U.S. Department of Labor guidance that said a Morgan Stanley deferred compensation plan wasn't protected by federal benefits law ignored court rulings and gives the banking giant an unfair advantage in arbitration proceedings, a trio of ex-employees said in New York federal court.

According to three former Morgan Stanley employees, U.S. Department of Labor guidance that said a Morgan Stanley deferred compensation plan wasn't protected by federal benefits law ignored court rulings and gives the banking giant an unfair advantage in arbitration proceedings. (AP Photo/Mark Lennihan, File) Steve Sheresky, Jeffrey Samsen and Nicholas Sutro asked the court Tuesday to strike down the agency's September advisory opinion saying the Morgan Stanley Smith Barney LLC deferred compensation plan was a bonus program rather than a benefit plan and subject to the Employee Retirement Income Security Act.

According to the former employees, Morgan Stanley lobbied the DOL for over a year after U.S. District Judge Paul G. Gardephe's November 2023 decision finding that the deferred compensation plan was subject to ERISA while sending claims over the plan to individual arbitration before the Financial Industry Regulatory Authority. Judge Gardephe refused to reconsider his holding that the plan was subject to ERISA in November.

Sheresky, Samsen and Sutro said they are among hundreds of former Morgan Stanley employees now arbitrating their claims, and "Morgan Stanley is … using the advisory opinion as a sword in the FINRA arbitrations, just like it told the DOL it would do."

"The DOL knew Morgan Stanley sought an advisory opinion … to defeat its former financial [advisers'] cases, and yet weighed in on the exact issue decided twice by this court and pending before the arbitrators, putting its thumb on the scale in Morgan Stanley's favor," the ex-employees wrote.

A group of former Morgan Stanley advisers, including Sheresky and Samsen, filed a suit in December 2020, alleging they were denied deferred compensation they earned from commissions while employed at the investment banking company. The suit challenged a vesting schedule for the deferred compensation plan that workers claim unlawfully forced them to forfeit certain benefits they were owed when they left.

Sheresky, Samsen and Sutro said in their complaint Tuesday that after Judge Gardephe sent the class claims to individual arbitration, they and many others filed arbitration claims to recover the compensation they allege they're owed.

Meanwhile, Morgan Stanley and its attorneys spent months meeting with DOL officials in an attempt to have the agency issue an advisory opinion that would essentially undo what it called a "very sloppy district court" decision and defeat the arbitration claims, according to the complaint. In July — the same month that the Second Circuit refused to upend Judge Gardephe's ruling, Morgan Stanley hired a Washington, D.C., lobbyist to ramp up its influence campaign, Sheresky, Samsen and Sutro claimed.

The resulting advisory opinion, issued by the DOL on Sept. 9, neglected to mention Judge Gardephe's decisions and erroneously adopted Morgan Stanley's position that the deferred compensation plan was explicitly a bonus program, even though multiple years of plan documents said nothing about bonuses, the former employees said.

Sheresky, Samsen and Sutro said the DOL "further adopted Morgan Stanley's mischaracterization about guidance and proposed regulations in its advisory opinion."

For example, Morgan Stanley said FINRA, the Federal Reserve, the U.S. Securities and Exchange Commission, and the Office of the Comptroller of the Currency had issued guidance and proposed regulations requiring that regulated entities defer portions of employee incentive compensation, and the DOL accepted this position, according to the complaint.

The former employees said the DOL also relied on a "legally invalid" regulation that specifies when bonus payments are not part of a pension plan subject to ERISA. According to the complaint, federal benefits law covers any plan that defers employee income beyond termination, and does not include the bonus regulation's additional requirement that the deferral be "systematic."

"A DOL regulation cannot supersede ERISA's clear statutory command," Sheresky, Samsen and Sutro wrote.

Doug Needham of Motley Rice LLC, who is representing the Morgan Stanley workers, said in a statement that "the Department of Labor violated its own procedures, ignored ERISA's language and case law, and accepted Morgan Stanley's position about inapplicable proposed rules and regulations when it issued the advisory opinion."

"This is exactly what Administrative Procedure Act was designed to prevent," Needham added.

A spokesperson for Morgan Stanley declined to comment Wednesday.

Because of the government shutdown, the Department of Labor could not be reached for comment.

The workers are represented by F. Franklin Amanat, Mathew P. Jasinski, Douglas P. Needham and Riley Breakell of Motley Rice LLC, Thomas R. Ajamie, John S. Edwards Jr. and Courtney D. Scobie of Ajamie LLP, Alan L. Rosca, Paul Scarlato and Lisa Fish of Rosca Scarlato LLC and Seth Klein of Izard Kindall & Raabe LLP.

Counsel information for the U.S. Department of Labor was not immediately available.

The case is Sheresky et al. v. United States of America et al., case number 1:25-cv-08935, in the U.S. District Court for the Southern District of New York.