Morgan Stanley has suffered a rebuke in its attempt to have a court of appeals overturn a lower judge’s ruling that the deferred compensation it pays advisors is protected by federal retirement law.
The U.S. Court of Appeals for the Second Circuit found Wednesday in an unpublished opinion that it lacks jurisdiction to intervene in a dispute between Morgan Stanley and a group of its former brokers led by an ex-advisor named Matthew T. Shafer, who left in 2018 to join Raymond James. Shafer initially filed a putative class action suit in 2020 arguing he’s still owed more than $500,000 for work he did at the firm before leaving. Nearly two years later, he was joined by 11 other former Morgan Stanley advisors in a class action claiming they’re owed more than $4 million in total.
Wednesday’s appellate decision means the dispute will now proceed before an arbitration panel provided by the Financial Industry Regulatory Authority, the broker-dealer industry’s self-regulator.
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Judge’s big decision on deferred comp and ERISA
At the heart of Morgan Stanley’s appeal were the firm’s objections to an opinion federal judge Paul Gardephe handed down in November 2023 finding that Morgan Stanley’s deferred compensation policies fall under the Employee Retirement Income Security Act of 1974, also known as ERISA. Various advisors who have left Morgan Stanley have argued in legal actions that the firm’s deferred compensation, money paid sometimes years after it’s “earned,” is something akin to 401(k)s and other sorts of retirement plans safeguarded by ERISA.
Morgan Stanley and other firms hit with similar suits have contended that their deferred comp policies are really bonuses used, in part, to reward employees for sticking around for a set period of time. It was such a dispute that led to Judge Gardephe’s opinion in 2023 that Morgan Stanley’s deferred compensation does in fact fall under ERISA.
Gardephe then agreed with Morgan Stanley’s contention that its dispute with its former brokers should be decided by a FINRA arbitration panel. But in a ruling that Morgan Stanley deemed irrelevant to the issues he was asked to decide, Gardephe also found that the sort of deferred-payment compensation offered by Morgan Stanley is not akin to year-end bonuses that 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.
Morgan Stanley later unsuccessfully tried to have Gardephe either clarify or overturn his opinion on ERISA law. Calling the attempt “disingenuous and incorrect,” the judge wrote in an opinion in November 2024 that, “Here, there is no ambiguity to ‘clarify.'”
“After an extensive discussion of the relevant language in plan documents and the applicable case law, this court concluded that ‘Morgan Stanley’s deferred compensation programs are ERISA plans,'” Gardephe wrote.
Who asked the judge to weigh in on ERISA?
Morgan Stanley’s appeal in the Second Circuit relied heavily on the argument that Gardephe was never asked to weigh in on whether the firm’s deferred comp falls under ERISA, only on if its dispute with its former brokers should go before a FINRA arbitration panel. Morgan Stanley, along with lobbying groups like the U.S. Chamber of Commerce and the Securities Industry and Financial Markets Association, have also argued that Gardephe’s opinion was fundamentally wrong.
In doing so, they’ve expressed anxiety that Gardephe’s opinion could bias arbitrators against their arguments. Court decisions do not necessarily provide binding precedent in arbitration proceedings. But lawyers representing Morgan Stanley have complained in court filings that Gardephe’s opinion, though not a formal precedent, has been cited as law in FINRA arbitration proceedings.
Morgan Stanley wins some, loses some in deferred comp fight
Despite that, Morgan Stanley has won recent disputes over its deferred comp policies.
In February, for instance, a three-member FINRA panel denied ex-Morgan Stanley broker Jeffrey Zapoleon’s claim for $1.2 million, which he said he was still owed after leaving to join Wells Fargo in 2019. In January, it prevailed against two former brokers who were seeking an unspecified amount of deferred compensation. And in June 2024, Morgan Stanely beat back eight ex-advisors’ attempt to wring roughly $850,000 in deferred comp out of the firm.
Not everything has gone Morgan Stanley’s way, though. In April 2024, the firm was ordered by an arbitration panel to pay more than $3 million claimed by seven advisors who had left to go to various firms. Likewise, two months later it was told to pay $1.1 million to a pair of ex-advisors who had joined Ameriprise.
In its unpublished opinion Wednesday, the Second Circuit Court of Appeals said those victories show that Morgan Stanley’s chances of prevailing in FINRA arbitration have not been forever doomed by Judge Gardephe’s opinion on its compensation polices and ERISA.
“Though arbitrators may consider the district court’s opinion, Morgan Stanley is free to argue to those arbitrators that the district court’s conclusion that the plans were governed by ERISA … was legally incorrect,” the appellate court wrote. “Indeed, Morgan Stanley admits that it has already done so — successfully — in some of the intervening arbitrations.”
Deferred comp disputes crop up across the industry
A spokesperson for Morgan Stanley said the appellate court found it lacks jurisdiction because Gardephe’s decision “doesn’t bind the arbitration panels that will decide these cases.”
Of the firm’s deferred compensation, the spokesperson said: “These awards are not a pension, as multiple arbitration panels have now recognized. We remain confident that as individual arbitrators see all the evidence, they will reach exactly the same result.”
One of the ex-brokers’ lawyers, Douglas Needham of the Mount Pleasant, South Carolina firm Motley Rice, said the appellate court’s decision means now Morgan Stanley can’t tell arbitrators they should disregard Gardephe’s decision on ERISA law because that opinion is on appeal.
“It takes that argument off the table, which is important,” Needham said. “And now we can point to Gardephe’s ruling and say, ‘This is a great road map for how arbitrators should look at these issues.'”
Needham said he’s representing about 100 former Morgan Stanley brokers who have deferred comp claims against the firm. He said a couple of the disputes were postponed pending the appellate court’s decision and that he expects decisions in some of the others in the next six months to a year.
Morgan Stanley is not the only Wall Street mainstay caught up in disputes involving deferred compensation. Wells Fargo agreed in early 2020 to pay $79 million to settle a class-action suit filed by former advisors who contended deferred comp had been illegally withheld from them. Merrill, meanwhile, prevailed in federal court in March against a broker who argued he was still owed more than $500,000 from his time at the firm before he left in 2021 to help found Quorum Private Wealth.
