Morgan Stanley Socks “Faithless Servant” With $31 Million Judgment

| Jason M. Knott

"Butler and Silver Service"

This past holiday week, many moviegoers took in The Wolf of Wall Street, which is the latest glamorization of Wall Street misdeeds to hit the big screen.  Of course, the most famous moment from a financial flick is still Gordon Gekko’s “Greed is good” speech in 1987’s Wall Street.

Greed isn’t always good, as Joseph F. “Skip” Skowron III, a former portfolio manager for Morgan Stanley, could probably tell you.   Skowron’s admitted misconduct has cost him not only his freedom, but also $31,067,356.76 that he must pay back to his employer.  Morgan Stanley v. Skowron, No. 12 Civ. 8016(SAS), 2013 WL 6704884 (S.D.N.Y. Dec. 19, 2013).

The big judgment arises from Skowron’s August 2011 plea agreement with the government, in which he admitted that he participated in a three-year insider trading conspiracy.  As news reports described, Skowron used insider tips from a French doctor to avoid losses in hedge funds he managed, and then lied to the SEC about the tips.  The judge in Skowron’s criminal case sentenced him to five years in jail, and ordered him to pay restitution to Morgan Stanley of 20% of his compensation over the time of the conspiracy. 

Morgan Stanley then sued him to recoup the rest.  In that lawsuit, it moved for summary judgment based on New York’s “faithless servant” doctrine.  Under that doctrine, if an employer can show that an employee was disloyal – either because he engaged in “conduct and unfaithfulness” that “permeate[d] [his] service in its most material and substantial part, or because he breached “a duty of loyalty or good faith” – it can recover all of the compensation that the employee was paid during the period of disloyalty.  Phansalkar v. Andersen Weinroth & Co., 344 F. 3d 184 (2d Cir. 2003).

Skowron’s guilty plea was all Morgan Stanley needed to show that he was a “faithless servant.”  In her order granting summary judgment to Morgan Stanley, Judge Schiendlin wrote that it was “patently clear” that Skowron's insider trading, and his subsequent lying and covering up of the trading, constituted disloyalty that “permeated his service.”  Skowron argued that the judge couldn’t find him disloyal because his plea didn’t establish that he lied to Morgan Stanley.  However, Judge Schiendlin found it “sufficient that Skowron knowingly committed insider trading, explicitly lied to the SEC under oath, and failed to disclose his participation to Morgan Stanley over the course of several years, . . . especially . . . given that Morgan Stanley’s Code of Conduct imposed on Skowron an affirmative duty to disclose any wrongdoing.”

As this decision shows, when an employee commits a serious act of misconduct, an employer should review its contracts and the common law to see if it may have a ground for recouping the employee’s pay.  Morgan Stanley used its offer letter to Skowron and its code of conduct to show that he was required to disclose his misconduct.  It also used the letter to demonstrate that he was not paid on a task-by-task basis, allowing it to recoup the entire amount of his salary and performance bonuses over the period in question.  However, because the contracts themselves didn’t provide for recovery in the event of misconduct, it had to look to the common law – the faithless servant doctrine – to get its money back.