Former Morgan Stanley Broker Sues Over Arbitration Policy

A former broker at Morgan Stanley has filed a class-action race-discrimination complaint against the company, accusing it of making “an end-run around the civil rights laws” with a new policy that bars employee participation in class actions and forces civil rights claims into private arbitration.

Kathy Frazier said in her complaint that African-Americans were underrepresented in the ranks of brokers at Morgan Stanley and were paid “substantially less” than their counterparts.

Ms. Frazier previously worked at Goldman Sachs and Merrill Lynch and has an economics degree from Amherst College and a master’s degree in business administration from the University of Pennsylvania’s Wharton School of Business. I wrote about Morgan Stanley’s new policy for The New York Times DealBook. You can read the story here.

Indicted Lawyers, Peeping Toms, Can Wind Up Judges in Finra Arbitration

Finra arbitration is often a surprise to investors — not least of all because so many Wall Street customers have no idea that they sign away their right to court when they open an account.

But how about the surprise of learning that one of your arbitrators had been indicted? Or that he had said he was a lawyer, but wasn’t?

My June 24 column for TheStreet tells about Finra’s latest surprise arbitrator — the guy who was arrested for being a Peeping Tom. Really. You can read it here.

Like Anita Hill vs. Clarence Thomas, Ellen Pao Lost Kleiner Perkins Gender Fight But Women Gained

Sometimes, even a loss can be a win.

A San Francisco jury said last month that Kleiner Perkins Caufield & Byers did not discriminate or retaliate against its former junior partner, Ellen Pao. From my column for

The four-week trial had received intense media coverage for its allegations of porn-star talk in business settings and exclusion of women from company events. Rather than invite a woman on a company ski trip, “Why don’t we punt on her and find 2 guys who are awesome?” a Kleiner partner suggested in an email.

Pao lost. But women didn’t. The case brought huge attention to workplace issues that rarely get aired. Most employers require employees to agree to give up their right to sue before they even show up for the first day of work. So-called “mandatory arbitration” agreements keep gender discrimination complaints out of the public eye, and leave violators of our discrimination laws unaccountable.

You can read my column here.

Wall Street Waging War Against Making Brokers Accountable to Investors

Securities and Exchange Commission Chair Mary Jo White told members of the House Financial Services Committee yesterday that there would be “many challenges” in changing the rules so that stock brokers and investment advisers are similarly regulated.

That’s an understatement. Wall Street has been on a tear for years fighting efforts to demand more of stock brokers. From my column yesterday for TheStreet:

As things stand today, brokers need only sell “suitable” investments that match a client’s investment profile. But they needn’t act as fiduciaries who are duty-bound to put clients’ interests ahead of their own, as investment advisers are expected to do.

You might think it’s a no-brainer that people doing essentially the same job in the financial industry should be subject to the same rules, but you’d be thinking wrong.

There are two fights going on related to the duties of investment advisers and brokers. There’s the one Ms. White has a say in: Changing the rules so that brokers and advisers both are expected to put their clients’ interest ahead of their own — a so-called “fiduciary duty.” And there’s another related to retirement money. The Department of Labor would like to raise the standards for people giving advice in that arena, too. President Barack Obama publicly supported the idea on Feb. 23.

The unsightly battle that has Wall Street fighting to avoid a more ethical approach to its customers is the latest reminder of the gap between the way the industry portrays itself in its marketing, and the way it actually treats its customers. From my column:

“These guys advertise like doctors and lawyers and litigate like used car salesman,” said Joseph C. Peiffer, president of the Public Investors Arbitration Bar Association, or Piaba, a group of lawyers who represent investors in securities arbitration.

You can read the story here.

Ellen Pao’s Case Against Kleiner Perkins Has Porn Star Talk, High Stakes for Women

Twenty years ago, there was Smith Barney’s Boom-Boom Room. Today, it’s Ellen Pao v Kleiner Perkins, the very high-profile sex discrimination trial that’s been going on for four weeks in San Francisco Superior Court.

Pao was a junior partner at Kleiner from 2005 to 2012, when she was fired. She says the firm discriminated against her, leaving her out of important meetings and passing her over for promotion while men moved ahead. Kleiner says she was a difficult employee who had a “female chip on the shoulder.” I wrote about it in my column today for

Among the affronts she has shared with the jury are the story of the female partner on a business trip who opened her hotel room door to see an uninvited Kleiner partner holding a bottle of wine and wearing his bathrobe; the co-ed business flight on a private jet where the conversation turned to porn stars; and the Kleiner meeting where a male partner approached a female partner to ask her to take notes. When the woman declined, he asked Pao to do it.

If Pao loses, it won’t bode well for women with grievances in the future. Women considering a lawsuit could wind up being warned “You know what happened to the woman in San Francisco,” said Linda Friedman, the Chicago lawyer who brought gender suits against brokerage firm Olde Discount Corp. in 1995, Smith Barney in 1996 and Merrill Lynch in 1997. You can read my story here.


Even Snowden Would Have His Hands Full Cracking Wall Street’s Arbitration Secrets

Say you hire a broker. You start out thinking he or she is terrific, of course, or you wouldn’t have signed up in the first place.

And then they wind up churning your account. Or putting you into mutual funds only because the funds generate high fees — for the broker, not you. Or persuading you to buy high-risk products that have no place in a portfolio like yours.

So you get around to thinking you’d like to sue. Well, tough luck, Mr. or Ms. Investor — you can’t. The day you opened that account, you signed a document saying you’d be willing to give up your right to court, and that you’d instead use Wall Street’s private arbitration system if your broker fleeced you. Welcome to Finra arbitration.

Public-minded politicians have tried for years to get laws passed to ban so-called “mandatory arbitration,” but all their efforts have failed. Wall Street’s lobby is a powerful one. Recently, though, a coalition of consumer groups wrote to a task force of the Financial Industry Regulatory Authority (Finra), which runs Wall Street’s arbitration,  pressing for more disclosures about investigations of Wall Street’s private tribunals.

In my most recent column for TheStreet, I talk about the secrecy that surrounds Finra arbitration. You can read the column here.


Internal Memo at Sterling Jewelers: Men Make 12.5% More Than Women

In the ongoing gender discrimination case against Sterling Jewelers, owner of Kay Jewelers, Jared the Galleria of Jewelers and 10 other chains, an arbitrator this week released a 118-page opinion that moves the fight to a new stage and reveals new information about pay disparities and sexual harassment.

Kathleen Roberts, a former U.S. magistrate judge and an arbitrator at JAMS in New York, said that the women may proceed as a class with their claim challenging Sterling’s pay and promotion practices. She declined to let them proceed with another claim of intentional discrimination.

Because it’s private arbitration, most of the documents are not public. But the law firm for the women was permitted to post Judge Roberts’ opinion so that the thousands of women in the class would have details about this next stage in their case.

The judge referred to several internal company memos that show that Sterling has been aware of pay disparities between men and women for years. From my story in The New York Times on Feb. 3:

In her ruling, the judge cited an internal company memo from 2006 that said female hourly sales employees made 40 cents less an hour than their male counterparts on average, adding up to more than seven million annual affected hours. A memo the next year said that men at Sterling’s stores, which include Jared the Galleria of Jewelry, were paid 12.5 percent more base pay than women and that women at the management level were getting higher performance scores but receiving lower pay increases than men.

The judge also talked about evidence of sexual harassment. More from my NY Times story:

Women in some cases were expected to undress publicly at company events and “accede to sexual overtures,” the judge wrote. She cited evidence of “references to women in sexual and vulgar ways, groping and grabbing women” and soliciting sexual relations, sometimes as a quid pro quo for job benefits.

You can read my story here. The judge’s opinion is here. And a story that I wrote for The Times about the case last year is here. Sterling has 1,700 stores in all 50 states. Chances are you’ve done business with some of these guys at your local mall.

Brokers Countersue to Thwart Suits by Unhappy Investors

So your broker sold you some shoddy private placements and you sued? Brace yourself, because you might get sued back.

In The New York Times today, I told the story of investors who sued their brokers for selling them private placements that tanked only to be hit with a suit from the broker. The firms’ argument: That the customers signed indemnification agreements when they purchased the securities, and thus owe the firms money for legal fees and other costs.

“The investors make representations to buy these things” and have a legal obligation to be truthful, said Vincent D. Louwagie, a Minneapolis lawyer who represented the brokerage firm Berthel Fisher.

It’s tough to evaluate the cases when the firms win. If you do business with a brokerage firm, you are stuck in private arbitration, where nobody has to explain how they came up with a decision. Suffice it to say, though, that a lot of customers will get spooked when they find out they’re threatened with a countersuit after they already have lost money. You can read the story here.

Finally, the Regulators Are Trying to Protect You. But It’s Nothing But Bad News for Investors

Finra, which is the outfit that Wall Street pays to regulate itself, is pushing hard on a proposal that it thinks will help nail bad guys on Wall Street.

It sounds great on the surface: Give arbitrators permission to refer a rogue to the director of enforcement even as an investor’s hearing is going on. You know, so we can catch people like Bernie Madoff, who was such a trusted name on Wall Street that he was chairman of the Nasdaq Stock Market.

As of now, arbitrators have to wait until a hearing is over before they can tell headquarters that a villain is on the loose. Finra wants to be able to get on the case ASAP.

Nice idea, if only it didn’t have the potential to wreak havoc on the arbitration hearing of the poor slob who’s in the middle of trying to get his or her case resolved. It’s yet another example of the nutty things that can happen when you bar investors from going to court, where you don’t have all the secrecy of arbitration and thus don’t have to jump through hoops to figure out ways to get the word out. Here’s my story published tonight on

New Evidence May Reopen Broker Fraud Case

You may recall the bizarre story of the Long Island stockbroker who hoodwinked the producers of the Broadway show “Rebecca” into thinking he’d lined up millions of dollars for the show. The producers put up $60,000 and the broker, Mark C. Hotton, put the money in his pocket.

It was a strange tale in many ways, not the least of which was that Hotton had been fleecing investors of millions of dollars for years before he wound up in headlines for picking up a paltry $60,000 from the show biz chumps.

I nearly choked when I read that Manhattan U.S. Attorney Preet Bharara had said in a press release that the FBI had uncovered Hotton’s misdeeds “with lightning speed” in 2012. Hotton had been fleecing people ever since he forged documents and bounced a $31,550 check to buy some used cars in 1990. That’s some pretty slow lightning.

In my story for The New York Times last week, I wrote about the latest twist in Hotton’s story. His former employer, Oppenheimer & Co., had been ordered by arbitrators to pay out only $2.5 million of the $5 million that a married couple had lost at Hotton’s hands. Then, six months later, their lawyer discovered evidence that the firm had held back a smoking gun. Read about it here.


Not even the EEOC was allowed at this sex discrimination hearing

On Feb. 26, eight women who had sued Sterling Jewelers, Inc. were ushered into a private hearing room in midtown Manhattan with their lawyers, lawyers for Sterling, and an arbitrator. The door was shut behind them.

Like an increasing number of disputes between employees and employers, this one would be heard in a forum where the public and the press were forbidden.

I asked to attend the late February hearings on this sex discrimination case that could wind up including 44,000 women in 50 states, but the arbitrator declined my request. More important is that the Equal Employment Opportunity Commission – the agency in charge of enforcing federal civil rights laws – also asked, and also was declined. 

Joseph Sellers, a lawyer for the plaintiffs, said that the agency was told it could ask for a transcript, although no guarantee was made that it would receive one.

Sterling, based in Akron, Ohio, is parent of 12 jewelry chains in the U.S., including Jared the Galleria of Jewelry and Kay Jewelers.

The two sides presented their arguments for and against a motion to certify a class of women who’d worked in sales positions at Sterling since 2003. The women at the hearing, who would act as representatives of the class, say that Sterling discriminated against them in its pay and promotion policies.

The case, which I wrote about Saturday in The New York Times, includes examples of some of the worst sexual harassment allegations I’ve ever heard, and that includes the vulgar behavior I wrote about in my book “Tales From the Boom-Boom Room: The Landmark Legal Battles That Exposed Wall Street’s Shocking Culture of Sexual Harassment.”

Sterling says the allegations are “without merit.” Continue reading

Black Marks Routinely Expunged from Brokers’ Records

Stock brokers who settle with an aggrieved customer are able to get the go-ahead to delete the customer’s complaint from their records almost every time they ask, according to a study released Oct. 16. I wrote about it in today’s New York Times.

To understand the history of these broker shenanigans, take a look at an earlier story that I wrote for The Times on June 10: A Rise in Requests From Brokers to Wipe the Slate Clean.

It’s a topic I’ve been watching for some time. Eleven years ago, brokers were on an earlier push to make their bad records look good, and I wrote about that for Bloomberg Markets Magazine — How Wall Street Protects Bad Brokers. So when Wall Street’s self-regulators at The Financial Industry Regulatory Authority (Finra) tell you this problem emerged in 2009, consider this article from 2002:

Schwab Case Could Mean Even Fewer Chances for Investors to Get Into Court

If you’re an investor who’s lost money at the hands of a broker who may have broken securities laws, you are pretty much stuck. In 1987, the Supreme Court said in Shearson v. McMahon that a brokerage firm had the right to force investors to forego court — and instead use industry-run arbitration — in the event of a grievance. Brokers did that by including a so-called “mandatory arbitration” clause in their customer agreements.

That means no public filings, no judge, no jury and no members of the public permitted in your private courtroom. Once the McMahon ruling came down, virtually every brokerage firm raced to add a mandatory arbitration agreement.

The only way since then that the investing public could get before a judge and jury has been in egregious cases where multiple investors claim to have been ripped off in the same way — a class action. Those cases, up to now, have been allowed to proceed in public view.

In 2011, though, Charles Schwab & Co. added a provision to its customer agreements saying that its clients couldn’t partake in class actions, either. Finra, a regulatory organization funded by Wall Street, objected to that. I write about what it all means in my story tonight for The New York Times. You can read it here.

Ten women, one man, get laid off. One of the women sues for bias, and (surprise) loses in court

Rochelle Cohen was fired from her job as a portfolio officer at Bank of New York Mellon on September 20, 2010. So were 9 other women. And one man.She sued the bank and went to trial in Federal Court in New York on July 23. After less than a day of deliberating, the jury ruled for the bank. Here’s my story about the case for The New York Times.

How to be a problematic broker with a good record

Don’t believe everything you read – or don’t read — when you check up on your stockbroker.

Brokers and Wall Street executives with black marks on their public records are working hard to get those blemishes deleted, a topic I got into in my story for The New York Times last week.

In “A Rise in Requests From Brokers to Wipe the Slate Clean,” I summed up some of the more egregious examples of Wall Street employees persuading arbitrators at the Financial Industry Regulatory Authority (Finra) to recommend expungement of their peccadilloes.

Kimon P. Daifotis, for example, managed to get arbitrators in eight different cases against him to recommend expungement since last August – a remarkable feat considering that on July 16, the former Charles Schwab executive had agreed in a settlement with the Securities and Exchange Commission to be barred from the business and to pay $325,000 in penalties and forfeited profits related to his role the Schwab Yield Plus fund, in which investors had lost millions of dollars.

He didn’t admit or deny wrongdoing in that case and will be allowed to reapply for Finra membership in 2015.

Brokers have to take their expungement recommendations to court to be approved once an arbitration panel has recommended deletion, and Pasadena, California broker Debra Reda-Cappos will be doing exactly that on August 15. Investors Howard and Karen Snyder accused Reda-Cappos of breach of fiduciary duty and fraud in a complaint filed with Finra on October 12, 2010, and the two sides told the panel on October 3, 2012 that they had settled.

Neither Reda-Cappos nor her lawyer Kasumi Takahashi responded to my email queries. But in granting a recommendation that the Snyder case be expunged, the arbitrators noted that the claim was “false” and that the couple “did not prove their claim.”

It’s a no-brainer that they would not have proven their claim: There was no hearing to prove or disprove it.  So it’s more than a little weird that the arbitrators would use that as a way to justify cleaning up a broker’s record.

The Snyder case settled for $116,000, according to Reda-Cappos’ Finra records.

Before those arbitrators recommended the expungement, a lawyer for the investors, Leonard Steiner, told the panel that his clients were willing to say under oath that everything in their claim was true, according to the arbitrators’ award. But the panel didn’t ask the Snyders to do that, and gave the go-ahead on the expungement anyway, Steiner says.

Plaintiffs lawyers have been getting steamed that brokers are strong-arming investors to endorse expungements before they’ll settle. There’s a “disturbing trend” of firms routinely asking investors to agree that they won’t oppose expungement, says lawyer Brett Alcata of San Mateo California.

Those arrangements put the plaintiff’s lawyer in a box. They have an obligation to get the best settlement possible for their clients, but cringe at the idea that the next investor who comes along won’t get the full story on the errant broker. Finra shouldn’t allow settlements to include provisions that the customer won’t oppose expungement, says Steiner.

Sometime this summer, Finra will propose new rules that will make it even easier for brokers to expunge their records. Brokers have been irritated by a Finra rule enacted in 2009 that forces them to reveal complaints even when they are not named in a lawsuit. So if John Smith’s firm is sued because of fraud that Smith allegedly committed, the broker now has to list that on his BrokerCheck even if he isn’t a defendant.

Under pressure from the industry, Finra is expected to propose  a new “expedited” process to clean up black marks: The broker would be able to ask a panel for expungement at the end of an arbitration hearing, and the arbitrators would have the power to approve – but not deny – the request. Should that not work, the broker could take another stab at getting an expungement in a separate proceeding.

The proposals were mapped out in a Dec. 6 Finra memo to members of its National Arbitration and Mediation Committee. “We cannot comment on Board deliberations or confidential memos to Finra committees,” Finra spokeswoman Michelle Ong told me in an email.

How banks keep the lid on sex discrimination cases (and thus avoid having to change)

In my Bloomberg View column earlier this week, I wrote about the disconnect between image and reality when it comes to Deutsche Bank’s record on diversity. The Frankfurt-based global bank wins all those warm-and-fuzzy prizes for “Best Company” for working mothers, for example, but is the target of lawsuits brought by women who say are treated with nasty little barbs at work such as “Maybe I should get pregnant so I can work from home.”

Those same women say they endured more than Neanderthal-style comments from the guys: They say lost their jobs when they became mothers, too. Deutsche Bank dodged a bullet big-time when two women who were considering a class-action pregnancy discrimination suit settled with the bank earlier this year. In a court filing, the bank denied one of the pregnancy claims against it, and its spokeswoman Michele Allison declined to comment on the others.

Discrimination against women on Wall Street is a persistent problem that hasn’t been fixed despite an assortment of programs that purport to address it. Deutsche Bank, in fact, takes a deep bow for its programs around the world for women in finance. The bank says that 5,000 women from Deutsche and other firms attended their conferences for women last year alone.

Despite all the woman programs, diversity training and new “heads of diversity” jobs at financial firms, the lawsuits and internal investigations around gender discrimination just keep on coming.

Deutsche Bank is far from the only problematic bank out there — they all are. But  it does have some history that illustrates how hard financial firms work to keep the public from knowing how bad things are for their female employees. In a splashy lawsuit filed more than a decade ago, Virginia Gambale, a partner in Deutsche Bank’s Capital partners unit, said she was passed over for a promotion because of gender discrimination and that the bank’s work environment was hostile to women. She would wind up with a “multi-million dollar settlement,” according to a transcript of a court conference in her case.

Gambale’s lawsuit described a September 1999 business meeting she was required to attend in Cannes, France where approximately 100 men and 5 women had to walk past “a welcoming committee of ‘sex goddesses’ who were wearing revealing clothing that was highly inappropriate for a business meeting.” The complaint said that entertainment at the meeting included “a scantily clad Marilyn Monroe look-alike, who publicly fondled several male executives.”

The most interesting part of her lawsuit, though, were the lengths Deutsche Bank went to to avoid having information about the gender breakdown of salary and promotion at the bank become public. In an August 2, 2004 ruling by the U.S. Court of Appeals for the second circuit, Judge Robert D. Sack described some of the history around efforts by the bank to lock up documents.

During discovery, Deutsche Bank had produced compensation planning charts “and four pages of an internal Bank study of diversity at the Bank, which contained information about the gender composition of the Bank’s employees,” Sack wrote. The judge added that the bank had said the settlement was “motivated significantly by its desire to avoid public disclosure at trial of the temporarily sealed documents.”

Sack wrote that Harold Baer, the district judge in the case had “wondered aloud why the public should not know about discrimination at a major banking institution.” Baer told the bank that he’d disclose the contents of the settlement agreement unless Deutsche Bank agreed to hire a third party to do a global gender review and provide the results to the court. No way, said the bank, cooking up a stipulation of dismissal with Gambale to get the case out of Baer’s jurisdiction.

Over the years, I’ve spoken to a number of women who’ve taken settlements after years of emotional and expensive litigation. They get worn out, and often wind up feeling guilty that they didn’t fight to the bitter end in court so that the ugly details of gender differences in pay and promotion would be exposed. Those who can’t sue in court because of mandatory arbitration agreements don’t even get satisfaction when they win: Men who lose a discrimination or harassment case do not have to reveal that in their public “BrokerCheck” records. Is there any wonder the problems go on and on?

What we really need is a system that forces employers to report how many internal complaints they’re getting that allege discrimination, and how much men and women are being paid for doing similar jobs. We’ve got an Equal Employment Opportunity Commission, after all, and it’s time that agency’s mandate was expanded to demand those statistics. The way things work now, there are too many ways for banks and brokers to keep evidence of their discrimination under lock and key.

A bit of welcome news in all this: It turns out that six years after Gambale’s 2003 settlement, some of those Deutsche Bank documents were unsealed. They are not available electronically, but I’ve put in a request with a document service to get them. Look for another post when I’ve got them in hand.

After Boom-Boom Room, Fresh Tactics to Fight Bias

The headline-grabbing sex-harassment charges against Wall Street firms in the 1990s are a thing of the past, but not necessarily because things are better for women at financial firms.

In my story today for The New York Times, I discuss the progress — and lack of progress — since “The Boom-Boom Room” lawsuit against Smith Barney became synonymous with lurid behavior at brokerage firms.

Fast-forward 17 years, and such landmark cases are not as prevalent. Wall Street’s women are more aware of their rights and are not so timid anymore, says Linda D. Friedman, a partner at Stowell & Friedman. Still, she says her firm does a lot of work these days behind the scenes, assisting women who face discrimination but are reluctant to pursue litigation because of the repercussions it would have on their careers.


You may not be reading about these problems in your favorite newspaper or blog, but they’re still part of life for women who work in finance. You can read my story here.