A federal appeals court shot down Morgan Stanley’s attempt to appeal a lower court’s decision that its deferred compensation plans were protected by federal law. The decision could impact numerous arbitration proceedings filed against the wirehouse by former employees.
The Second Circuit Court of Appeals issued its dismissal of Morgan Stanley’s appeal, arguing it didn’t have proper jurisdiction, and denied Morgan Stanley’s request that the district court judge who filed the previous opinion “strike its legal conclusion that the deferred-compensation plans” fell under the Employee Retirement Income Security Act.
It’s the latest development in a years-long class action filed by several former Morgan Stanley advisors, who collectively accused the wirehouse of denying them millions in deferred compensation when they left for other firms.
In an interview with WealthManagement.com, Motley Rice Attorney Douglas Meedham (who helped bring the initial class action complaint) said the decision marked the end of “quite a saga of twists and turns,” and looked forward to assisting clients to prevail in arbitration.
The original class action was filed in 2020 and led by Matthew Shafer, a Florida-based rep who left Morgan Stanley for Raymond James in 2018. He estimates he forfeited over $500,000 in deferred compensation. Shafer and the other plaintiffs brought the class action for all former advisors in similar positions when they left the firm.
The plaintiffs claimed Morgan Stanley deemed some of their compensation “deferred” and placed it in plans to vest for several years. According to the suit, if the reps left before the vesting dates, they’d forfeit that compensation. Shafer and the plaintiffs argued these plans were “employee benefit pension plans” under ERISA protections and asked the court to decide that Morgan Stanley’s rule violated federal law.
In 2023, New York Southern District Court Judge Paul Gardehpe partially ruled for the wirehouse, deciding that advisors had agreed to argue claims in private arbitration. However, in the same ruling, Gardehpe agreed with the reps that the compensation plans were covered under ERISA, making it easier for reps to make that argument in arbitration proceedings (Gardehpe Reconfirmed the decision at Morgan Stanley’s request in 2024.)
In its appeal, Morgan Stanley argued that Gardehpe wasn’t required to rule on whether the plans fell under ERISA protections, and that the findings “impaired Morgan Stanley’s right to arbitrate” because its defenses “turn on the contention that the plans fell outside of ERISA and its anti-forfeiture rules.”
The appeals court agreed that merely assuming the plans fell under ERISA could have been “a better course” for the district court, but didn’t think that warranted striking the language.
“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 EIRSA was … legally incorrect,” the order read. “Indeed, Morgan Stanley admits that it has already done so—successfully—in some of the intervening arbitrations.”
According to Needham, Morgan Stanley had argued in several arbitration proceedings that panel judges shouldn’t consider the district court’s decision, claiming the appellate judges could overturn it. The Second Circuit’s ruling “takes Morgan Stanley’s argument completely off the table,” he said.
“Morgan Stanley remains free to argue why it believes the decision wasn’t correct, and likewise, we are going to argue why it is correct,” he said. “But we think that the New York Court’s decision … will provide a great road map for the arbitration panels on how they should decide the issue of whether ERISA applies.”
According to a Morgan Stanley spokesperson, the appellate court determined that it lacked jurisdiction because the district court didn’t bind the arbitration panels deciding the case.
“These awards are not a pension, as multiple arbitration panels have now recognized,” the spokesperson said. “We remain confident that, as individual arbitrators see all the evidence, they will reach exactly the same result.”
Though it was impossible to determine exactly how many former Morgan Stanley advisors were in arbitration, Needham said a “tremendous number” were pursuing claims (Needham said his firm consistently had arbitration sessions scheduled for the next year-and-a-half). While the Second Circuit’s decision was largely procedural, Needham hoped its merits extended further.
“I’m not necessarily in a position to predict how other firms may or may not respond,” he said. “But we do think it’s an overall important issue in the general space of ERISA law and also financial advisor compensation.”
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