WELLINGTON’S VICTORY OVER EX-PARTNER: MASSACHUSETTS JUDGE UPHOLDS CONTRACT BAN ON LURING CUSTOMERS

A Massachusetts Superior Court judge ruled the non-compete provisions in the partnership agreement of Boston-based Wellington Capital Management LLP were reasonable and enforceable.

He also ruled that former partner Arnold Schneider is obligated to abide by the agreement.

$1.4 billion left with him It was a relief and a victory for Wellington partners Duncan McFarland, Robert Doran and John Ryan. They filed the lawsuit against Mr. Schneider, their former partner, after he left the firm in late 1996 and took $1.4 billion in Wellington business with him to his new firm.

A spokesman says Mr. Schneider will appeal the decision and is working on a stay to keep the former Wellington clients at Schneider Capital Management Inc., his new firm in Wayne, Pa. Without those clients, Schneider Capital would manage $300 million. Wellington manages $175 billion in assets.

The public bickering – unusual for a publicity-averse firm like Wellington – has been watched closely by investment management professionals nationwide as a test of the enforceability of non-competition agreements.

Firms that don’t have non-compete clauses in their partnership agreements might be compelled now to consider them, says Michael Martinolich, president of Tennyson Advisors, a New York recruitment firm.

The situation at Wellington began in mid-1996 when the other partners rejected a bid by Mr. Schneider for more autonomy. Mr. Schneider, who worked in the firm’s Philadelphia office, was expelled as a partner in December of that year. Three of his eight Wellington clients quickly moved their accounts to Schneider Capital.

The Wellington partners filed for an injunction to prevent Mr. Schneider from accepting any more Wellington accounts, and the case went to trial last spring.

At the heart of the controversy is the portion of the partnership agreement that forbids partners to solicit Wellington clients for five years after leaving the firm.

Middlesex Superior Court Judge James McHugh ruled Mr. Schneider had disregarded this obligation and that he must terminate his relationship with the former Well-ington clients within 90 days. They are: Frank Russell Co. of Tacoma, Wash.; Utah State Retirement Systems of Salt Lake City; and RJR Nabisco Inc. of New York.

The former Wellington clients had argued that they were free to choose Schneider Capital as their manager. The judge’s decision questions that argument.

“I am not persuaded that Russell, Utah Retirement and RJR would have left Wellington if Mr. Schneider had announced to them that he was unavailable to manage their money following his departure,” the judge concluded in his Feb. 18 judgment.

Leading questions?

In his ruling, the judge said Mr. Schneider structured things in a way that encouraged clients and staff to follow him, yet still allowed him to say he had not solicited them.

“The fact that solicitations occurred in the form of responses to questions the clients raised does not make Mr. Schneider’s ostensibly reactive overtures any less solicitous,” the judge wrote.

The judgment notes the clients Mr. Schneider took with him didn’t check to see if he was bound by an agreement with Wellington. And Wellington officials, while offering the clients an alternative Wellington manager, neglected to tell them Mr. Schneider would be prohibited from managing their money if he started a new firm, according to court records.

Mr. Schneider discussed the possibility with some potential clients, but said he didn’t think the Wellington agreement would be enforced, according to court documents.

There were, however, a couple of small victories for Schneider Capital.

First, the decision does not require Schneider Capital to close. One portion of the partnership’s non-compete agreement restricts a departing partner from starting a competing firm or from taking Wellington staff, both of which Mr. Schneider did.

Freed from the threat of closure, Schneider Capital now can find managers, improve its contacts with consultants and build its assets under management, says spokesman John Conlin.

The judge also ordered Wellington to pay Mr. Schneider $481,449 in incentive pay for the last six months of 1996, when he worked as a portfolio manager, plus 12% interest a year from the date the payment would have been made until the date the payment is made. He also ordered that once Mr. Schneider stops managing assets for former Wellington clients he receive a 10-year series of payments as outlined in his partnership agreement.

Crain News Service