September 18, 2012 / 6:03 PM / 6 years ago

California court overturns $5 million ruling against Morgan Stanley

(Reuters) - A California court overturned a nearly $5 million securities arbitration ruling against Morgan Stanley Smith Barney (MS.N) in a case filed by two brokers who said the company broke promises it made when recruiting them.

Judge Lisa Schall of the Superior Court of California in San Diego agreed with Morgan Stanley’s arguments that one of three securities arbitrators who heard the case did not disclose his daughter’s ties to the securities industry - an omission that could give the impression of bias.

The arbitrator’s daughter worked in the brokerage industry and had an account at Morgan Stanley, according to four-page decision on Monday.

The case is a rare instance of a court’s decision to overturn, or vacate, an arbitration ruling. Decisions by arbitrators are typically binding, but parties can file a court case to request overturning the award. While courts are often hesitant to grant those requests, they may do so in limited circumstances such as when an arbitrator is biased.

A Financial Industry Regulatory Authority arbitration panel, in June, ruled that Morgan Stanley must pay $5 million to brokers John Paladino and Todd Vitale, who are still with the firm, for making false promises when recruiting them from rival brokerage UBS.

“We are extremely pleased with the court ruling that validates the facts in this matter,” said a Morgan Stanley spokeswoman.

A lawyer for Paladino and Vitale could not be immediately reached for comment.

Reporting By Suzanne Barlyn in New York; Editing by Steve Orlofsky

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