A judge ruled late last month that Julian Tzolov and Eric Butler will not have to repay their signing bonuses to Morgan Stanley after both were discovered for committing fraud and resigned from the company after less than a year.The reason each will get to keep his $4.5 million signing bonus is pretty simple: the fraud wasn’t committed at Morgan Stanley. It was committed a year before they joined the company, while they were at Credit Suisse.
Tzolov and Butler joined Morgan Stanley a year later and each received a $4.5 signing bonus. Then, about a year later, Tzolov pleaded guilty to securities fraud and testified against Butler.
The SEC alleged:
Julian Tzolov and Eric Butler misled customers into believing that auction rate securities being purchased in their accounts were backed by federally guaranteed student loans and were a safe and liquid alternative to bank deposits or money market funds. Instead, the securities that Tzolov and Butler purchased for their customers were backed by subprime mortgages, collateralized debt obligations (CDOs), and other non-student loan collateral.
They deceived foreign corporate customers into buying Credit Suisse auction rate securities by “sending or directing their sales assistants to send e-mail confirmations in which the terms ‘St. Loan’ or ‘Education’ were added to the names of non-student loan securities purchased for the customers.”
So OK, that’s shady, but it has nothing to do with their Morgan Stanley signing bonuses so, fine.
The ridiculous part is that the pair were allowed to keep the bonuses after resigning just a year after joining Morgan Stanley.
Usually a signing bonus is meant to be an investment in the new hire. The signing contract will stipulate something like, if the hire leaves before 3 years, he will repay the bonus.
There are countless examples of men and women who have had to repay their signing bonuses because they left the company early. We didn’t even bother putting them in this list of Wall Streeters who had to give back their bonuses because there are too many to count and it’s common practice.
Somehow, Tzolov and Butler won’t have to join that list. Annoyingly, we won’t ever know how or why, because the Finra panel didn’t provide a reason for its ruling (that’s expected and standard). (Our wild unsubstantiated guess: Tzolov bargained before he testified against Butler.)
Obviously, Morgan Stanley is even more upset. This is pretty embarrassing for the firm for a number of reasons: They’re out $9 million, they lost a standard, usually black-and-white case, they’re now associated with these fraudsters, they hired them in the first place, maybe their lawyers didn’t write the best contract…
Now there’s nothing they can do.
A Morgan Stanley spokesman told the Wall Street Journal:
The firm is “disappointed in the result, but … once the arbitration panel rules, there are not many other options for us to pursue.”
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