Since the Protocol for Broker Recruiting was established in
2004, the practice of firms routinely suing each other when their
advisors defected has largely faded away.
However, some highly publicized cases over the past few weeks
have advisors and their attorneys questioning whether the bad old
days of claims and counterclaims - with clients stuck in the middle
- are set to return.
The protocol permits advisors switching from one firm to another
to take basic client contact information with them. This includes
names, addresses and phone numbers, for example, but not account
numbers or positions. It essentially allows advisors switching
firms to contact their clients once they leave their prior firm to
see if they also want to switch their accounts.
The protocol currently has over 400 signatories, according to
Thomas B. Lewis, a partner-in-charge of the employee litigation
group at Stark & Stark. But, he said, only around 30 of those
are national firms, with the remainder made up of small firms with
only a few advisors.
In particular, the "boutique" firms have been reluctant to sign
the agreement, and appear to be paying the consequences. Last week,
Goldman Sachs [GS] filed a claim against five former advisors and
two employees who jumped to rival Credit Suisse [CS], accusing them
of taking confidential information with them.
The firms quickly came to a settlement, but not before suffering
through some unwanted publicity.
Neither Goldman Sachs nor Credit Suisse is a signatory to the
protocol, according to Lewis, and Goldman Sachs, in particular,
takes the attitude that the clients belong to the firm, not the
advisor, and therefore should not move if an advisor defects.
In addition, Goldman Sachs does not poach many advisors from
other firms, Lewis said, and so they don't feel they need the
proteciton of the protocol. Instead, the firm generally hires
graduates from the top business schools.
"It breeds from within and elevates from within," he said.
Indeed, the lawsuit filed against the defecting advisors hints
at Goldman's attitude. In the firm's non-solicitation agreements it
said that advisors may develop business with people they knew
before they joined Goldman Sachs, but "in developing such business,
you will be acting as a representative of Goldman Sachs and will be
utilizing and benefiting from Goldman Sachs' goodwill, reputation,
name recognition and other assets and resources."
Therefore, these clients, except direct relatives, are also
subject to the non-solicitation clause.
However, while the high-end boutiques may deliberately avoid
signing the protocol to be able to enforce their own non-compete
clauses, Wachovia Securities, which is now Wells Fargo Advisors,
[WFC] is taking advantage of one regional firm's delay in jumping
on the protocol bandwagon.
Wachovia has aggressively pursued former advisors who jumped to
Stifel Nicolaus following Wachovia's takeover of AG Edwards in
October 2007. At the time of the acquisition, Stifel was not a
signatory to the protocol, but it signed up in August 2008.
Wachovia brought some claims before Stifel signed the protocol
and others afterwards, but so far, Wachovia has not been successful
in most of its claims. Still, a number of arbitrations remain
However, it's not just non-signatory firms that are facing these
actions. Last week, Morgan Stanley [MS] brought a case against
HighTower advisors Steven Ayer, Roman Ciosek, John Lang, Peter Lang
and Jeffrey Sullivan, accusing them of breaching the Protocol when
they moved from Morgan Stanley.
On Monday, a New York Supreme Court judge denied Morgan
Stanley's request for a temporary restraining order against the
Elliott Weissbluth, the chief executive officer of HighTower,
vigorously denied the claims and said they are remnant of the
pre-protocol era when firms launched these suits to intimidate
advisors trying to switch firms and prevent their clients from
Weissbluth said that his firm is committed to following the
"We respect the integrity of the Protocol because it's a
contract among market participants, and everyone needs to respect
it to make it work," he said.
Alan Foxman, a securities attorney at Boca Raton, Fla.-based
Fred Chikovsky & Associates, said he would be surprised if
there was a sustained increase in claims at the moment, given all
of the movement among brokers over the past year.
"I can't imagine we'll return to the days when the same pattern
was repeated over and over again," he said. "They used to spend
money, time and effort and aggravate their clients."
Foxman suggested that Morgan Stanley may have decided to take
action against the advisors who went to HighTower because that firm
is unlikely to be a focus of their own recruiting efforts. "There's
less concern that they'll end up on the receiving end of an
injunction next week," he said.
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