Recent raiding at broker-dealers has sparked ugly and bitter feuds and led to significant damage awards, and financial industry attorneys and experts see more cases in the offing.
Last month, a three-member
Financial Industry Regulatory Authority Inc. arbitration panel ordered Morgan Stanley of New York, along with some employees, to pay $1 million in damages to a small regional broker-dealer for taking its president and five top-producing brokers.
That firm, Strand Atkinson Williams & York Inc. of Portland, Ore., alleged that Morgan Stanley had “blindsided” the firm in December “by a swift and crippling raid” of senior management, brokers and support staff, according to a complaint filed that month.
And in February, a panel of arbitrators from Finra of New York and Washington ordered independent broker-dealer Park Avenue Securities LLC of New York to pay $20 million in damages, plus interest, and attorneys fees, for raiding brokers and staff of Metropolitan Life Insurance Co. of New York.
Although
MetLife is an insurance company, the brokers who left were also licensed with Finra to sell securities.
Because their compensation is tied to their firm's stock, many brokers who took significant hits last year are continuing to look at ways to join new firms and replenish their personal coffers.
In that light, raiding cases, roughly defined as when one brokerage firm takes 25% to 30% of gross revenue from a rival or a branch, may come to the fore, experts said. Raids also have to be targeted, and typically involve key executives such as branch managers.
“Raiding is cyclical,” said Howard Berg, an expert witness used by Strand Atkinson in its case against Morgan Stanley. At the moment, he sees “a fair amount.”
Of course, the raiding claims and lawsuits that occurred before the market collapse stemmed from a variety of reasons.
Attorneys and experts who handle raiding cases noted that recruiting is as important as ever in the brokerage business, but there is a right way and wrong way to recruit. Raiding is often the result of sloppy business practices or simply getting the wrong advice, they said.
Also, raiding cases can also be painfully personal, with teams of brokers and financial advisers who have known each other for years turning overnight into adversaries.
In the Morgan Stanley case, the Finra panel decided that Morgan Stanley; Bradford Wear, the past president and treasurer of Strand Atkinson; and three former brokers of that firm were liable to pay for damages in the matter.
According to the arbitration complaint filed after the departure of brokers, Mr. Wear and the five brokers' “service to Morgan Stanley began prior to their departure from Strand Atkinson.”
The complaint added: “While the employees were still working at Strand Atkinson, Morgan Stanley induced them to use their positions as trusted officers and employees to covertly recruit fellow employees, to copy confidential information and to improperly solicit Strand Atkinson customers.”
Morgan Stanley and the former Strand Atkinson employees breached their fiduciary duty, the arbitration decision stated.
Mr. Wear was also ordered to pay $89,000 in damages to his former firm for breach of contract, and another broker, Norman Fincher, likewise was ordered to pay $152,000.
Industry attorneys and expert witnesses also said that raiding cases often center on the role of branch managers or executives who have a fiduciary duty to their employer.
Morgan Stanley declined to comment about the matter, said spokeswoman Christine Pollack.
And raiding cases also present the risk of becoming a significant drag on a firm's time and finances.
Park Avenue Securities is appealing the loss of the arbitration case, said Michael Sheehan, a partner in Chicago with Drinker Biddle & Reath LLP, who represents
MetLife in the case. The appeal is to be decided next month.
But that doesn't end the litigation.
MetLife is suing Park Avenue Securities' parent company, The
Guardian Life Insurance Company of America, in state court in Massachusetts, where the raid of some 20
MetLife agents occurred in 2006, Mr. Sheehan said.
MetLife is seeking another $30 million in damages in that lawsuit, he said.
One allegation in the suit is that executives from The Guardian and Park Avenue Securities acted along with Mitchell Doran, a former managing director with
MetLife, Mr. Sheehan said.
“We do not comment on legal matters,” said Richard Jones, a spokesman for The Guardian.
E-mail Bruce Kelly at [email protected].
