Twelve directors of Morgan Stanley
Shareholders accused the outside directors of corporate waste and breaching their duties by setting aside 62 percent of net revenue, or $14.3 billion, for compensation in 2009.
They said the amount was excessive given that Morgan Stanley had lost $907 million that year and had accepted a $10 billion government bailout the previous fall. That has since been repaid.
Shareholders said incentive payments made in 2006 and 2007 should be clawed back because they were based on results goosed by excessive risk-taking and which the 2008 global financial crisis had shown to be ephemeral.
A New York State appeals court panel in Manhattan said the shareholders should have demanded that the board make changes before suing. The panel said investors had not shown that the board had conflicts of interest that would have made such a demand futile.
Shareholders did not show any reason to doubt that the directors' compensation awards were the product of a valid exercise of business judgment, the five-justice panel said in an unsigned opinion.
The lawsuit had been filed on behalf of the Security Police and Fire Professionals of America Retirement Fund of Roseville, Michigan, and other shareholders. It is one of many lawsuits challenging Wall Street pay practices.
Thursday's decision upheld a December 2010 ruling by New York State Supreme Court Justice Shirley Kornreich.
Other defendants included Morgan Stanley Chief Executive James Gorman and his predecessor, John Mack. Kornreich had not decided the merits of the claims against them.
Jay Eisenhofer, a lawyer for the shareholders, did not return a call seeking comment. Morgan Stanley spokesman Mark Lake declined to comment.
Morgan Stanley's ratio of compensation to net revenue fell to 51 percent in 2010 and 2011, a regulatory filing showed.
The case is Security Police and Fire Professionals of America Retirement Fund et al v. Mack et al, New York State Supreme Court, Appellate Division, 1st Department, No. 7175A.
(Reporting By Jonathan Stempel in New York; Editing by Steve Orlofsky)