A California federal judge suggested on Wednesday that he is unlikely to reduce the legal fees related to Morgan Stanley’s $10 million settlement with financial advisers, despite the discovery of a previously undisclosed "side deal" between the firm and lead plaintiff Brandon Harvey. The judge stated that although the existence of this provision should have been disclosed, it did not affect the fairness of the settlement.

During a virtual hearing, U.S. District Judge William H. Orrick expressed that, while the "walkaway" provision tied to Morgan Stanley's claims with the Financial Industry Regulatory Authority (FINRA) against Harvey had been abandoned, the overall fairness of the settlement remained intact. "The walkaway agreement should have been disclosed," Judge Orrick said, noting that it constituted a "covered side deal" under Rule 23 of the Federal Rules of Civil Procedure.

Despite the provision being dropped, Harvey had initially claimed no such side agreement existed. However, Judge Orrick contradicted this statement, suggesting that Harvey's earlier assertion to the Ninth Circuit might not have been entirely accurate. Both Morgan Stanley and Harvey had earlier confirmed that the walkaway deal was not part of the formal settlement submitted for court approval.

Mark Humenik, representing objectors Matthew Lucadano and Tracy Chen, argued that the failure to disclose the side deal tainted the fairness of the settlement. He emphasized that this hidden agreement undermined the undivided loyalty that class counsel owed to the plaintiffs.

"The fairness of the settlement has already been established," Judge Orrick responded. He added that the settlement was found to be fair in previous rulings and upheld during the appeal process.

Humenik also argued that the fee awarded to Harvey's lawyers, amounting to $2.1 million, should be returned, citing Ninth Circuit precedent on conflicts of interest in class action settlements. He pointed out that the walkaway provision was initially part of the agreement before being discarded, and claimed this provision gave Harvey a personal benefit, suggesting a potential conflict of interest.

However, Edward Wynne, representing Harvey, defended the settlement, insisting that no quid pro quo existed and that the failure to disclose the abandoned side deal was an honest mistake. Wynne clarified that the monetary aspects of the settlement were negotiated first, with the walkaway provision added as a secondary matter that was eventually removed.

Morgan Stanley’s attorney, Andrew Livingston of Orrick Herrington & Sutcliffe LLP, argued that the walkaway provision was never part of the final agreement and therefore did not require disclosure. He described it as an early, non-binding deal that was quickly rescinded.

The objectors also pointed to a separate state court case where the walkaway provision was disclosed as part of a complaint against Morgan Stanley. Harvey argued that this disclosure violated the mediation privilege, as the memorandum of understanding (MOU) outlining the provision had been shared without his consent.

This dispute is part of a protracted legal battle that began in 2018, when Harvey sued Morgan Stanley over the company’s expense reimbursement system, which he claimed violated California labor laws. Following a settlement, objectors Lucadano and Chen sought to intervene, alleging that Morgan Stanley had structured the deal to avoid a potentially larger payout in their nearly identical state court case, which was nearing trial.

Despite objections, the district court approved the settlement in 2019, which was subsequently appealed. In 2022, the Ninth Circuit remanded the case, suggesting the settlement might be overly broad. In response, the case was returned to the lower court, and in October 2023, the revised settlement was approved.

The parties involved in the case include Harvey, Morgan Stanley, and the objectors, represented by various legal firms.

The case is titled Harvey v. Morgan Stanley Smith Barney LLC and is being heard in the U.S. District Court for the Northern District of California.