Whistleblower gets no justice on Wall Street

In a typical civil courtroom proceeding, if recorded testimony is lost or tampered with, one can expect the case to be dismissed. It seems hard to imagine that the case would proceed in court without such missing evidence, especially if a verdict against a defendant could destroy his career and force him into bankruptcy.

But, the arbitration process forced on bankers and customers who have a dispute with a Wall Street firm is about as far as you can get from a court of law. Mandatory arbitration with the Financial Industry Regulatory Authority (Finra) may be the single largest ongoing abdication of legal rights in the US.

Typical courtroom rules of evidence and procedure do not apply in a Finra proceeding, which is adjudicated by three arbitrators who work for the organisation, which gets more than $1 billion (Dh3.67 billion) a year from Wall Street's biggest firms. In other words, in Finra arbitration, the judge and jury work for Wall Street, which is always on one side of the case or the other. Doesn't seem fair or American, does it?

Take the case of Mark Mensack, a former financial advisor at Morgan Stanley with a wife, three children and a house in New Jersey. Mensack worked at a Morgan Stanley office from August 2008 to November 2009. Six months after he got there, he claimed he found wrongdoing involving $4 billion of 401(k) assets that Morgan Stanley administered.

Violations reported

Mensack reported his ethical and legal concerns through the management ranks and to the board of directors.

Mensack tells me the head of the firm's 401(k) department threatened him in an e-mail for pursuing these alleged violations. When the matter reached Gary Lynch, the firm's general counsel at the time, his response was "reasonable minds can differ," Mensack wrote me in an e-mail.

After he reported the wrongdoing, Mensack claims Morgan Stanley "began retaliating against me such that it was impossible for me and my team to conduct ethical and legal 401(k) business".

No longer at Morgan Stanley, in March 2010, Mensack filed a whistleblower suit in New Jersey Superior Court against the firm because he believed its 401(k) sales programme violated regulations of the Securities and Exchange Commission, Finra and the Employee Retirement Income Security Act.

A month later, Morgan Stanley filed a "breach of contract" arbitration claim against Mensack, seeking return of the $750,000 sign-on bonus that the firm had given him. Also, since Mensack had been a Wall Street employee, Morgan Stanley argued successfully that the case should be moved to Finra.

Mensack's arbitration proceeding with Morgan Stanley occurred between June 6 and June 9 in Philadelphia and consisted of seven three-hour recorded sessions. Mensack lost his case.

In August, Mensack's attorney requested a video copy of the hearing to review the testimony to consider an appeal of the ruling. When Mensack and his attorney reviewed the video, they expected to hear 18 hours of on-the-record testimony. Instead, it contained only 10 hours of testimony.

In September, according to Mensack, Finra threatened to revoke his broker licences unless either he paid the $1.2 million, filed a motion to vacate the arbitration decision or filed for bankruptcy. He didn't have the $1.2 million to repay, he said, and if he lost his licences, he could no longer earn a living as a broker. And so in late September 2011, Mensack filed a Chapter 7 bankruptcy proceeding. As a result of this, Finra stopped trying to take away his certifications. But now, he might lose his home.

In October, Finra's ombudsman informed Mensack's lawyer that the eight hours of recordings were "never recorded due to mechanical or human error."

On January 13, Katherine Bayer, Finra's regional director in the Northeast, got back to Mensack with an apology. She confirmed that "unfortunately, portions of testimony returned to us by the panel are missing from the recordings for the June hearing sessions. I apologise for this and for any perceived miscommunications from the Finra staff about the status of the recordings."

This is Finra and Wall Street at their very worst. The only just outcome here is for the award in the arbitration to be vacated and for Mensack to be able to pursue his claim in New Jersey Superior Court.

— Bloomberg