Morgan Stanley case spotlights legal hurdles for indie recruits

A former Morgan Stanley adviser who joined LPL last month won back the right to serve his clients

Jun 10, 2014 @ 1:31 pm

By Mason Braswell

A former Morgan Stanley broker who took client information when he went independent with LPL Financial can begin serving his clients again after a federal judge dissolved a restraining order against him.

At the end of May, Judge Ronald B. Leighton of the U.S. District Court for the Western District of Washington overturned a temporary restraining order against Scott Maloy and denied Morgan Stanley's request to permanently bar the broker from soliciting his former clients.

“Clients are not property,” Mr. Leighton said, according to a transcript of the proceedings. “They're not indentured servants. They're not hostages.”

Once the judge denied the motion for permanent injunction, effectively closing the case, Morgan Stanley dropped litigation and is proceeding with a separate arbitration claim with the Financial Industry Regulatory Authority Inc.

The judge's denial comes as firms continue to fight tooth and nail to retain client assets, a metric that has become even more important as firms look to shift their business model to collect a fee on the percentage of assets under management, according to Andrew Parish, an industry recruiter and founder of AdvisorHub Inc.

“Firms are highly protective of their assets under management,” he said. “And given that there's been this pivot over the last two or three years into wealth management as the goose that lays the golden egg, that AUM is what produces those eggs.”

Morgan Stanley filed for a temporary injunction nine days after Mr. Maloy left. The case revolved around a box of shredded client documents and a series of e-mails he sent to himself in November 2012 and October 2013 with some non-public client information, including a death certificate, according to court documents, transcripts and an interview with Mr. Maloy.

The firm accused him of breaching contract and violating the Protocol for Broker Recruiting, which allows brokers to move between firms as long as they take limited client information, such as names and phone numbers. Both LPL and Morgan Stanley have signed the agreement, but firms still frequently look for potential violations, according to Danny Sarch, of career consulting firm Leitner Sarch Ltd.

“Firms look at immediately, is this a protocol firm and can we catch them doing anything that isn't in the protocol,” Mr. Sarch said. “They're looking for sloppiness and reasons that they can shut people down.”

In his defense, Mr. Maloy said the records, sent in November 2012 and October 2013, were e-mailed well in advance of his move and were necessary because as a single father, he frequently worked from home. The documents were shredded because the firm was remodeling the office and trying to go paperless, he said.

“If you read the case carefully, there's a very clear explanation,” Mr. Maloy said. “Firms are violating the spirit of their own protocol to make example of their brokers.”

Moreover, while the temporary restraining order was in place for approximately one week in advance of a hearing on May 22, Morgan Stanley also was contacting Mr. Maloy's approximately 85-90 households, approximately 80% to 90% of which he transferred from his days at A.G. Edwards Inc., according to court documents. He had only transferred four by the time the order came down, he said.

“They haven't heard from me and somehow there's word that there's litigation involved,” Mr. Maloy testified. “For those who haven't spoken to me, they're probably assuming the worst, that there's like a Bernie Madoff thing going on or something.”

Mr. Leighton ultimately found, however, that the information that Mr. Maloy took was not compelling enough to harm Morgan Stanley to the point that an injunction was necessary.

“The protocol is a good idea and if there was any substantial evidence that Mr. Maloy was violating his obligations under the protocol in any material way, I would gladly issue the preliminary Injunction,” he said.

Mr. Maloy is not out of the woods yet. Although he has beaten the injunction, he still faces a Finra arbitration claim from Morgan Stanley. His attorney, Stephanie Bloomfield of Gordon Thomas Honeywell Malanca Peterson & Dahheim, declined to comment on the Finra proceedings. She said only that it was on related grounds.

“The matter is properly before Finra. Morgan Stanley will allow the arbitration process to move forward and a panel of Finra arbitrators to decide the ultimate outcome of the case,” said Christine Jockle, spokeswoman for Morgan Stanley.

“I have been here many times with registered representatives and brokers,” Mr. Leighton said, according to a transcript of the proceedings. “The last time it was Morgan Stanley wearing the shoes of LPL.”


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