[ by Howard Haykin ] An arbitration panel ruled that Morgan Stanley Smith Barney oversold a job opportunity to coveted recruits, then failed to follow through on promises that were made.  Now, MSSB has to make some big payouts. The arbitration award, issued Tuesday, requires MSSB to pay $5 million to 2 brokers after the firm made false promises when recruiting them from rival UBS.  The award is the latest decision in a spate of cases where firms subsequently reneged on promises made to big producers during the recruiting process.  In their arbitration claims, the advisers say the firm simply turned a blind eye to the agreements, once they started work. While Morgan Stanley issued a statement saying they believe the decision is wrong and unsupported by the facts, the lawyer representing the brokers - Erwin Shustak said:  "Rarely do you have a case where everything that the claimant says is completely corroborated by Morgan Stanley's own...documents." Facts and Circumstances of the Case. Advisers John Paladino and Todd Vitale, who are still with the firm, were recruited by Morgan Stanley in August 2008 - just months before the company's wealth unit merged with Citigroup's Smith Barney in January 2009 to create the largest U.S. brokerage. Under the terms of the recruiting deal, as documented in MS internal memos, Vitale was promised he'd become a salaried manager within 6 months of joining, and Paladino was promised he would inherit Vitale's book - valued at about $450,000 in annual production - when Vitale was promoted.  At the time Paladino joined Morgan Stanley, he had been generating $250,000 in annual revenue. Yet, 4 years later, Vitale never made it to management, and Paladino never had a chance to inherit Vitale's book.  Further, Paladino had his monthly pay cut because of the small size of his book, which wouldn't have been the case if the recruiting scenario had played out. Awarded Compensatory Damages. Both brokers received compensatory damages - Vitale got $2.6mn, and Paladino got $2mn.  They were awarded another $355,000 or so for attorneys fees.  The $5 million award exceeded the $3.3 million in damages that an expert witness for the claimants had initially calculated.  Shustak said he believes the panel was swayed by the "extensive documentation" and Vitale's "own meticulous records," including internal memos from senior management, as well as e-mails and day-planner notes confirming the brokers' claims. Industry Problem. The case against Morgan Stanley Smith Barney is not unique, industry lawyers say.  Recruiters often make verbal promises to advisers that do not appear in the contract, said Laurence Moy, a lawyer with Outten & Golden LLP.  The practice is so common that brokerages try to protect themselves from those oral representations, he said. Moy says that firms try and protect themselves by issuing offer letters to brokers that outline their compensation, and warn them not to rely on promises other than those in the letter.  In part, that might be done to protect managers who may be in the process of hiring numerous brokers and can't remember everything that was said.  The manager who recruited Vitale and Paladino, for example, testified that he was involved in recruiting upward of 40 brokers at any one time, according to Shustak. "It's a difficult situation for the individual, especially in this hiring environment," Moy said. "They're stuck with this paperwork that's designed to create an out for the firm while encouraging the individual to take the job." Larger producers typically have an easier time negotiating some verbal promises into the written contract, Moy said. Smaller producers are generally more vulnerable because they have less leverage, he said. For further details, go to:   [Reuters, 6/20/12].