Fight over deferred comp comes to Merrill's door

The fight over deferred compensation for advisors who have left their firms has now spilled over to Merrill.

A putative class action suit filed in federal court in North Carolina late last month alleges Merrill owes Kelly D. Milligan, an advisor in Danville, California, $500,000 in deferred comp he earned over the course of his 21-year career at the wirehouse. Underlying Milligan's claims are arguments lawyers separately used to wring a more than $3 million arbitration award out of Morgan Stanley in March. 

Namely, Milligan is arguing that Merrill's deferred compensation policies violate the Employee Retirement Income Security Act of 1974, or ERISA. As in the Morgan Stanley case, Milligan's lawyers are questioning Merrill's right to deny him unpaid deferred comp after he left in early 2021 to found Quorum Private Wealth, a firm affiliated with Sanctuary Securities and Sanctuary Advisors.

"The overall point of it is to recover the protected deferred compensation that advisors left behind when they changed firms," said Douglas Needham, a lawyer at Mount Pleasant, South Carolina-based Motley Rice and a member of Milligan's class-action legal team. 

"We maintain that ERISA governs the deferred compensation of Merrill Lynch advisors."

The suit states that while Milligan was at Merrill, he saw at least 5% of the commissions he earned set aside into what's known as the WealthChoice Contingent Award Plan. Any money placed in the plan would "vest" in eight years, meaning it would be paid to Milligan. But if he left earlier, he'd be subject to a "cancellation rule" and have to forfeit his deferred comp.

A spokesperson for Merrill said the firm is confident the "WealthChoice Plan is not covered under ERISA and that our compensation program complies with all relevant laws."

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But Milligan's lawsuit comes as just the latest in a flood of ongoing or threatened legal actions that clearly have Wall Street firms nervous about their deferred compensation policies. Underlying much of the unease is an opinion that federal Judge Paul Gardephe of the U.S. District Court in Manhattan handed down in November when deciding if a similar case brought by former Morgan Stanley brokers should be dealt with in arbitration.

While finding that Financial Industry Regulatory Authority arbitration was indeed the correct forum for the ex-Morgan Stanley employee's claims, Gardephe also opined that the firm's deferred comp policies were indeed subject to ERISA. That decision has since prompted Morgan Stanley's legal teams twice to petition Gardephe to reconsider his position on ERISA.

The latest letter, dated April 26, states that another FINRA arbitration case over Morgan Stanley's deferred comp policies is scheduled to start in three days. The claimants in that case, according to the letter, "are once again arguing that this Court already decided the central issue to be arbitrated, precluding a contrary finding by the arbitration panel."

Morgan Stanley's legal team has pointed out that Gardephe's opinion was cited several times in the one FINRA arbitration case so far not found in the firm's favor. The lawyers representing the claimants in that case said, for instance, that, "Now, I'll conclude by saying that the … opinion by Judge Gardephe is the law, Federal District Court opinion, and it holds in no uncertain terms that Morgan Stanley's plans are governed by the broad law ERISA."

Jack Edwards, an attorney with Houston-based Ajamie law firm representing Milligan in the Merrill case, said he thinks that Gardephe's opinion will be just one "data point" cited in these deferred comp cases. Edwards also noted a similar class action case netted a $79 million settlement from Wells Fargo in 2020.

Edwards said he thinks the current legal questioning of firms' deferred comp policies could eventually extend beyond Merrill and Morgan Stanley.

"We're getting calls from just about everybody," he said. "We are looking at all of these firms that offer deferred comp for financial advisors." 

Needham said Milligan is now the only plaintiff in the class action suit against Merrill. But he and others on the legal team have heard from plenty of others who'd like to be added, he said. 

Needham, who is also pursuing deferred comp claims against Morgan Stanley, said he has roughly 15 cases in FINRA arbitration now and has discussed similar matters with at least 100 clients.

Separately, Alan Rosca, a partner and securities lawyer at the Beachwood, Ohio-based firm Rosca Scarlato, said he is pursuing or contemplating deferred comp claims against Morgan Stanley, Merrill and "other household names," which he declined to divulge. 

"We have a bunch of arbitration hearings through the end of 2025 and a bunch more we are about to file," he said. "I expect to see several new awards between now and the end of the year."

Rosca said he thinks the biggest flaw in these firms' compensation plans is that they are meant primarily to punish employees who leave.

"The purpose is not to increase compensation," he said. "The primary goal is to tie them to their jobs. There's a pretty big difference between how the things are structured on Wall Street and how they are structured everywhere else."