A FINRA arbitration panel ordered Morgan Stanley and one of its advisors to return a client’s investment in two private placement funds totaling $536,000 and pay him $37,500 in compensatory damages for what he claimed were unsuitable investments.
Shawn Scheuer, a 46-year-old entrepreneur who sold an advertising technology company in 2013, said he agreed to "give every penny" from the sale of the business to Morgan Stanley advisor Steven Anderson who was a close personal friend of his father-in-law.
His trust in him, however, was misplaced. He later accused Anderson of breach of fiduciary duty, denouncing him for putting him into illiquid and extremely risky private equity funds even though he was an inexperienced investor with a moderate risk tolerance.
"I had absolutely no investment experience of any kind," Scheuer said.
Scheuer alleged that Anderson inflated his total net worth to qualify him for the two funds, which yielded Anderson and Morgan Stanley huge upfront fees.
Anderson repeatedly boosted his net worth, he claimed, even after the firm's compliance team reduced it, on the premise that Scheuer anticipated starting a "future, yet-to-be conceived business." At one point, he inflated his net worth by almost $10 million, Scheuer said.
At the hearing, Anderson's manager testified against Anderson, saying that advisors "can't use at-risk future businesses for total net worth," according to Scheuer.
Christine Jockle, a spokeswoman for Morgan Stanley, denied the allegations.
Scheuer also accused the advisor of withholding the performance reports for his investment advisory account and lying to him about the portfolio's performance. He argued that the investments were concentrated in risky sectors, such and energy and emerging markets, causing him to sustain significant investment losses.
Scheuer also took issue with the two mutual funds Anderson selected to open his brokerage account, which was established prior to the advisory account. Rather than invest in safe, liquid securities, Anderson invested $950,000 in two risky mutual funds that invested in non-investment grade debt securities, Scheuer said.
Scheuer blasted Anderson for keeping him in the dark about mutual fund breakpoints and share classes, which would have reduced his hefty upfront fees. He accused Anderson of buying the mutual funds just below the breakpoint and of hitting him up with a second round of fees when money was transferred to the advisory account.
Anderson and Morgan Stanley denied the allegations, arguing that Scheuer was a well-educated, sophisticated businessman, that the securities recommended were suitable, and that he was informed of the accounts' performance and costs. "Shawn Scheuer is dissatisfied because he got cold feet during a market downturn in 2015 and pulled out of the market," they wrote in their arbitration brief.
In a statement in his BrokerCheck report, Anderson strongly disputed the accuracy of Scheuer's claims, gleefully noting that as Morgan Stanley took ownership of the two profitable investments Scheuer rescinded, the firm posted a net benefit while Scheuer posted a net loss. "The compensation awarded to the client included $37,500, which is approximately 35% of the profit on the two investments at the time of the hearing," he wrote.
It's not unusual that FINRA arbitrators would rule to have the money returned to the client, said Daniel Nathan, a partner at Orrick, Herrington & Sutcliffe and a former FINRA director of regional enforcement.
"It puts the customer back in the position that they would have been if they hadn't done the transaction," he said.
In addition to getting his money back and being awarded $37,000 in compensatory damages, Scheuer was granted $90,500 for the costs he incurred to hire expert witnesses. The panel denied Anderson's request to have the complaint expunged from his regulatory records.
Scheuer, who sought $1.9 million in damages, was disappointed with the outcome.
"It's insulting," he said. "I'll never have anyone manage my money again."