After losing about two dozen brokers to poaching by the big boys on Wall Street, David Lerner had no interest in settling claims.
"I reached a point where I felt I had to protect my business," says Mr. Lerner, who heads David Lerner Associates Inc. in Syosset, N.Y.
So Mr. Lerner went to the mat on two arbitration cases and, to the surprise of many observers, ended up body slamming two giant rivals, Salomon Smith Barney Inc. and Prudential Securities Inc., both of New York.
In separate NASD arbitration awards, panels ordered Smith Barney and Pru to pay $1.07 million and $515,000, respectively, to Mr. Lerner's firm, which has about 170 brokers and is primarily a fixed-income shop.
The awards stand out because most broker-dealers would rather settle disputes involving the recruitment of brokers, according to industry observers and recruiters. But whether other firms will follow his lead and spark a trend remains to be seen.
Firms that pay large upfront bonuses to brokers to get their books of business will have to consider the potential costs of their actions, says Michael Shannon, head of the securities broker-dealer practice at Brown Raysman Millstein Felder & Steiner LLP of New York.
The recent arbitration awards may curtail the wirehouse practice of paying large upfront bonuses to lure brokers from small rivals, adds the lawyer, who represents David Lerner Associates.
But smaller broker-dealers fear the attention and notoriety a full arbitration hearing may bring. Plus, the legal costs of arbitration are prohibitive, observers say.
As for the poaching firms, settlements - typically between 10% and 15%, of deals - are treated as a cost of doing business, observers add.
A spokeswoman for Salomon Smith Barney did not return a call to comment. Pru has no comment, according to a spokesman.
raid and pay
The
bear market has slowed the number of arbitration cases over individual brokers breaking non-compete clauses and "raids" of groups of brokers and branch managers, says Michael McAllister, a partner in New York with Satterlee Stephens Burke & Burke LLP.
Brokers "are fearful of moving and losing customers," he says.
For companies that press arbitration claims, NASD panels lately have ordered poachers - and the brokers and branch managers jumping ship - to pay up for their raids.
In January, for example, Fahnestock & Co Inc. was awarded almost $22 million, including interest - an NASD record - as compensation for a 1997 raid.
At the time J.J.B. Hilliard, W.L. Lyons Inc. of Louisville, Ky., lured almost 20% of Fahnestock's brokers. Ten branch managers involoved in planning the raid were ordered to pay the bulk of the monetary damages.
Still, the nature of the issues at dispute appears to be "in flux," particularly as broker-dealers base more of their business on gathering assets, says Richard Ryder, editor of Securities Arbitration Commentator in Maplewood, N.J.
"Over time, the firm gets its hooks into customer assets," Mr. Ryder says "A broker may talk to the customer a lot less than he used to," and that leads to greater retention of clients by the firm when the broker leaves.
He notes that, in the individual disputes, that may lower damages because brokers potentially carry fewer assets to the new firm.
Lawyers agree brokers and branch managers have to be careful when changing firms.
In the Fahnestock case, the 10 individuals ordered to pay more than 80% of the award were branch managers or execs who trained recruits.
The penalties were heavy, ranging from $467,000 to $4.3 million. "Can a branch manager leave? Absolutely," Mr. McAllister says. "But he can't walk out the door with his troops."
Paper shuffle
Mr. Lerner says about two dozen of his brokers have been picked off by other firms during the past few years. The upfront offers ranged from $1.1 million to $1.2 million.
Ralph Haebich was a 12-year veteran with David Lerner Associates when he moved to Salomon Smith Barney in August 2001.
For his services, Salomon has to pay $870,000 in compensatory damages, and Mr. Haebich has been ordered to pay $200,000 for attorneys' fees and costs, according to the NASD award decision.
The $870,000 is "precisely what David Lerner was claiming for five-years of lost profit," says Mr. Shannon.
For snagging 15-year Lerner Associates veteran Bruce Brown in November 2000, Prudential and Mr. Brown are jointly liable for $515,000 in compensatory damages and attorneys' fees.
Paperwork figured prominently in both arbitration decisions, says Mr. Shannon.
"Copies of certain statements were given to the firms before the broker left," he explains.
Both firms used outside services to prepare the broker's clients for the change, he says. "That work was completed one week before the broker left" clearly suggesting he was poached, he adds.
The Lerner brokers had non-compete clauses in their contracts, but that didn't prevent them from working for another firm, says Mr. Shannon. They were, however, restricted from using records of the company and soliciting clients for periods of one and two years.
During the bull market, wirehouses competed for top brokers. Prudential became notorious for bidding up the price of brokers.
Brokers producing $1 million in commissions were offered upfront deals of 100% of their trailing 12 months' commissions, with Prudential offering 100% to 150%.
For Mr. Brown, Prudential paid an upfront bonus of more than $1.1 million.
Last year, David Lerner Associates won a similar $385,000 arbitration against
UBS PaineWebber Inc. of New York, says Mr. Shannon. It has another arbitration claim pending against Smith Barney.
