INVASION OF THE (ALLEGED) EMPLOYEE SNATCHERS: PUTNAM VS. LIBERTY IS A LEGAL CHILLER

A recent precedent-setting court decision involving allegations of customer-snatching at Boston’s Wellington Management Co. may affect another legal battle — this one over allegations of employee raiding — that touches just about every big-name money manager in Beantown.

For the past 15 months, Putnam Investments has been embroiled in a bitter lawsuit against Liberty Financial Cos., as well as several Putnam defectors who went to work there. Making matters worse for the defendants: The judge is the same one who ruled in Wellington’s favor.

Putnam alleges that the marketing professionals breached contractual and anti-solicitation agreements when they quit and went to work for Liberty in 1996 and 1997, and subsequently raided Putnam of employees.

Among those named in the suit: Stephen Gibson, president and chief executive officer of Colonial Group Inc., a mutual fund subsidiary of Liberty.

Liberty, Mr. Gibson and the two other former Putnam employees maintain they broke no such agreements. They referred calls to a company spokesman, who declined to comment.

The outcome of the case could have far-reaching implications for executives at money management companies, especially if it is decided in Putnam’s favor. At the very least, such a ruling could put a crimp in the propensity of executives to follow colleagues to other firms.

While non-solicitation agreements are rarely enforced, a ruling in Putnam’s favor is not out of the question. In February, the judge in the Putnam case, Massachusetts’ Middlesex Superior Court Judge James F. McHugh, upheld Wellington’s non-solicitation agreement with its former star portfolio manager, Arnold C. Schneider.

While the Wellington case involved the solicitation of clients — as opposed to employees — the ruling certainly sharpens the teeth of Putnam’s argument.

sees reason for worry

“I’d be worried about the (Wellington) case,” says Pamela Wilson, a mutual fund attorney at the Boston law firm of Hale & Dorr. “It does establish that non-compete and non-solicitation provisions in a contract are not inherently unenforceable.”

With that in mind, lawyers for Liberty and the other defendants last month quickly filed a motion to draft the judge a memorandum pointing out the distinctions between the two cases. “This case rests on a very different factual and legal foundation than did Wellington,” they argued in the motion. “There is no evidence of unseemly machinations that the court found so troubling in that case.”

The motion was denied for procedural reasons but legal experts say it is likely to be resubmitted.

That’s if the case doesn’t get decided first. In an attempt to avoid a lengthy — and expensive — trial, both sides asked Judge McHugh in February to render a verdict. He is not expected to agree. But he is trying to encourage the two sides to settle the case with a court-appointed mediator.

Industry observers say the lawsuit is likely to drag on, possibly for years. Boston law firm Sullivan & Worcester, which is representing Putnam, is using every trick in the book to make the case as difficult as possible for Liberty and the other defendants, who are represented by Eckert Seamans Cherin & Mellott, also based in Boston.

On Christmas Eve, for example, Mr. Gibson received a note from Putnam’s lawyers requesting more than 805 documents, with a salutation that read, “Happy Holidays!”

phone records sought

Court documents also show that Putnam’s lawyers want to subpoena the home phone records of Mr. Gibson and the other defendants, Louis Tasiopoulis and James Tambone.

The suit does not set an amount of damages. But Putnam believes the executives have forfeited their right to receive money from incentive compensation plans, according to court documents. Putnam officials decline to comment.

If nothing else, the defendant attempts to portray Putnam as a fortress where employees have limited mobility — in a provincial, talent-hungry city.

For instance, among the hundreds of documents filed is a 1994 letter from Paul J. Hondros, then president of Fidelity Institutional Services Company, to William Shiebler, Putnam’s chief of retail sales, in which Mr. Hondros (who is now with PBHG Funds) promises to honor Mr. Shiebler’s request to “lay off” hiring Putnam employees. Mr. Hondros goes on to say that he gave instructions to cease negotiations with three Putnam employees who had “progressed far into the interview process and to terminate other conversations.”

Mr. Hondros couldn’t be reached for comment, but industry experts say such informal agreements between money managers are common, but are not usually written.

While Putnam’s legal bills could easily run into the millions, the firm is no doubt hoping to use the suit to send a strong message to employees thinking of defecting and to rivals who want to hire them.

“The industry is becoming more and more litigious,” says Philadelphia mutual fund consultant Burton Greenwald. “It’s a sign of the times. Everyone has got very deep pockets because they are making a lot of money right now.”