989 F. Supp. 2d 356
S.D.N.Y.2013Background
- Morgan Stanley acquired FrontPoint Partners in 2006; Skowron was co-portfolio manager.
- Skowron was offered $1.5 million base salary plus performance-based fees under an Offer Letter and Sign-on Agreement with New York choice of law.
- Code of Conduct required insider-trading prohibition, confidentiality, and self-reporting; related duties were part of employment.
- Between April 12, 2007 and December 1, 2010, Morgan Stanley paid Skowron $31,067,356.76 in compensation.
- Skowron pled guilty on August 15, 2011 to conspiracy to commit insider trading covering April 2007–November 2010; he was sentenced to 5 years and Morgan Stanley received restitution of 20% of his compensation during the conspiracy period.
- Morgan Stanley filed this civil action seeking forfeiture of the remaining compensation during the conspiracy period and other remedies; the court granted partial summary judgment on the faithless servant claim.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Governing law for the faithless servant claim | New York law applies due to contract incorporation. | Connecticut law should apply; Sign-on provision is narrow. | New York law governs. |
| Whether Skowron was a faithless servant under New York standard | Skowron’s insider trading and cover-up breached loyalty and permeated his service. | misconduct did not substantially permeate his entire service. | Skowron is faithless under either standard; substantial permeation shown. |
| Extent of forfeiture: apportionment or full forfeiture | Only tainted compensation should be forfeited under apportionment. | Fees were not task-by-task; apportionment should apply. | No apportionment; Skowron must forfeit all compensation during disloyalty. |
| Relation to contract: can faithless servant claim coexist with contract | Faithless servant theory supplements breach of contract; not barred. | Equitable claims barred by contract. | Contract does not bar faithless servant claim; doctrine allows relief on same facts. |
Key Cases Cited
- Carco Grp., Inc. v. Maconachy, 383 Fed.Appx. 73 (2d Cir. 2010) (faithless servant claim grounded in agency/employment; contract-law framework)
- Carco Grp., Inc. v. Maconachy, 718 F.3d 72 (2d Cir. 2013) (Carco II; affirming related contract/faithless servant rulings)
- Phansalkar v. Andersen Weinroth & Co., L.P., 344 F.3d 184 (2d Cir. 2003) (two standards for forfeiture; apportionment when commissions)
- Samba Enter., LLC v. iMesh, Inc., 390 Fed.Appx. 55 (2d Cir. 2010) (faithless servant doctrine applied to breach of fiduciary duty and forfeit compensation)