers Mr. Paladino and Mr. Vitale, who are still with the firm, for making false promises when recruiting them from rival brokerage UBS.