Judge strikes Morgan Stanley another blow on deferred comp

A federal judge's ruling this week is likely moving Morgan Stanley and other wealth managers closer to having to pay millions in deferred compensation allegedly owed to advisors who left for other firms.

Judge Paul Gardephe for the southern district of New York rejected on Tuesday Morgan Stanley's request that he reconsider his previous opinion that deferred compensation paid to the firm's advisors is indeed protected under federal retirement law. In an opinion admonishing Morgan Stanley for being "disingenuous and incorrect," Gardephe instead doubled down on his finding in November last year that deferred compensation at Morgan Stanley is akin to retirement pay and does indeed fall under the Employee Retirement Income Security Act of 1974, or ERISA. 

"Here, there is no ambiguity to 'clarify,'" Gardephe wrote. "After an extensive discussion of the relevant language in plan documents and the applicable case law, this court concluded that 'Morgan Stanley's deferred compensation programs are ERISA plans.'"

Hanging on Gardephe's interpretation could be millions of dollars that advisors argue they were illegally denied by Morgan Stanley, Merrill and other wealth managers after those advisors left for other firms. The case that prompted Gardephe's ruling, for instance, was filed by a dozen or so ex-Morgan Stanley brokers who claim their former employer still owes them roughly $4 million in deferred compensation.

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A Morgan Stanley spokesperson said the firm plans to appeal Gardephe's latest ruling that its deferred compensation policies fall under ERISA.

"As other panels have concluded after reviewing the full factual record, there is no merit to these claims," the spokesperson said.

A bonus or retirement pay?

Deferred comp is generally paid to advisors years after they earn it. It comes not out of their base salaries but rather from the percentage they get to keep from revenue generated for their employers. At Morgan Stanley, according to a 2018 compensation plan, the proportion withheld varied from 15.5%, for advisors who generate $5 million or more, to 1.5%, for advisors who generate less than $240,000.

Morgan Stanley and other firms have argued such payments are really "bonuses" used to reward employees for sticking around for a set period of time. Plaintiffs and their lawyers have instead contended that deferred comp is something akin to 401(k)s and other sorts of retirement plans safeguarded by ERISA.

A precedent to cite

Douglas Needham, a lawyer at Mount Pleasant, South Carolina-based Motley Rice, said Gardephe's reaffirmation that deferred compensation falls under ERISA is likely to exert a strong influence on the scores of complaints he and other lawyers are taking before Financial Industry Regulatory Authority arbitration panels on behalf of ex-Morgan Stanley advisors. Needham acknowledged that court decisions don't set a binding precedent for arbitrators to follow.

Arbitration panels will nonetheless often look to court decisions for guidance in their own rulings, Needham said. 

"We think this decision is very applicable," Needham said. "At a minimum, it should be considered."

Meaghan VerGow, an attorney representing Morgan Stanley, warned in a brief submitted to Gardephe's court in April that the judge's decision on deferred compensation and ERISA is already being cited in arbitration cases. In one recent dispute, VerGow noted, lawyers for ex-Morgan Stanley advisors were acting as if Gardephe's interpretation had left nothing for arbitrators to determine on their own.

"The sum total of the claimants' argument at the hearing was that the court had already decided the central question presented," she wrote.

Deferred compensation ups and downs

Morgan Stanley has suffered some defeats in recent months in arbitration cases over its deferred compensation policies. In March, a FINRA panel awarded seven former Morgan Stanley brokers $3 million, including $1.5 million in deferred compensation, over allegations that they had been denied pay owed them under ERISA. Three months later, a different set of arbitrators handed a pair of ex-Morgan Stanley advisors a more than $1 million win also over unpaid deferred compensation.

But not everything has gone against Morgan Stanley. In June, yet another arbitration panel denied a group of eight advisors' claims for more than $800,000 in deferred compensation. The arbitrators in that case found that Morgan Stanley's pay policies did not "in the usual course, defer compensation past employment with respondent, let alone until retirement."

The lead lawyer in that dispute and several other arbitration cases — Alan Rosca of the Beachwood, Ohio-based firm Rosca Scarlato — said he thinks Morgan Stanley will eventually have to change its deferred compensation plan. That's especially true, he said, in light of Judge Gardephe's recent opinion.

Rosca said he's filed roughly 40 FINRA complaints against Morgan Stanley on behalf of more than 300 former employees seeking deferred compensation.

"I think the big picture here is that this is a signal to those firms that have plans like Morgan Stanley that they need to change those plans," Rosca said. "The judge made it abundantly clear that these plans are governed by ERISA."

Why bring ERISA into it?

In asking Gardephe to reconsider his opinion, Morgan Stanley has contended that no one ever asked the judge to weigh in on whether the firm's deferred compensation policies fall under ERISA. Morgan Stanley instead has argued it was merely asking Gardephe to find that its dispute with its ex-advisors belonged in FINRA arbitration, rather than the regular court system.

"The district court wrongly opined on the merits without being asked, and without the benefit of a hearing, briefing or the factual record the arbitrators will have," the Morgan Stanley spokesperson said Thursday. 

The irony of that position, Needham said, is that Morgan Stanley did in fact ask the judge to issue an opinion related to ERISA. The firm's lawyers asked the judge to find that Morgan Stanley's deferred compensation plan fell outside of the retirement law's protections.

Only when the judge took the opposite stance, Needham said, did Morgan Stanley decide he shouldn't be ruling on ERISA. Now Gardephe has made clear his original opinion was not in error, Needham said.

"He considered new arguments and materials," he said. "This not only solidified the original decision but also strengthened it quite a bit."