Ex-Morgan Stanley Brokers Must Arbitrate Class Claim Over Deferred Comp, Judge Rules

Nov 2023 // AdvisorHub

A federal judge has granted Morgan Stanley’s motion to send to arbitration a putative class action claim that it violates federal law by withholding deferred compensation from brokers who move to other firms.

Morgan Stanley “demonstrated” that the advisors agreed in employment and bonus contracts to file such claims in private arbitration, U.S. District Judge Paul G. Gardephe in Manhattan wrote in a 56-page ruling on Tuesday. They also did not opt out of the wirehouse’s alternative dispute resolution program, called Convenient Access to Resolution for Employees (CARE), according to the ruling.

The plaintiffs, represented by multiple lawyers, including the Ajamie firm in Houston, argued that their claims are not subject to mandatory arbitration clauses in their Morgan Stanley employment agreements because they are appearing in court as pension plan participants rather than as employees.

In his ruling, Gardephe concluded that the ex-advisors had claims under the Employment Retirement Income Security Act (ERISA) but wrote that the plaintiffs failed to prove that those were non-arbitrable. The judge also wrote that, although his ruling prohibits the advisors from seeking to represent a class, they could still individually seek in arbitration the same damages or other relief that they had sought in court.

The plaintiffs are led by Matthew Shafer, who first filed the case in December 2020. Shafer is a 26-year industry veteran who worked in Boca Raton, Florida for the wirehouse for nine years until 2018 and is registered with Raymond James & Associates. Since he filed the initial complaint, Shafer has been joined in amended versions by other ex-Morgan Stanley brokers who moved to Raymond James as well as Ameriprise Financial and Stifel, Nicolaus & Co.

The Shafer plaintiffs allege they are representing the claims of thousands of other ex-Morgan Stanley advisors and argue that its compensation plan violates federal laws governing vesting and anti-forfeiture rules for pension and retirement packages by withholding deferred pay when brokers move to the competition.

In September, Morgan Stanley disclosed in a letter to Gardephe that a rash of other of its ex-advisors are “piggybacking” on the Shafer case and filing unpaid deferred compensation claims in arbitration.

Both the Shafer plaintiffs and Morgan Stanley have corroborated in court filings details about its deferred compensation—including that it can entail as much as 15% of advisors’ pay and require up to eight years to vest.

Shafer alleges Morgan Stanley owes him $500,000 in unpaid compensation.

Deferred compensation is one key factor keeping brokers in their seats, recruiters and Morgan Stanley executives have said.

The Shafer lawsuit has been closely watched as it comes after a $79 million settlement in 2020 in a similar class action lawsuit against Wells Fargo Advisors. The plaintiffs in that case, who were also represented by the Ajamie law firm, sought $265 million.

“We appreciate that the court correctly determined these claims belong at arbitration and are reviewing other aspects of the decision,” a Morgan Stanley spokesperson said.

His clients “do not plan to appeal,” John S. “Jack” Edwards, a lawyer from Ajamie, who represents the plaintiffs, said.

“Judge Gardephe concluded that the Morgan Stanley deferred-compensation plan is an ERISA pension plan,” Edwards added “This means that our clients’ deferred compensation is vested and non-forfeitable. We plan to file individual arbitrations to recover the deferred compensation that Morgan Stanley wrongly forfeited when our clients left Morgan Stanley.”