An arbitration panel has ordered Morgan Stanley to pay more than $3 million in back pay, fees and interest to seven of its ex-advisors in the Chicago area who said the company cheated them out of their deferred compensation when they left the firm for greener pastures.
The Financial Industry Regulatory Authority panel sided with the ex-advisors, who claimed that Morgan Stanley had improperly stretched out compensation periods in violation of ERISA law, then canceled the payments altogether after the advisors left, cutting a deferred compensation benefit. The claimants said they had worked for the money and were still entitled to it.
In their Finra complaint, the advisors requested deferred compensation, earned but unpaid bonuses, revenue trailers and damages for the alleged violation of various industry rules and state laws. Finra found for the claimants in an award announced Friday.
According to an attorney for the advisors, this is just the beginning of an avalanche of claims other ex-Morgan Stanley advisors will be making against the company in the upcoming months. Alan Rosca of Rosca Scarlato in Beachwood, Ohio, said that he has some 20 other cases pending, three in April and late May, and that the total amount his clients will be claiming will total in the eight-figure area.
“These advisors left the firm, and upon their departure Morgan Stanley forfeited or confiscated their deferred compensation,” says Rosca. “We said this money was already earned by the advisors and it thought it was improper for Morgan Stanley to confiscate it at that point.”
Morgan Stanley countered that idea in its own in statement to Financial Advisor magazine and fought the idea that these funds were ERISA benefits, saying they were instead an incentive the advisors chose to abandon. “Morgan Stanley has long offered deferred compensation to financial advisors to reward them for loyalty and good guardianship," the firm declared. "This is not a retirement plan, as prior arbitration panels have rightly decided, and we think the panel reached the wrong result. We will continue to aggressively defend against meritless attacks suggesting otherwise.”
The company declined to answer more detailed questions about the ERISA question, but according to Rosca, Morgan Stanley fought the idea that the back pay in question was subject to ERISA law in the first place. Rosca said he successfully showed the panel that ERISA applied, and bolstered the argument with the finding of a U.S. District Court in New York that was handed down last November. In that case, Shafer et. al. vs. Morgan Stanley, another group of former Morgan Stanley advisors led by Florida advisor Matthew Shafer also tried to sue the company for back pay, this time in federal court. That case was sent back down for Finra arbitration.
Rosca referred to a section of the ERISA law in which a benefit plan “results in a deferral of income by employees for periods extending to the termination of covered employment or beyond.”
Rosca said that once it was established that this deferred compensation was covered by ERISA, “the deferral time periods were far in excess of what ERISA provides.” The Finra panel agreed with his argument.
In 2017, Morgan Stanley and UBS prominently dropped out of the broker protocol where firms agreed to avoid litigation when it came to advisors switching firms. Since then, a raft of litigation has followed advisors around as the war for talent grows highly competitive and contentious. J.P. Morgan is also known for filing restraining orders against advisors who leave its orbit and take client information with them. Rosca suspects that the Morgan Stanley’s cancelation of deferred compensation is a way to chill advisors’ thoughts about leaving.
Among the 15 advisors named in the arbitration posted Friday (a case that had consolidated two separate previous claim groups) were a large contingent who skipped to Stifel Nicolaus around 2018 and 2019, according to BrokerCheck. The ex-Morgan Stanley advisors now at Stifel include Alfredo Serrano, Brian Thomas, Henry Enno, Jeff Schimmelpfennig, Gary Phelps, Daniel Raupp, Myron Hendrix, Ronald Ouwenga, Zachary Birkey and Michael Bruner. A number of other claimants were listed as well in a consolidated claim, but many claims were dismissed, some voluntarily, leaving only seven advisors with awards: Serrano, Phelps, Raupp, Enno, Manfred Hegwer, Scott Weissman and Thomas Bruce.
The awards for canceled compensation, interest, expenses and attorneys’ fees varied widely among the claimants, but the largest payout was to Scott Weissman for $614,786 in deferred compensation, $267,255 in interest and $352,816 in attorney’s fees. Bruce received back pay of $197,971 and interest of $86,060. Bruce and Weissman are now listed with Matrix Private Capital Group, according to BrokerCheck.