Morgan Stanley has been ordered by a Finra panel to pay $11.7 million to a client over a covered call option strategy that caused big tech stock positions to be whisked out of the client’s account, a result that he says cost him millions.
An arbitration panel of the Financial Industry Regulatory Authority awarded Dr. Anthony E. Nowak $11.5 million in compensatory damages, plus another $157,656.81 in costs after he claimed Morgan Stanley made unauthorized sales of stocks that it sold away as part of the covered call strategy.
Nowak, a retired dentist who lives in Tampa, Fla., accused the firm of fraud and negligence, claimed it breached its fiduciary duty and that it failed to supervise broker Craig Sherman Thistlethwaite in these transactions it allowed between 2018 and 2021, Finra said in releasing the ruling on Thursday.
According to Nowak, the strategy meant that large positions in Nvidia, Tesla Motors, Apple, Salesforce, Microsoft and other stocks were removed from his trust account. Nowak filed a complaint on behalf of himself and the revocable trust in his name.
A covered call strategy is one in which you sell someone else the right to buy a stock you already own in the future, and thus you must also hold shares in those stocks in your accounts. Morgan Stanley had to sell those positions to meet the calls, Nowak’s complaint said.
In his claim against Morgan Stanley, Nowak sought damages for alleged unauthorized transactions between 2018 and 2021 involving several tech stocks, including about $33.6 million worth of Nvidia shares and $5.6 million worth of Nvidia option contracts. The transactions also involved Salesforce, Microsoft and Apple shares.
Beyond the allegations about the covered call, Nowak also said Morgan Stanley mishandled evidence in the case by failing to preserve text messages between Nowak and Thistlethwaite, the Toledo, Ohio-based broker at the center of the complaint and an unnamed party in the Finra dispute.
Morgan Stanley responded that Nowak and Thistlethwaite were close friends and that when they discussed investments the text messages were not exchanged on Morgan Stanley-issued devices.
“Upon learning that … Thistlethwaite had utilized his personal cell phone to text with [the] claimant on investment-related matters, [Morgan Stanley] took reasonable steps to ensure the retention of potentially relevant messages.
Robert Savage, Nowak’s attorney with Savage Villoch PLLC in Tampa, added in an interview with Financial Advisor that his firm had identified 550 unauthorized trades that Morgan Stanley made between 2015 and 2021. He said Morgan Stanley's argument was that Nowak had made money on the strategy, but Savage argues that the issue of unauthorized trading was irrelevant to that fact.
“It was comes down to the fact that Dr. Nowak didn’t want this activity,” Savage said. “He expected no activity in his account except for occasional trades. The problem was that he realized there were all these trades and all these stocks were called away he was intending to hold until retirement.”
In a statement to Financial Advisor, a Morgan Stanley spokesperson said, “The firm strongly disagrees with the award and is evaluating its options.”
Finra released the decision on December 1.