Herskovits PLLC is investigating whether Morgan Stanley unlawfully “forfeited” deferred compensation otherwise due and payable to financial advisers formerly employed by the firm. A class action lawsuit involving similar claims has begun in the U.S. District Court for the Southern District of New York. That litigation is in its early stages and may carry on for years before a resolution is reached.

Morgan Stanley’s Deferred Compensation Plan

Morgan Stanley compensates FAs based on revenues generated from the FA’s customers’ accounts. Morgan Stanley typically defers a portion of the fees generated as “deferred compensation” and allocates a substantial percentage of the FA’s deferred compensation to the Morgan Stanley Compensation Incentive Program. 75% of the deferred compensation vests over a six-year period and 25% vests over a four-year period. However, Morgan Stanley “cancels” the deferred compensation if the FA leaves Morgan Stanley prior to the vesting dates.

Potential Legal Claims

In simple terms, it can be argued that the deferred comp plan in an “employee benefit pension plan” under ERISA because it “results in a deferral of income” for services rendered years ago. If this argument proves successful, the deferred compensation program’s “cancellation rule” will be deemed a violation of ERISA’s vesting and anti-forfeiture requirements.

Where to Pursue these Claims?

Certain formerly employed FA’s may be eligible to join the class action lawsuit should the judge certify the class. It is unknown at this time whether or when the court will certify the class. Moreover, if the class is certified, it is unclear whether joining the class – as opposed to pursuing the ERISA claims on an individual basis in FINRA arbitration – is preferable avenue for the FA. FAs are always free to pursue their claims on an individual basis in FINRA arbitration.

Considerations for the FA When Deciding Whether and Where to Pursue the Claims

Class actions lawsuits sometimes result in recoveries of “pennies on the dollar” for the members of the class. This structure nonetheless serves the plaintiffs’ lawyers well, because the lawyers receive a substantial percentage of the class settlement – which may be a large pool of money – whether or not an individual class participant recovers much money.

Another consideration to weigh concerns claims which Morgan Stanley may assert. The firm can – and does – aggressively pursue claims for unpaid “employee forgivable loans” (EFLs). Morgan Stanley will pursue those EFL claims in FINRA arbitration. Therefore, the FA has to carefully weigh whether he would garner greater leverage by meeting the EFL claim with a deferred comp counterclaim in FINRA arbitration. By pursuing the deferred comp claim as part of a class, the FA would be left without a potentially potent defense against than EFL claims in FINRA arbitration.

A second consideration concerns the payout of any settlement in court versus arbitration. An FA has to make a determination when he believes he will recover more by pursuing his claims on an individual basis in FINRA arbitration.

Herskovits PLLC has a nationwide practice representing the interests of financial advisors, including FAs with claims for unpaid compensation. Please call us at 212-897-5410 for a consultation.

This blog post looks at an interesting FINRA arbitration award issued on January 7, 2020: Daniel Paul Motherway v. UBS Financial Services, Inc., FINRA Arbitration No. 17-02799. This case seems to prove the old adage: a man who is his own lawyer has a fool for a client. Here we have an FA who proved, quite literally, that UBS defamed him, but was nonetheless ordered to stroke a check to UBS for more than $1 million.

Background Facts

On June 28, 2017, UBS fired Motherway and offered the following termination explanation on BrokerCheck: “Financial Advisor’s employment was terminated after review concluded that he made false claims of merchant fraud on his personal credit and debit cards to an affiliate of the firm and made conflicting statement during the review.”

Apparently, UBS’s Form U5 disclosure didn’t sit well with the FA and he filed a FINRA arbitration against UBS for defamation, among other things. The FA sought $12 million in damages and expungement of the Form U5 disclosure.

UBS likewise filed a FINRA arbitration against the FA seeking repayment of an employee forgivable loan. UBS sought damages of $1,012,729, plus attorneys’ fees and expenses.

Underlying Arbitration

The arbitrators consolidated the 2 arbitrations over UBS’s objection. After 3 full days of hearings, the arbitrators found UBS’s termination disclosure to be defamatory and ordered that: (a) the reason for termination be changed to “other” (according to BrokerCheck, the current reason for termination is “discharged”), and (b) the Termination Explanation be changed to “termination for providing conflicting and misleading information in connection with the firm’s inquiry into a non-securities related matter.”

Regrettably for the FA, however, UBS’s Form U5 defamation did not relieve his obligation to repay the promissory note. The arbitrators really dropped the hammer here, ordering him to pay compensatory damages of $1,012,729, interest at 3% until the award is satisfied, $111,400 in attorneys’ fees, and $20,254 in “late fees,” whatever that may be.

This award underscores the fact that the odds are stacked against the FA when challenging a forgivable loan in FINRA arbitration. In this case, the FA got the money, he signed a promissory note, and the arbitrators strictly held him to the terms of the promissory note, which were likely clear and unambiguous. There are instances in which arbitrators refuse to order repayment of a promissory note. But those cases generally involve instances in which the firm actively took steps to harm the FA’s book of business.

Given that UBS’s conduct was questioned by the arbitrators, one is left to wonder whether the FA’s choice to go it alone was a wise one.

Herskovits PLLC has a nationwide FINRA arbitration practice. Feel free to call us for a consultation. 212-897-5410.