FINRA panel deals Morgan Stanley another blow on deferred comp

Ex-Morgan Stanley advisors have again managed to wring deferred compensation out of their former employer before FINRA arbitrators.

Jeff M. Davis and William V. Swisher, who both worked for Morgan Stanley in the Dallas area before leaving for Ameriprise, won $442,344 in compensatory damages and $235,395.47 in attorney's fees and costs from a three-member arbitration panel on Friday. One of their attorneys, Alan Rosca of the Beachwood, Ohio-based firm Rosca Scarlato, said the total will come to about $1.1 million once interest Morgan Stanley owes on the pair of former employees' deferred compensation is added in.

Rosca said Monday that he hopes that cases like this one will help change how "the broader industry pays advisors." Deferred compensation is only paid out, or vested, years after it is earned. 

Firms view it as a way to reward employees for loyalty, but an increasing number of arbitration disputes suggests many of the industry's deferred comp policies clash with federal retirement law.

Advisors "work for this money," Rosca said. "They sell products, they generate commissions. And we think they're entitled to those commissions."

Rosca said he learned of the results in Davis and Swisher's case after flying back from Boca Raton, Florida, where he had been arguing before a FINRA arbitration panel for deferred compensation separately claimed by seven former Morgan Stanley advisors. All told, he said, he's representing roughly 200 ex-Morgan Stanley employees in similar disputes.

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All of these cases entail essentially the same arguments. Rosca and lawyers from the Philadelphia-based firm Salmanson Goldshaw contend that Morgan Stanley's deferred comp — which is often only paid years after it is earned — falls under the federal Employee Retirement Income Security Act of 1974, or ERISA. Rosca said he and his legal team are also arguing the policies run afoul of New York wage and hour laws.

As is the case with most FINRA arbitration rulings, the panel in the latest dispute involving former Morgan Stanley advisors did not give reasons for its decision. Rosca confirmed most of the arguments before the three-member panel centered on ERISA.

"I think the panel reacted well to the arguments we made and to the facts of the case," he said. "It was a unanimous decision."

A spokesperson for Morgan Stanley said the firm's deferred compensation policies are meant to award advisors "for loyalty and good guardianship during their employment. This is not a retirement plan, and we will continue to aggressively defend against meritless attacks suggesting otherwise."

Firms often make use of "cancellation clauses" meant to withhold unpaid deferred compensation from employees who leave for rival firms. Claimants like Davis and Swisher have argued, with frequent success lately, that they can't forfeit money protected under federal retirement law.

Davis and Swisher's victory comes a little more than two months after seven former Morgan Stanley advisors won $3.3 million on March 22 from a separate FINRA arbitration panel. That was followed, in late April, by the filing of a putative class-action lawsuit in federal court in North Carolina by an ex-Merrill advisor who contends he's owed roughly $500,000 in deferred comp from his former employer. 

Before any of this, Wells Fargo agreed in early 2020 to pay $79 million to settle a class-action suit filed by former advisors who contended deferred comp had been illegally withheld from them. In all these cases, the central question was if these firms' compensation policies violate ERISA.

In pushing these arguments, lawyers representing advisors who've left one firm for another have at least one big court precedent to cite. In an opinion handed down on Nov. 21, Judge Paul Gardephe of the U.S. District Court in Manhattan agreed with the contention that Morgan Stanley's deferred compensation plan falls under ERISA. 

Gardephe held that the payments are not akin to year-end bonuses many firms use as performance incentives.

"In sum, Morgan Stanley's deferred compensation programs result in the deferral of income to the post-employment period within the definition of ERISA," Gardephe wrote.

Jack Edwards, an attorney at Houston-based Ajamie law firm who's representing claimants in similar cases against both Morgan Stanley and Merrill, heralded the latest FINRA arbitration decision as "a great result for those advisors."

"It supports our argument, adopted by Judge Gardephe, that ERISA governs Morgan Stanley's deferred compensation plan," he said in an email.

Davis, who has 32 years of industry experience, joined Morgan Stanley in 2009 after stints at UBS, Merrill and Thomas James Associates. He left Morgan Stanley to go to Ameriprise in 2020.

Swisher, who has 41 years in the industry, joined Morgan Stanley in 2012 after stints at RBC Capital Markets, Bear Stearns and Smith Barney. He left Morgan Stanley to go to Ameriprise in 2021.

Davis and Swisher were originally part of a larger group of former Morgan Stanley advisors bringing claims for deferred compensation. The others with them at first — Robert Pearson, Michael Witt, Robert Silvestri and Thomas Chretien — all agreed to have their claims dismissed.

Rosca said he expects to learn the results from his case against Morgan Stanley in Boca Raton in the next couple of weeks.

"And then, starting in the fall, we'll have a bunch more cases against Morgan Stanley — through the end of next year actually," he said.

— This article was revised to include comments from Jack Edwards of the Ajamie law firm.