Ex-Morgan Stanley advisors' $3M win could open floodgates to deferred comp claims

To a group of seven ex-Morgan Stanley advisors, a recent FINRA arbitration ruling means they're one step closer to recouping more than $1.5 million in deferred compensation they say they're still owed after leaving for other firms.

But to the lawyers representing them, it's just the first victory in what's likely to be an onslaught of lawsuits questioning the Wall Street giant's pay policies for wealth managers.

"We've assembled a group right now, I think we have close to 150 clients," said Alan Rosca, a partner and securities lawyer at Beachwood, Ohio-based Rosca Scarlato, which represented the plaintiffs in the case. "And I am aware that there's at least a couple of other firms who are pursuing arbitrations."

Rosca's law firm claimed victory on March 22 when a Financial Industry Regulatory Authority panel ruled that the seven ex-Morgan Stanley advisors it represented were entitled to more than $3 million from their former employer. That amount includes not only roughly $1.5 million in deferred compensation but also roughly $604,000 in interest, $9,000 in legal expenses and almost $860,000 in attorney fees.

It's the latest case to test just how far firms can go in trying to prevent experienced wealth managers from taking their expertise and books of business to competitors. In an industry in which aggressive recruiting is the norm, advisors can be tempted to depart to rivals by sign-on deals offering generous upfront payments — some of which is often meant to compensate them for any deferred compensation they left behind at a previous employer.

Morgan Stanley has long been persistent about making sure advisors can't leave without encountering a few legal hurdles. The firm decided in 2017 to exit the so-called Broker Protocol, an industry-spanning pact that allows advisors to take certain types of client information with them to a new employer without fear of legal consequences. Morgan Stanley has also obtained temporary restraining orders against ex-employees it has accused of not living up to their contractual duties to avoid reaching out to former customers.

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The latest case

FINRA arbitrators seldom explain their decisions in public, and the three-member panel that handed down the decision in the Morgan Stanley case did not go into its reasoning. But Rosca confirmed that his clients grounded their claims on arguments that their deferred compensation should fall under guarantees offered by the Employee Retirement Income Security Act of 1974, or ERISA.

Rosca and other lawyers have argued that deferred compensation earned by financial advisors is akin to 401(k)s and other retirement plans safeguarded by ERISA. That means the money belongs to them, Rosca said, regardless of where they're employed.

Morgan Stanley has countered in various legal documents that the deferred comp is instead meant as an incentive to encourage employees to stay with the firm. Its policies include a "cancellation rule" stating that they forfeit their deferred compensation if they leave within a certain amount of time after earning it — usually four to six years.

A Morgan Stanley spokesperson told Financial Planning, "Morgan Stanley has long offered deferred compensation to financial advisors to reward them for loyalty and good guardianship."

She noted that other arbitration panels have agreed that the firm's deferred compensation policies are not retirement plans and said, "We will continue to aggressively defend against meritless attacks suggesting otherwise."

More on the way

Rosca Scarlato and its fellow litigator in the recent FINRA arbitration case — Philadelphia-based Salmanson Goldshaw — aren't the only firms pressing these claims against Morgan Stanley. Douglas Needham, a retirement law attorney at Mount Pleasant, South Carolina-based Motley Rice, said his firm is pursuing cases with roughly 80 ex-Morgan Stanley advisors likewise seeking deferred compensation.

"We filed several in the past month and a half," Needham said. "We filed one yesterday. We're getting another one on file today, on behalf of three advisors in Pennsylvania. And we're going to file another one this week on behalf of two advisors in Georgia. So there is a national-scope client base for these claims."

Like Rosca, Needham and his colleagues point to ERISA as the reason their clients are owed deferred compensation. As far as he knows, Needham said, the recent FINRA arbitration ruling in the Morgan Stanley case is the first to take the advisors' side in one of these sorts of disputes.

Needham acknowledged that, unlike court opinions, arbitration decisions do not set binding precedents for other panels that might take up similar matters in the future. Still, he thinks the FINRA panel's ruling in the recent Morgan Stanley case bodes well for his clients.

"Of course it still depends on the particular panel that you get, but I do think it's helpful," Needham said. "I think they're all incremental steps in the right direction, and I think they're going to benefit all our clients."

Is deferred comp earned comp?

Jim Eccleston, the managing member of Chicago-based Eccleston Law and a client referral source for Rosca in the recent arbitration case, said he thinks the flaw in Morgan Stanley's pay policies lies in the firm's decision to tie deferred compensation directly to advisors' performance. According to the firm's 2018 compensation plan submitted to the court, deferred comp doesn't come from advisors' base salaries. 

Rather, it's pulled from their share of the revenue they've made for the firm over the previous 12 months. The proportion withheld varies from 15.5%, for advisors who generate $5 million or more, to 1.5%, for advisors who generate less than $240,000.

Eccleston said the production-based component of Morgan Stanley's pay policies puts advisors' deferred comp firmly in the category of money they've earned and are entitled to take with them should they leave.

"The mistake that they made here, and it's apparent, is that they took this money out of the advisors' pockets," Eccleston said. "The advisors had already earned that money, and they took those earnings out of their pockets and called it some sort of deferred compensation with all these other conditions attached."

Judge: Deferred comp falls under ERISA

In making such arguments, the lawyers representing Morgan Stanley advisors 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 plaintiffs' 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.

In an emergency motion filed on Tuesday, a lawyer for Morgan Stanley argued there's an urgent need for the court to reconsider Gardephe's conclusion regarding ERISA. Meaghan VerGow, a partner at Los Angeles-based O'Melveny Myers, suggested Gardephe's ruling is already having an effect on the outcomes in the roughly 20 arbitration disputes the firm now finds itself defending its deferred comp policies in. 

VerGow noted that cases that went before FINRA arbitrators before Gardephe's ruling had tended to go in Morgan Stanley's favor. Decisions handed down separately in March 2023 and September 2023, she pointed out, both denied ex-Morgan Stanley advisors' claims to deferred compensation.

VerGow said the influence Gardephe's ruling could have on future arbitration decisions is "no longer potential."

"The order is being cited as 'law' that precludes arbitration panels from making their own independent determinations in these proceedings," she wrote in a brief to Gardephe.

VerGow also cited several arguments made by the claimants' attorneys in the latest FINRA arbitration case. For instance, according to her brief, the lawyers representing former Morgan Stanley advisors stated, "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."

VerGow noted that Motley Rice and two other firms representing former Morgan Stanley advisors have started a website seeking more clients who believe they're owed deferred compensation. The site states, "We obtained a ruling from a federal court in NY concluding that the Morgan Stanley deferred compensation plan is governed by the Employee Retirement Income Security Act, a federal law with strict anti-forfeiture rules." 

Who got what

The amounts awarded to the ex-Morgan Stanley advisors in the latest case ranged from almost $1.24 million to just over $154,000. The largest payment is going to Scott Weissman, who was with Morgan Stanley from 1996 to 2019 before leaving to join the New York-based asset management firm Matrix Private Capital Group. Weissman, who couldn't be reached for comment, received $614,786 in deferred compensation, $267,255 in unpaid interest, $4,328 in legal costs and $352,816 in attorney fees.

The second largest payout is going to Manfred Hegwer, who is getting $474,033 in total. Hegwer, who referred questions to Rosca, started at Merrill in 1993 and had stints at UBS and Citigroup before going in 2009 to Morgan Stanley, which he then left in 2022 to join the LPL Financial-affiliated firm Velos Wealth Management. His award consists of $283,732 in deferred compensation, $53,590 in interest, $1,782 in legal costs and $134,929 in attorney fees.  

Their arbitration case against Morgan Stanley was consolidated from two separate disputes with 15 claimants combined. Rosca said several of the former Morgan Stanley advisors who were originally involved chose for various reasons not to pursue the arbitration proceedings all the way to the end.

He said there will be plenty more where they came from for cases challenging the pay policies not only of Morgan Stanley but other firms as well.

"I have three more evidentiary hearings scheduled," Rosca said. "One is later this month, one in May and one in late May. So we're busy. And we're finding more cases. We have, by far, the largest number of Morgan Stanley advisors because we've been working on it for a couple of years."