Morgan Stanley Deferred Compensation Lawsuit and ERISA Fight

The Morgan Stanley deferred compensation lawsuit is a putative class action filed in 2020 by former financial advisor Matthew T. Shafer, who alleges the firm illegally canceled millions of dollars in unvested deferred pay when advisors left for competitors, in violation of the Employee Retirement Income Security Act of 1974 (ERISA). The case has since fractured into hundreds of individual FINRA arbitrations, a Second Circuit appeal, a U.S. Department of Labor advisory opinion siding with Morgan Stanley, and a separate federal suit accusing the DOL of issuing that opinion after an improper lobbying push.

What the Lawsuit Alleges

Shafer filed his complaint in the U.S. District Court for the Southern District of New York, and 11 other former advisors later joined, bringing the group’s claimed losses to nearly $4 million. Shafer alone said he was denied more than $500,000 he had earned over a nine-year tenure from 2009 to 2018.¹

The plaintiffs’ theory is that Morgan Stanley’s deferred compensation plans function as pension plans covered by ERISA, which contains anti-forfeiture rules. If that is right, canceling unvested awards when advisors leave is unlawful. Morgan Stanley’s position is that the plans are retention bonuses exempt from ERISA under a Labor Department regulation, 29 C.F.R. § 2510.3-2(c), and that the firm has always described the program as rewarding “loyalty and good guardianship” rather than providing retirement income.²

How the Deferred Pay and Forfeitures Work

Morgan Stanley’s program has two pieces. The Equity Incentive Compensation Plan (EICP) accounts for 25% of an advisor’s deferred awards and pays out in unsecured deferred stock that vests after four years. The Morgan Stanley Compensation Incentive Plan (MSCIP) is the remaining 75%, a cash award that vests after six years. Both are funded through “Deferred Credits” set at between 1.5% and 15.5% of an advisor’s total incentive compensation, scaled to the revenue the advisor produces.³

Unvested awards are canceled if an advisor leaves before the vesting date. They are also forfeited if the advisor violates securities rules, discloses trade secrets, makes disparaging comments about the firm, solicits Morgan Stanley clients for a competitor within three years of departure, or joins a competitor within 100 miles without consent within a year of leaving. Limited exceptions apply for death, disability, retirement, involuntary termination not involving prohibited conduct, and government service.³ Former advisors have described participation as effectively mandatory, with deferral rates rising as production climbs.²

Is the Program an ERISA Pension Plan or a Bonus Plan

The whole case turns on this classification. Courts and regulators weigh several factors when deciding whether a compensation program is an ERISA pension plan: whether it systematically defers income to termination or beyond, whether a significant share of distributions actually goes to former employees, whether the plan targets workers near retirement age, and whether the employer communicates the program as a source of retirement income.³

If the program is a pension plan, ERISA’s anti-forfeiture protections apply and the cancellations are unlawful. If it is a bonus plan, the regulatory exemption applies and the forfeitures stand.

The Federal Court Rulings and the Second Circuit Appeal

On November 21, 2023, U.S. District Judge Paul G. Gardephe granted Morgan Stanley’s motion to compel arbitration, sending the individual claims to FINRA. In the same ruling, he concluded the deferred compensation plans were subject to ERISA, citing evidence that between 8% and 15% of awards were paid to former employees.⁴ The order gave Morgan Stanley the arbitration it wanted and gave former advisors a judicial finding they could quote in those arbitrations. Judge Gardephe denied the firm’s motion for reconsideration in November 2024, reaffirming that the plan is not a bonus plan and is subject to ERISA’s anti-forfeiture rules.⁵

Morgan Stanley appealed and also petitioned the U.S. Court of Appeals for the Second Circuit for a writ of mandamus to strike the ERISA conclusions. On July 9, 2025, a panel of Circuit Judges Gerard E. Lynch, Richard J. Sullivan, and Steven J. Menashi dismissed the appeal and denied the mandamus petition. The court held that Section 16(b)(2) of the Federal Arbitration Act bars appeals of orders compelling arbitration, and it rejected the argument that Judge Gardephe’s ERISA commentary effectively denied arbitration. On mandamus, the court found Morgan Stanley had adequate alternative means because it could argue to arbitrators that the ERISA conclusions were nonbinding dictum, an approach it had already used successfully.⁶ Judge Gardephe’s analysis stayed on the books as a reference point that former advisors could cite and Morgan Stanley could dispute case by case.⁷

The DOL Advisory Opinion and the Lobbying Allegations

On September 9, 2025, the U.S. Department of Labor issued Advisory Opinion 2025-03A, concluding Morgan Stanley’s program is a bonus program exempt from ERISA. Jeffrey Turner, director of the DOL’s office of regulations and interpretations, authored the opinion. It found that 91.8% of stock awards and 85.3% of cash awards went to current employees, that the program’s purpose was retention and performance rather than retirement income, that awards were unsecured and contingent, and that post-employment exceptions for death, disability, and retirement were incidental. The opinion also relied on annual disclosures telling participants the program was a “bonus program and not a retirement plan.”³⁸ The opinion directly contradicted Judge Gardephe’s rulings and, according to industry reports, prompted some advisors to drop their claims.⁹

On October 28, 2025, three former advisors — Steve Sheresky, Jeffrey Samsen, and Nicholas Sutro — sued the DOL and senior Labor Department officials in the Southern District of New York, alleging the opinion resulted from an improper lobbying campaign. The complaint says Morgan Stanley’s outside counsel at O’Melveny & Myers, including former Solicitor of Labor Greg Jacob, arranged meetings with DOL officials, including a December 2024 lunch with EBSA Deputy Assistant Secretary Timothy Hauser. Jacob is alleged to have asked a DOL official for a “Front Office nudge to get this really important ‘tort reform’ type of letter over the finish line and out.”¹⁰

The complaint also alleges Morgan Stanley hired lobbyist Kent Mason in July 2025 and that after a meeting with Acting Assistant Secretary Janet Dhillon, DOL officials sent a draft of the opinion’s statement of facts to Mason, who returned a redlined version. The plaintiffs allege that plan disclosures from 2015 through 2020 did not use the phrase “bonus program” and that Morgan Stanley suggested footnote language to paper over the discrepancy.¹¹ The suit accuses the DOL of violating its own policy against issuing advisory opinions for use in existing litigation and seeks to vacate the opinion and invalidate the underlying bonus-program regulation as applied.¹⁰

The government moved to dismiss in early 2026, arguing the plaintiffs lack standing because the opinion has no binding legal force, that it is not a final agency action reviewable under the Administrative Procedure Act, and that any harm from arbitrator interpretation is speculative.¹² As of March 2026, the motion was still pending.¹³

What Is Happening in FINRA Arbitration

Because Judge Gardephe compelled arbitration, individual recoveries are being decided in FINRA proceedings. Results have moved in both directions.

Early panels sided with the advisors. In March 2024, an arbitration panel ordered Morgan Stanley to pay more than $3 million in back pay, interest, fees, and expenses to seven former Chicago-area advisors, with individual awards from roughly $70,000 to over $600,000.¹⁴ In May and June 2024, Texas advisors Jeff M. Davis and William Swisher were awarded over $1 million combined, including nearly $638,000 in back pay plus 9% interest dating to 2015.²

Morgan Stanley then won four consecutive cases. It defeated a June 2024 claim from eight former advisors seeking roughly $850,000, prevailed in January 2025 against two brokers who moved to Rockefeller Financial, defeated Jeffrey Zapoleon’s $1.2 million claim in February 2025,¹⁴ and in August 2025 defeated Patrick O’Neill’s claim for $546,000 in back pay, roughly $400,000 in stock, and $191,000 in attorney fees.¹⁵ FINRA panels do not typically explain their reasoning, so the shift is hard to pinpoint.

Attorney Alan Rosca of Rosca Scarlato represents close to 300 former Morgan Stanley advisors in more than 30 group arbitrations and has projected total individual claims could reach 500 to 600.⁵

The Merrill Lynch Parallel

Morgan Stanley is not alone. In May 2024, former Merrill Lynch advisor Kelly Milligan filed a putative class action alleging the firm’s WealthChoice Contingent Award Plan violated ERISA’s anti-forfeiture rules.¹⁶ Wells Fargo settled a similar case, Berry v. Wells Fargo, for $79 million in 2020.¹⁷

On April 17, 2026, the Fourth Circuit affirmed summary judgment for Merrill Lynch, holding that WealthChoice is an exempt bonus plan. Applying a six-part framework, the court found roughly 92% of awards went to current employees between 2018 and 2024.¹⁸ That ruling gives Morgan Stanley an appellate decision to cite from a sister circuit, even though the Second Circuit has not yet ruled on the ERISA question.

Morgan Stanley’s 2026 Compensation Change

Less than two weeks after the DOL opinion, Morgan Stanley announced changes to its 2026 compensation plan, cutting deferred compensation deferral rates to a range of 0.75% to 7.75% of broker pay, down from 1.5% to 15.5%.⁹ Vince Lumia, head of wealth management client segments, described it as a change “designed to recognize and reward growth.” Some industry consultants viewed it as a way to deliver good news without altering the overall compensation grid.¹⁹

Where the Case Stands Now

As of mid-2026, the fight is spread across four venues. The Shafer class claims remain in FINRA arbitration under Judge Gardephe’s compel order. The Second Circuit has closed off Morgan Stanley’s direct appeal of the ERISA finding. The DOL advisory opinion stands but is being challenged in the Sheresky suit, with the government’s motion to dismiss pending. Nicholas Sutro’s individual FINRA arbitration was scheduled for May 26, 2026, with the Sheresky and Samsen arbitrations expected later in the year.²⁰

A federal judge in New York has twice concluded Morgan Stanley’s plans are covered by ERISA. The Fourth Circuit has ruled that Merrill Lynch’s structurally similar plan is exempt. The DOL has sided with the firms. That split leaves FINRA arbitrators without clear, uniform guidance, and outcomes continue to vary from panel to panel.

1
Ajamie LLP. Ajamie Wins Deferred Compensation Case Against Morgan Stanley in the Second Circuit Court of Appeals
2
AdvisorHub. Morgan Stanley Escalates Legal Battle as It Loses Another Deferred Comp Case
3
U.S. Department of Labor. Advisory Opinion 2025-03A
4
CaseMine. Shafer v. Stanley, 20 Civ. 11047
5
ThinkAdvisor. Morgan Stanley Dealt Blow in Deferred Comp Clawback Lawsuit
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U.S. Court of Appeals for the Second Circuit. Shafer v. Morgan Stanley, Case No. 24-3141
7
Wealth Management. Court Strikes Down Morgan Stanley Appeal in Deferred Comp Class Action
8
PlanAdviser. DOL Backs Morgan Stanley, Says Deferred Pay Is Exempt From ERISA
9
AdvisorHub. Ex-Morgan Stanley Brokers Sue DOL Over Deferred Comp Findings
10
PlanAdviser. Former Morgan Stanley Advisers Sue DOL Over ERISA Ruling
11
Case Filings Alert. Sheresky et al. v. United States of America et al. Complaint
12
Plan Sponsor. DOL Moves to Dismiss Opinion in Morgan Stanley Deferred Pay Dispute
13
NAPA Net. DOL Pushes Back on Advisors’ Advisory Opinion Suit
14
Financial Planning. Morgan Stanley Wins a Deferred Comp Case, JPMorgan Loses
15
AdvisorHub. Morgan Stanley Prevails Against Another Deferred Comp Claim
16
AdvisorHub. Ex-Merrill Lynch Broker Brings Class Claim Over Forfeited Deferred Comp
17
Bloomberg Law. Wells Fargo’s $79 Million ERISA Settlement Gets Judge’s Final OK
18
U.S. Court of Appeals for the Fourth Circuit. Milligan v. Merrill Lynch, No. 25-1385
19
AdvisorHub. Morgan Stanley Reworks Deferred Comp, Boosting Advisors’ Take-Home Pay
20
Plan Sponsor Council of America. Former Morgan Stanley Advisers Sue DOL Over Deferred Comp Opinion