Local Couple Awarded $315,946 from Morgan Stanley Dean Witter

Local Couple Awarded $315,946 from Morgan Stanley Dean Witter

A Delray Beach couple, who lost virtually their entire net worth in a highly speculative and margined stock portfolio, recovered all of their investment losses, interests and expenses from Morgan Stanley Dean Witter in a recent arbitration before the National Association of Securities Dealers. The couple, Mr. and Mrs. Johnson, suffered losses of 90 percent of their portfolio during 2000 and 2001. The arbitration panel ordered Morgan Stanley to pay them $258,500 plus prejudgment interest, which totaled $315,946.

The couple’s attorney, Marc A. Wites of WITES & KAPETAN, P.A. in Lighthouse Point, said that the Panel rendered a just award that properly compensates a young couple for huge losses that could have easily been prevented through proper portfolio management.

In 1999, Mr. and Mrs. Johnson were living in a small Texas town. They drove old cars, rented an apartment, and had no assets. Mr. Johnson, who was then 34-years old, received an inheritance of $369,000 from his father’s estate. At the time, Mr. Johnson, a former US Marine, was US Border Patrol officer. Mrs. Johnson, age 29, was a sales representative for a greeting card company. They both had extremely limited financial experience.

Without the time, ability, or experience to manage their investments, the couple turned to Mr. Johnson’s childhood friend, Eric Johnson, a stockbroker at Morgan Stanley. The couple told Eric that they wanted to invest the money for retirement and their future children’s education. Based on their longtime friendship and Eric’s promise to properly invest their money, Mr. Johnson handed the check he received from his father’s estate to Eric Johnson, and entrusted his family’s entire net worth to Morgan Stanley.

Mr. and Mrs. Johnson placed their full and complete trust in Eric and Morgan Stanley. The couple accepted all of, and never questioned, Morgan Stanley’s investment advice. Indeed, the only two investments chosen by Mr. and Mrs. Johnson were small positions in Harley Davidson because of Mr. Johnson’s affinity for motorcycles, and Johnson & Johnson, since the couple and broker all shared the company’s name. Unfortunately, rather than investing the remainder of the couple’s accounts in a diversified portfolio that should have included a combination of stocks and bonds, Morgan Stanley invested one hundred percent of the account in stocks, including large concentrations in technology stocks. The account also was heavily margined.

When the market began its decline in early 2000, the lack of diversification and margin debt caused the Johnsons’ account to sink with the market. The Johnsons ultimately suffered a loss of 90% of their investment.

To make matters worse, Mr. Johnson suffered a traumatic brain injury in October 2000. By that time, the vast majority of Mr. Johnson’s inheritance, which should have been available to help pay for his expenses and life-long rehabilitation, was gone.

At the arbitration, Eric Johnson and Morgan Stanly placed all of the blame on the Johnsons and the market. Eric Johnson also placed part of the blame on Morgan Stanley. He was relatively new to the brokerage business, and testified that the office manager was not around much, and had a drug problem. According to Eric Johnson, Morgan Stanley ultimately fired the manager.

In contrast, the Johnsons, through their attorney Marc A. Wites, argued that Eric Johnson and Morgan Stanley breached their fiduciary duty to the Johnsons by placing them in an unsuitable investment portfolio. The Johnsons’ expert witness, Steve Stern, CFA, compared how their portfolio performed against how it should have performed had it been properly invested during the same time period. Based on this analysis, Mr. Stern testified that the Johnsons’ losses were approximately $250,000.

In addition to the $315,946 awarded, the arbitration panel also ordered Morgan Stanley to pay the Johnsons $3,700 for expert witness fees, $500 representing the Johnsons’ filing fee, and $11,250 in forum fees to the NASD. The panel ordered Eric Johnson to pay the Johnsons $1,500.