Schwab wins $957K award from RBC

Panel rules that broker violated terms of employment agreement

Oct 12, 2008 @ 12:01 am

By Dan Jamieson

Charles Schwab & Co. Inc. has won a nearly $1 million award in an unusual raiding case against RBC Wealth Management Inc.

The case erupted after Philadelphia broker Scott Karpiak, who was part of San Francisco-based Schwab's advice unit, left to join the Minneapolis firm, previously known as RBC Dain Rauscher.

He ended up transferring about $24 million in assets to RBC, said Michael Greco, a partner at Fisher & Phillips LLP of Philadelphia, who represented Schwab.

An arbitration panel of the Financial Industry Regulatory Authority Inc. of New York and Washington late last month awarded $957,000 to Schwab.

The panel upheld Schwab's employment agreement, which specified that Mr. Karpiak would owe Schwab 4% of any client assets he took from the company.

That type of clause is known as a "liquidated damages" provision and is unique to Schwab, Mr. Greco said.

The case could raise the stakes for Schwab brokers who change firms and solicit clients.

"It's the first case of its type that I'm aware of," Mr. Greco said.

He is handling similar cases for Schwab, which he declined to discuss.

A spokeswoman for RBC and Mr. Karpiak's attorney, Elliot Good of Chorpenning Good & Pandora Co. LPA of Columbus, Ohio, didn't return calls seeking comment. Other legal observers agreed that the Karpiak case appeared to be unique.

Typically, similar cases against wirehouse brokers are settled for a fraction of a broker's annual production. Brokers typically produce about 1% or less of assets under their control.

By contrast, the 4%-of-assets figure "seems heavy in that it represents multiple years of revenues from that size book of business," said Christopher Vernon, a founding partner of Vernon Healy LLC in Naples, Fla., who defends brokers. "In this case, 4% may have seemed equitable to the arbitrators if this was a book of business that Schwab ... just handed to the broker," he said.

"It is a different situation [than at a wirehouse], where you develop your own book by pounding the pavement," Mr. Greco said. At Schwab, brokers such as Mr. Karpiak work in teams and are given ac-counts to service, he said.

Still, the award could be a recognition by the arbitrators that "there's been [an industry] transition from a transaction-based business model to an asset-based business model," Mr. Greco added.

Legal observers doubt that other firms will follow Schwab and put liquidated-damages provisions in their broker contracts. "The problem is that a liquidated-damages clause in a contract may prevent firms from obtaining temporary restraining orders against their former employees," said Brent Burns, a lawyer at Lax & Neville LLP in New York.

Courts usually will grant restraining orders only if the plaintiff brokerage firm can argue that it will be irreparably harmed if a broker isn't prevented from taking clients.

"You can't go into court claiming that you have irreparable harm when the contract contains a liquidated-damages clause," Mr. Burns said.

But in the Karpiak case, Schwab was able to obtain a court injunction late last year that prevented him from soliciting Schwab customers.

The arbitration panel in Mr. Karpiak's case didn't explain its reasoning.

"So it is impossible to tell why the panel felt giving Schwab liquidated damages was proper in this case or why awarding such damages together with injunctive relief was proper," said Larry Moy, an employment lawyer and partner at Outten & Golden LLP in New York.

Mr. Greco said that a carefully drafted liquidated-damages provision and injunctive relief can go hand in hand.

"Sometimes the injunction can stop further harm, but it can't undo what's been done," he said. Liquidated damages can compensate for prior improper conduct.

In court testimony given in response to Schwab's request for an injunction against him, Mr. Karpiak admitted preparing a spreadsheet of customer names, addresses and account titles from information that he got in part from the firm's databases. He gave the information to RBC prior to departing Schwab.

Mr. Karpiak ultimately contacted about 90 clients, 17 of whom transferred their accounts to RBC.

He claimed that he was one of 200 individuals who were selected by Schwab to assist in developing a fee-based advisory program in 2001.

"Brokers changing jobs always get into trouble taking paper or data owned by their former employer," said Rodney Heggy, a lawyer with Heggy & Associates LLC in Oklahoma City, Okla. He said that reps need to be able to create an online phone book of clients from memory after they leave a firm.

E-mail Dan Jamieson at djamieson@investmentnews.com.

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

May 02

Conference

Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in four cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Featured video

Events

The power of data

Your clients have financial news and data at their fingertips, but donít know how to interpret it. Katy Gibson of Envestnet|Yodlee and Blake Kannady of Envestnet discuss the power of leveraging aggregated data.

Recommended Video

Path to growth

Latest news & opinion

Morgan Stanley reports a loss of advisers after exiting the protocol for broker recruiting

The firm said it lost 47 brokers in the fourth quarter, the most in any quarter of 2017.

Morgan Stanley's wealth management fees climb to all-time high

Improvement reflect firm's shift of more clients into fee-based accounts priced on asset levels, which boosts results as markets rise.

Legislation would make it harder for investors to sue mutual funds over high fees

A plaintiff would have to state in their initial complaint why fiduciary duty was breached, and then prove the violation with 'clear and convincing evidence.'

Relying on trainees, Merrill Lynch boosts adviser headcount in 2017

Questions remain about long-term effectiveness of wirehouse's move away from recruiting experienced brokers.

Supreme Court review of SEC judges could roil pending cases

But long-term, the agency may get around questions of constitutionality by changing the way it brings on administrative law judges.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print