A New York man who worked as a Compliance Risk Officer at Morgan Stanley Smith Barney (MSSB) sued the firm last week, alleging that the firm fired him for trying to investigate potential wrongdoing.
Clifford Jagodzinski said in a lawsuit filed in federal district court in New York City that he worked at the firm six years, receiving good reviews, but when he wanted to investigate possible churning by a new wealth manager in late 2011, things started to change.
Supervisors at first expressed support, then tried to quash his investigation of that wealth manager, who was a high producer, the lawsuit said. It further alleges that supervisors tried to put the brakes on other investigations, including those involving:
another wealth manager whom Jagodzinski said admitted to unauthorized trading;
improper Treasury trades by a different MSSB employee; and
drug use by one of the firm’s financial advisers.
Jagodzinski told a supervisor that unless the violations stopped, Morgan Stanley supervisors would themselves be violating SEC regulations, he alleges. Finally, he told a supervisor that the violations should be reported to FINRA, and 10 days later, on April 4, Jacodzinski was fired, the lawsuit alleges.
“Upon information and belief, MSSB instructed Mr. Jagodzinski to keep quiet about these transgressions so that it could (i) limit its exposure to client claims; (ii) not jeopardize its wealth managers’ books of business; and (iii) limit its exposure to legal and regulatory sanctions,” the lawsuit says.
Jagodzinski said he was a victim of “unlawful retaliation” under the whistleblower provisions of Dodd-Frank and the Sarbanes-Oxley Act.
The firm said in a statement: “We believe the complaint is without merit and we intend to vigorously defend ourselves.”
Performance reviews
The lawsuit said that for the six years Jagodzinski worked at MSSB, “he performed his job very well and received exemplary reviews in writing and verbally.” In December 2011, Jagodzinski reported the possible churning and at first his supervisors were pleased, with one of them saying, “Great job for catching this scam,” the lawsuit asserts. But MSSB expected to make significant earnings from that wealth manager and didn’t want to jeopardize its book of business, the lawsuit adds, saying Jagodzinski later was told to stop investigating that individual.
The lawsuit further asserts that Jagodzinski discovered that another financial adviser admitted to making 80 unauthorized trades on behalf of one client and making other unauthorized trades on behalf of several others. Jagodzinski was told not to take further steps to investigate because, according to one of Jagodzinski’s supervisors, the subject of the investigation was “a stand-up guy” that the supervisor didn’t want to see fired, the lawsuit said.
When Jagodzinski allegedly investigated what appeared to be improper Treasury trades, one of Jagodzinski’s supervisors told him not to report it to the legal department because it would have caused the trader to be placed under special supervision, the lawsuit asserts.
It further says that during the time Jagodzinski worked at the firm, he received one or two performance reviews each year and every one of them said he exceeded expectations in job performance. The review that differed – rating him as “meeting expectations”- was given on Jan. 13, 2012, after Jagodzinski first raised alarms about the new, high-producing wealth manager, the lawsuit says.
Jagodzinski’s steadfastness “annoyed his supervisors … and they retaliated against him,” claims his attorney, Rishi Bhandari of Mandel Bhandari in New York.
The Jagodzinski case marks the attempt to use the whistleblower protections expanded by Dodd-Frank. The rule’s anti-retaliation protections “only apply if someone formally reports misconduct to the SEC” before the alleged retaliation, reminds Jordan Thomas, a partner with Labaton Sucharow in New York. Thomas helped craft the whistleblower rule when he worked at the SEC.
A compliance officer is among a select few who must wait four months before reporting a violation if he or she wishes to be eligible for a monetary award under the whistleblower award. However, this waiting period can be waived in cases where there is imminent harm to investors, the firm is impeding an investigation or evidence is being destroyed, notes Thomas.
The 120-day delay only applies for a financial award. Thomas says it could be wise for a compliance officer who fears retaliation to report anonymously early on. “It’s a placeholder” in case of retaliation, he says. Reporting anonymously also protects the officer against potentially being blackballed from the industry, he adds.
Bhandari declined to indicate whether his client made any kind of submission to the SEC under the whistleblower rule. The lawsuit also seeks protection under Sarbanes-Oxley Act, which contains anti-retaliation provisions limited to employees of public companies.
Bhandari hopes Jagodzinski’s case “sends a strong message that you cannot fire people for reporting these kinds of violations. Instead, you’ve got to reward them.” At the very least, firms should take action in response to suspected securities violations, he adds.
