Morgan Stanley Dealt Blow in Deferred Comp Clawback Lawsuit

Morgan Stanley building in New York with a blue lit-up sign

A new ruling in a legal saga involving Morgan Stanley's deferred compensation program could give a boost to a growing set of former advisors set to enter arbitration over claims that the company has improperly withheld certain payments to which they say they are entitled.

Specifically, the ruling Tuesday denied Morgan Stanley's latest motion asking the court to reconsider a prior ruling that determined that the firm's deferred compensation plan is subject to the anti-forfeiture rules governed by the Employee Retirement Income Security Act.

In doing so, the U.S. District Court for the Southern District of New York has reaffirmed that the plan is indeed governed by ERISA, which several hundred former advisors and their legal representatives have been arguing before arbitration panels around the country.

So far, the advisors have been met with mostly positive results in the arbitration process, according to attorney Alan Rosca, who is representing nearly 300 former Morgan Stanley advisors involved in more than 30 group arbitrations pending against the firm. The reaffirmation should help ensure that the momentum continues, he said.

"The court relied heavily on findings of fact from one of our arbitration cases, where Morgan Stanley showed evidence indicating that between approximately 8% to 15% of the deferred compensation awards went to former employees," Rosca told ThinkAdvisor. "The court found that those percentages were sufficient to bring the firm's plans under ERISA."

The court also found that the deferred compensation plan was not a bonus plan, Rosca noted, something that his team has argued in each of its arbitration actions.

Rosca said he expects the latest ruling could bring additional former Morgan Stanley advisors "off the sidelines," with the potential for 500 to 600 total individual arbitration claims — each potentially resulting in tens or hundreds of thousands of dollars in damages.

Morgan Stanley, in an email, confirmed its intentions to appeal the new ruling.

"We look forward to addressing the errors in the district court's decision on appeal," a spokesperson wrote. "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. As other panels have concluded after reviewing the full factual record, there is no merit to these claims."

While acknowledging that he has a horse in the race, Rosca said he doesn't see much potential for a successful appeal on those grounds.

"Morgan Stanley itself invited consideration of the merits by bringing those percentages into their motion," he argued. "The judge emphasized those percentages three times to show that the payments to former employees were substantial. And remember, they actually won on the original motion; they just didn't like the rationale under which subsequent arbitration would proceed."

Credit: Bloomberg