By Andrew Welsch

Ever hear of a company winning a court ruling and then seeking to appeal its own victory?

It may sound odd, but that is essentially what is unfolding in a legal battle between Morgan Stanley and a group of former Morgan Stanley financial advisors who sued the company in federal court in New York claiming it wrongly withheld their deferred compensation when they left to work at another firm.

The latest twist in the saga is that the advisors are arguing in court that Morgan Stanley shouldn't be allowed to appeal a court decision in a case that it sought to compel to arbitration.

The first round. Morgan Stanley won the first part of this legal fight when a federal judge granted its request on Nov. 21, 2023 to compel the advisors to take their claims to private arbitration. However, in the same ruling, the judge found that Morgan Stanley's deferred comp plans were governed by a federal law known as Erisa that governs retirement and other benefit plans. That aspect of the ruling has been "wreaking havoc" on Morgan Stanley's arbitration cases, according to the company.

Morgan Stanley asked Judge Paul G. Gardephe to revisit his ruling, a request he denied Nov. 5, 2024, saying that the Erisa issue was front and center to the dispute. "Having chosen to litigate Erisa coverage on the merits, [Morgan Stanley] will not be heard to complain that this court ruled on the merits of arguments they chose to make," Judge Gardephe wrote.

The company then filed an appeal in the U.S. Court of Appeals for the Second Circuit arguing that the lower court improperly weighed on whether Morgan Stanley's deferred comp plans are governed by Erisa. "That question is the core dispute in plaintiffs' claims against Morgan Stanley, and the court's ruling has effectively deprived Morgan Stanley of its bargained-for right to have an arbitrator adjudicate it," the company said in its Jan. 22 filing.

Morgan Stanley's Jan. 22 filing asked the appeals court to vacate the lower court's ruling and require it to reissue it without any analysis of Erisa. Alternatively, if the appeals court determines it was necessary to weigh on the Erisa issue, then the court should find that Erisa isn't applicable, Morgan Stanley argues.

A representative for Morgan Stanley said the company believes the lower court erred. "Morgan Stanley's deferred compensation awards for financial advisors are compensation, not a pension benefit," the representative said in a statement. "The district court's contrary suggestion erroneously purported to take that key question from the arbitrators who must decide the matter, reached the wrong legal conclusion about it, and undermined the core purpose for which the awards were granted in the first place: to reward advisors who demonstrate good guardianship and loyalty."

Appealing arbitration? Last week, the advisors responded, telling the federal appeals court that Morgan Stanley's request should be rejected outright because it violates a federal law that expressly prohibits appealing orders compelling arbitration. In other words, if the advisors can't appeal a ruling compelling arbitration, neither should Morgan Stanley. But if the company can appeal the ruling, then the advisors -- who were seeking class action status for their deferred comp lawsuit -- will do likewise because they feel the lower court "erred by compelling individual arbitrations of inherently plan-wide claims."

Should the court decide that Morgan Stanley can appeal Judge Gardephe's ruling, it should hold that he correctly addressed Erisa's applicability, the advisors' response states. It was necessary for the judge to determine Erisa applicability to rule on Morgan Stanley's request to compel arbitration, the response states. "[T]he parties' arbitration agreements expressly authorized judicial determination of 'any issue' regarding representative-action waivers -- language that necessarily encompasses whether Erisa's representative enforcement mechanisms apply, " the advisors' response states.

Big numbers. For both sides, there's a lot of stake in the dispute. The law firm representing the advisors in court, Motley Rice, and other law firms are representing dozens of advisors in arbitration and they are seeking millions in deferred compensation. Morgan Stanley's appeal states that Gardephe's ruling "has prompted a flurry of copycat [arbitration] claims -- more than 80 and counting -- in which other claimants are arguing the district court's Erisa coverage finding on this central question is 'binding' law that definitively resolves the dispute in their favor."

Morgan Stanley pays advisors a combination of upfront and deferred compensation based on how much annual revenue they generate for the company. The percentage of compensation that is deferred ranges from 1.5% to 15.5%, according to a copy of Morgan Stanley's 2018 compensation plan, details of which were included in the advisors' court filings.

The company is one of the nation's largest wealth managers with thousands of financial advisors and more than $6 trillion in client assets (Morgan Stanley doesn't disclose advisor head count).

Although only a few of the Erisa-related deferred compensation cases in arbitration have concluded, Morgan Stanley has prevailed in several. For instance, last month, a Finra arbitration panel in Boca Raton, Fla., denied advisor Jeffrey Zapoleon's $1.2 million deferred comp claim against Morgan Stanley.

"We are gratified that after fully evaluating all the evidence, the panel reached the correct conclusion based on the facts and the law: Morgan Stanley awards deferred compensation to financial advisors during their employment to reward them for retention and good guardianship," the company representative said. "That is not a pension plan."

A lawyer representing Zapoleon didn't respond to a request for comment.

Other arbitration cases haven't gone Morgan Stanley's way. In May 2024, a Dallas-based arbitration panel ordered Morgan Stanley to pay Jeff Davis and William Swisher a combined $442,000, plus 9% interest per annum from Jan. 1, 2015 through May 13, 2024, and to cover the men's lawyer fees of $235,000.

While other arbitration cases are pending, Morgan Stanley is getting some support in its appeal from business and brokerage industry trade groups, such as the U.S. Chamber of Commerce and the Securities Industry and Financial Market Association, known as Sifma.

In an amicus brief filed Jan. 29, Sifma warned that allowing the lower court ruling to stand could harm other wealth management companies that use similarly structured deferred compensation plans. "The destabilizing effects of the district court's order threaten deferred-compensation programs throughout the financial sector," Sifma wrote.

Write to Andrew Welsch at andrew.welsch@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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March 03, 2025 16:43 ET (21:43 GMT)

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