A former Morgan Stanley broker is asking a federal court to vacate a $1.2 million dispute resolution against her on the grounds that one of the arbitrators may have had conflicting interests.

Rachael Leigh Konz filed a petition to vacate the award because the three-member FINRA panel was not appointed in accordance with the regulator’s own rules, according to the petition. One of the arbitrators, Paul Mabry III, should have been disqualified from sitting on the panel because he was employed by a law firm that worked with other financial institutions — excluding him from being a “public arbitrator,” per FINRA rules, the petition argues.

“The arbitrators exceeded their authority under the promissory notes and breached the FINRA rules of procedure … when the panel was composed,” according to the petition. “Therefore, the award should be vacated.”

FINRA Rule 13100 states public arbitrator may not be employed by a firm that derived $50,000 or more, or at least 10% of its annual revenue, from work with registered broker-dealers, investment advisors or other financial services firms. Mabry’s law firm, Hanson Bridgett, appears to have represented firms in the financial industry that could have disqualified the arbitrator from sitting on the panel, according to exhibit documents attached to the petition.

Mabry also failed to disclose possible conflicts of interest in his FINRA arbitrator profile, the petition argues.

“The arbitration panel was not appointed in accordance with FINRA procedure as provided in the parties’ agreement; therefore, the court should vacate the award as the arbitrators exceeded their powers,” according to the petition.

(Bloomberg News)
(Bloomberg News)


The original award resolved a dispute between Konz and her former firm. Konz worked for Morgan Stanley for three years before leaving for Merrill Lynch in 2016, according to FINRA BrokerCheck records. Morgan Stanley claims that when she left the company, she failed to repay two promissory notes entered into at the time of her employment with the wirehouse in 2013. Last month, Morgan Stanley was awarded $1,197,844.69 plus interest and attorney fees in the amount of $189,201, according to FINRA award.

“It’s a lot of money,” says Joshua Brinen, an attorney for Konz, who filed the petition last week. “The most important thing in a case of this nature is that you cannot attack the arbiters’ decision. The only thing you can look at is: did the arbiters adhere to the terms of the contract?”

Since Mabry worked for a firm that lists financial institutions as clients, the underlying award should be vacated, Brinen argues. “The arbitration is a creature of contract and to violate that contract vitiates the power of the arbiter to render an award,” Brinen says. “There’s plenty of good case law out there to that effect.”

In the exhibit documents, Hanson Bridgett’s website describes itself as a firm that works with financial institutions — and specifically regarding promissory notes. “We represent financial institutions and other lenders as well as borrowers in drafting and negotiating promissory notes, deeds of trust, loan agreements … , ” according to the website.

Working closely with firms that negotiate promissory notes could have swayed the arbitrator’s decision, the petition argues.

Regarding the likelihood the award would be vacated, Brinen says Konz would not have filed the petition without a “good-faith basis” to challenge the contract. “These note cases take a certain amount of vetting and understanding of the rule to even discern whether or not there was a problem,” Brinen says, adding that these types of petitions are extremely rare.

Morgan Stanley declined to comment.

Konz is an 18-year industry veteran. She began her career with Citicorp Investment Services in 1999 and moved to Merrill Lynch a year later, per FINRA BrokerCheck records. She had stints at Wells Fargo and Bancwest Investments, before landing at Morgan Stanley in 2013, per BrokerCheck.

Konz is currently registered with Merrill Lynch.

Sean Allocca

Sean Allocca is an associate editor of Financial Planning, On Wall Street and Bank Investment Consultant.