Morgan Stanley faces significant challenges as a federal judge ruled against it in a long-standing legal dispute with hundreds of financial advisors demanding millions in deferred compensation they claim the firm improperly withheld.
Judge Paul G. Gardephe declined Morgan Stanley’s request to reconsider a previous November 2023 ruling, which the company argued created disadvantages in numerous arbitration cases brought by advisors.
The legal battle focuses on Morgan Stanley’s deferred compensation plans. Like other firms, Morgan Stanley compensates advisors with a mix of cash and deferred payments, which vest over time. If advisors leave for a competitor, Morgan Stanley considers the deferred compensation forfeited.
In 2020, a group of advisors who had departed to join rival firms filed a lawsuit seeking class action status in a New York federal court. They alleged that Morgan Stanley forced them to forfeit more than $4 million in deferred compensation after moving to other firms.
Morgan Stanley sought to compel these advisors to resolve their claims through arbitration, which Judge Gardephe granted in November 2023. However, he also ruled that Morgan Stanley’s deferred compensation plans are subject to the Employee Retirement Income Security Act (ERISA), a 1974 law governing retirement and other benefit plans.
While ERISA is primarily associated with retirement plans, it also applies to certain other types of benefit plans. Advisors involved in the lawsuit claim Morgan Stanley’s deferred compensation plans violate ERISA’s vesting and anti-forfeiture provisions.
Following this ruling, Morgan Stanley submitted a new filing in December 2023, arguing that Judge Gardephe’s ERISA finding was “susceptible to misinterpretation” and could prejudice the firm in ongoing arbitrations. Morgan Stanley contended that the ERISA issue should be left to arbitrators and not addressed by the court.
“Because it was neither necessary nor appropriate for the Court to rule on the merits of plaintiffs’ claims in order to decide the motion to compel arbitration, Morgan Stanley respectfully requests that the court modify its opinion to clarify that it has not done so,” the December filing stated.
In April, Morgan Stanley sent a follow-up letter to the court, reiterating its request for “urgent relief” due to the judge’s finding being cited in multiple arbitration cases. In a notable May case, an arbitration panel ordered Morgan Stanley to pay $1 million to two advisors pursuing deferred compensation claims.
ERISA remains a central issue. On November 5, Judge Gardephe again rejected Morgan Stanley’s request to modify his earlier ruling. “The issue of ERISA’s applicability to defendants’ deferred compensation programs has been front and center since this lawsuit was filed in 2020,” he stated.
To address whether the advisors could be compelled into arbitration, the court had to first establish whether their deferred compensation plans fell under ERISA and then assess whether the advisors’ arbitration agreements might conflict with ERISA regulations, Gardephe explained. He noted that Morgan Stanley had “vigorously argued” against ERISA coverage for the plans.
“Having chosen to litigate ERISA coverage on the merits, [Morgan Stanley] will not be heard to complain that this court ruled on the merits arguments they chose to make,” he added.
A Morgan Stanley spokeswoman maintained in a statement that the advisors’ claims lack merit. “We look forward to addressing the errors in the district court’s decision on appeal,” she said, criticizing the court for making a ruling “without a hearing, briefing, or the factual record the arbitrators will have.”
Attorney Doug Needham, representing the advisors who initiated the lawsuit, expressed satisfaction with the ruling. Needham’s firm, Motley Rice, now represents over 80 advisors in arbitration cases against Morgan Stanley, seeking tens of millions in deferred compensation and damages. The first arbitration hearing is scheduled for April, he noted.
“The court correctly found in a thorough manner that ERISA applied and rejected the arguments that Morgan Stanley tried to make,” Needham stated.
Attorney Alan Rosca, who represented advisors in the May arbitration case, currently represents around 300 advisors in over 30 arbitration proceedings, with claims amounting to millions in deferred compensation.
Morgan Stanley’s advisor compensation is tied to annual revenue generation, with deferred compensation ranging from 1.5% to 15.5% of an advisor’s pay, as detailed in the firm’s 2018 compensation plan. These details were included in court filings by the advisors.
Morgan Stanley’s legal team argued in filings that the deferred compensation constituted a bonus, not a deferral of income that would otherwise qualify as an ERISA-covered plan.
Judge Gardephe disagreed in his prior ruling, concluding that the deferred compensation represents a deferral of regular income, distinguishing it from year-end bonuses, which the firm also pays separately.
