A federal judge reaffirmed his earlier decision that Morgan Stanley’s deferred compensation plans fall under federal mandates, in a blow for the wirehouse.
The decision by New York Southern District Court Judge Paul Gardehpe is the latest development in a years-long class action suit filed by an array of former Morgan Stanley advisors. The group accused the wirehouse of denying millions in deferred compensation when reps left for other firms.
Last year, Gardehpe decided that Morgan Stanley’s deferred compensation plans did fall under the protections of the Employee Retirement Income Security Act of 1974 (ERISA), which governs requirements for companies offering pension and retirement plans.
But in an unusual move, the wirehouse asked him to “clarify” and “reconsider” his decision, which Gardehpe denied in an order filed this week. However, a Morgan Stanley spokesperson said the firm looked forward to “addressing the errors in the district court’s decision on appeal.”
About a dozen Morgan Stanley advisors initially filed a suit in 2020, led by Matthew Shafer, a Florida-based advisor with more than two decades of experience, who joined the wirehouse in 2009 until leaving in 2018 for Raymond James. According to the complaint, he forfeited over $500,000 in deferred compensation. Shafer and the other plaintiffs brought a class action suit to represent the untold number of reps who had lost money due to the structure of the wirehouse’s deferred compensation programs.
According to their complaint, the plaintiffs claimed these rules violated ERISA. The former advisors claimed that the wirehouse automatically designated a portion of the revenue reps generated as “deferred,” allocating them into several “incentive” plans to vest for several years. However, if the advisors left before these vesting dates, the reps would forfeit their deferred compensation, known as “the Cancellation Rule” (although the wirehouse had exceptions in place for illness, physical disability or retirement).
The plaintiffs argued that the firm’s compensation programs were “employee benefit pension plans” under ERISA because they deferred employee income for periods “extending to the termination of covered employment or beyond.” The plaintiffs asked the court to declare the plans subject to ERISA and to decide the Cancellation Rule violated vesting and anti-forfeiture requirements within the federal mandate.
Doug Needham, a senior counsel with Motley Rice, helped bring the initial class action complaint. In an interview with WealthManagement.com, Needham said the reps’ attorneys argued that a “plan cannot be an ERISA plan for one person and a non-ERISA plan for another.”
“And even though the advisors didn’t come within the exceptions in the plan, our argument was there shouldn’t have to be exceptions anyway because this is an ERISA plan,” Needham said. “The ERISA vesting rules should apply.”
In 2022, Morgan Stanley tried to force the conflicts with advisors out of the courtroom and into arbitration panels. In its argument, the wirehouse didn’t broach whether its deferred comp plans fell under ERISA but said compelled arbitration wouldn’t violate the plaintiffs’ chance to argue their claims.
The court asked both sides to argue whether or not these plans fell under ERISA jurisdiction, with the advisors arguing they did and Morgan Stanley urging the opposite.
In late 2023, Judge Gardehpe ruled partially in favor of the wirehouse, assessing that the advisors had agreed to file claims in private arbitration. However, in the same ruling, he agreed with the reps that their deferred compensation plans were covered under ERISA, which could make advisors’ attempts to claw back compensation in arbitration far easier.
Gardehpe underscored this decision with this week’s denial of Morgan Stanley’s motion, which a spokesperson for the wirehouse argued was made in error.
“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 spokesperson said. “As other panels have concluded after reviewing the full factual record, there is no merit to these claims.”
According to Needham, the firm has “well over a hundred” clients pursuing arbitration. Thus far, claimants are 2-1 against Morgan Stanley in proceedings related to their deferred compensation following the judge’s initial ruling last year. Many arbitrations are “in the pipeline,” with hearings scheduled over the next 18 months to two years.
While each panel will determine how much weight to give Gardehpe’s order on ERISA protections, Needham hoped this week’s ruling would provide a stronger foundation for arbitrators’ decisions.
