Morgan Stanley wins dismissal of 'pay to play' suit

Ruling hinged on the firm's disclosure of revenue-sharing agreements

Feb 27, 2014 @ 10:46 am

By Mason Braswell

Morgan Stanley; fraud, pay-to-play, federal court
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A federal judge has thrown out a lawsuit against Morgan Stanley alleging that the firm violated the Employee Retirement Income Security Act of 1974 by unlawfully directing business to ING as part of a “pay to play” scheme.

Judge Analisa Torres of the U.S. District Court of the Southern District of New York said that Skin Pathology Associates Inc. did not have a case under ERISA law, because a reasonable amount of revenue sharing was permitted under ERISA, provided that it was disclosed.

Moreover, the order ruled that Morgan Stanley only needed to provide Skin Pathology with a general description, and not the details of how much was revenue was being shared as part of the agreement.

“Fee-sharing arrangements, kickbacks, 'soft dollars,' etc., between service providers [such as Morgan Stanley] and third parties [such as ING] make a contract for services between plans and service providers unreasonable under [ERISA] if they are not disclosed,” Ms. Torres wrote in her order. “Put differently, the cover-up is worse than the crime.”

(More: Morgan Stanley shuffles top leadership with addition of new role)

Skin Pathology Associates argued in its original complaint that it had elected to have ING Life Insurance and Annuity Co. manage its retirement assets because of a recommendation from Morgan Stanley.

The medical lab said that Morgan Stanley's recommendation was biased because it received additional compensation from some, but not all, of its so-called Alliance Partners, or top-tier money managers, for the amount of assets that are sent to them.

“Plaintiff alleges that Morgan Stanley's additional compensation arrangement constitutes a conflict of interest, because instead of finding the best fit for the plan, Morgan Stanley promoted Alliance Partners, like ING, that provide the 'pay to play' fee,” Ms. Torres wrote.

Under certain circumstances, that could have constituted a violation of ERISA law if Morgan Stanley had been found to have acted as a fiduciary or if Morgan Stanley had been paid with retirement plan assets, according to David Levin, a partner focusing on ERISA law for the firm Drinker Biddle & Reath.

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But Ms. Torres said that in making the recommendation to ING, Morgan Stanley's role was only as a “party of interest,” not a fiduciary, and that no plan assets changed hands as part of the agreement.

ERISA permits brokers or service providers such as Morgan Stanley to accept compensation for directing business to a retirement plan provider, provided that it is “reasonable compensation.”

According to the ruling, Morgan Stanley provided Skin Pathology with a description of the compensation arrangement that Skin Pathology challenged in the litigation. The court said that based on ERISA law, Morgan Stanley did not have to provide a full rundown of how much payment it received.

“In all of these cases, disclosure becomes a critical aspect,” Mr. Levin said.

“It doesn't make [something that's] good bad or bad good,” he said. “It's simply the notion that someone can raise it and deal with it.”

A spokeswoman for ING, Emily Dawe, said the firm had no comment.

Skin Pathology Associates dismissed ING as a defendant during the course of hearings.

The medical lab didn't return calls seeking comment.

Morgan Stanley said it is happy with the dismissal.

“We're pleased the court dismissed these unfounded claims,” Morgan Stanley spokeswoman Christy Jockle said.

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