## Facts

- Morgan Stanley acquired FrontPoint Partners LLC in December 2006 and employed Joseph F. Skowron III as a Managing Director and Senior Portfolio Manager, with substantial compensation tied to fund performance.
- Skowron’s employment terms included a sign-on agreement with a New York choice-of-law clause.
- Morgan Stanley’s Code of Conduct prohibited insider trading and required employee cooperation with internal and regulatory investigations.
- During his employment, Skowron engaged in insider trading involving health-care investments and then lied to the SEC and obstructed investigations.
- Skowron pled guilty in a criminal case to conspiracy to commit securities fraud and obstruction of justice.
- Morgan Stanley sought forfeiture of all compensation paid during the period of disloyal conduct, identified as April 2007 through November 2010.

## Issues

1. Whether Skowron’s insider trading, deception of regulators, and obstruction while employed constituted disloyalty that “permeated” his service under New York’s faithless-servant doctrine.
2. Whether Morgan Stanley was entitled on summary judgment to full forfeiture of Skowron’s compensation from April 2007 through November 2010.
3. Whether any civil forfeiture award should be reduced to account for restitution ordered in the criminal proceeding.

## Decision

- The court granted Morgan Stanley’s motion for partial summary judgment on the faithless-servant claim.
- The court held that Skowron’s insider trading and related cover-up constituted disloyalty that permeated his service as a portfolio manager.
- The court ordered Skowron to forfeit all compensation received from Morgan Stanley during April 2007 through November 2010, totaling $31,067,356.76.
- The forfeiture amount was ordered to be offset by the restitution amount imposed in the criminal case to avoid double recovery.

## Legal Principles

- Under New York’s faithless-servant doctrine, an employee who is faithless in performing services may be required to forfeit compensation.
- Total forfeiture is warranted when the employee’s disloyalty permeates the most material and substantial part of the employment relationship, rather than being isolated or de minimis.
- An agent who acts adversely to the employer in any part of the employment-related dealings, or fails to disclose interests likely to influence conduct, forfeits the right to compensation for the period of disloyalty.
- Criminal convictions and admissions can remove genuine disputes of material fact regarding disloyal conduct, permitting summary judgment on forfeiture when the remaining question is the legal consequence under state law.
- Civil forfeiture remedies may coexist with criminal sanctions; an offset may be used to prevent duplicative recovery where criminal restitution has been ordered.

## Conclusion

The court held that a highly compensated portfolio manager’s sustained insider trading and obstruction of regulatory investigations constituted faithless service under New York law, requiring forfeiture of all compensation earned during the disloyalty period, with an offset for criminal restitution.


Morgan Stanley v. Skowron, 989 F. Supp. 2d 356 (S.D.N.Y. 2013)