Afraid of Being Sued by Morgan Stanley, Merrill Lynch, Wells Fargo or UBS? Here's How to Strike First
As originally published in Financial Advisor IQ
The departure of two major wirehouses – Morgan Stanley in November and UBS in December – from the Protocol for Broker Recruiting sent shockwaves through the industry, particularly among advisors contemplating jumping ship and other companies planning to hire from these firms and other broker-dealer firms.
Since their exit from the protocol, Morgan Stanley and UBS have sued a number of former advisors, typically for breach of contract, misappropriation of trade secrets and unfair competition.
But even protocol-member firms such as Merrill Lynch have sued former advisors for the same reasons, citing – among other things – employment agreements that prevent the advisors from soliciting former clients until one year after their departure from the firm.
At stake is millions or billions of client assets and whether they stay put with the broker-dealer firms or follow the advisors to their new practice.
In instances where broker-dealer firms get the TROs they seek from the courts, their former advisors typically must cease and desist from any attempts or perceived attempts to solicit the business of their former clients. Following the TROs, these cases either end up tied up for many months -- or even years -- in Finra’s arbitration forum or are settled. Either way, while the disputes are pending the advisors are prevented from taking with them clients whom they often have serviced for years and in some cases have built close personal relationships
with.
“If a fight looks unavoidable or inevitable, then you might as well strike first. Be the plaintiff, choose the timing and pick your court.”
Erwin Shustak
Shustak Reynolds & Partners
One law firm that often represents brokers and advisors – Shustak Reynolds & Partners – has developed a strategy to prevent departing advisors from being paralyzed by a TRO: a preemptive strike in federal court.
The potential for business paralysis is “the ultimate concern” when brokers or advisors transition to new firms, says Erwin Shustak, the law firm’s San Diego, Calif.-based managing partner.
“We’re not worried about the ultimate merit as much as we are worried that our clients will get stuck in a frozen no-man’s land where they can’t transition clients over while the brokers at their former firm are splitting up their clients,” Shustak says. “It’s the ability to transition the client assets, the book of business that we’re after.”
It’s much harder for broker-dealer firms to get TROs against their former advisors in federal courts because they tend to be more meticulous. Federal courts take their time to deliberately give all parties notice and the opportunity to present their arguments, and are generally averse to any knee-jerk granting of TROs, according to Shustak.
In contrast, he says state courts “tend to issue TROs more readily” than federal courts. An example of a speedy TRO was one granted by the Jacksonville Division of the U.S. District Court of the Middle District of Florida in January, one day after the complaint was filed by Morgan Stanley against its former registered representative, Daniel Abel. Shustak Reynolds & Partners was not involved in that case.
“If a fight looks unavoidable or inevitable, then you might as well strike first,” says Shustak. “Be the plaintiff, choose the timing and pick your court.”
Shustak says the law firm seeks “declaratory relief” for their clients or a declaration that its clients have not violated the federal Defend Trade Secrets Act and have not breached enforceable provisions in agreements. Most recently, the law firm used this strategy in a case it filed against Morgan Stanley on May 18 on behalf of its clients Connie Sanders-Timian and Michael O’Leary, former advisors at the wirehouse, and Hilltop Securities, the firm where the advisors moved. Sanders-Timian and O’Leary joined Morgan Stanley’s San Diego office in March and July of 2012, respectively, and were both registered with the wirehouse until May 21 this year.
Morgan Stanley spokeswoman Christine Jockle declined to comment on this pending case. But back in May she told media: “Claimants seem determined to fight claims that Morgan Stanley has not made, making this action premature in the extreme. The advisors’ agreements comply fully with California law, and the suggestion that injunctive relief is necessary to prevent an action Morgan Stanley has not even pursued against them defies logic and common sense.”
Shustak says the law firm has used this preemptive strike strategy seven times over the past three years, but it expects to use it more often, given the more litigious environment following the departure of firms from the broker protocol.
Following the exits of Morgan Staney and UBS from the protocol, Dennis Concilla, Columbus, Ohio-based head of Carlile, Patchen & Murphy’s securities litigation and regulation practice group – who closely monitors membership in the protocol – says exits have increased significantly since those high-profile departures. “In anticipation of our clients getting caught up in TROs, which can be a nightmare for them, we’ve been bringing preemptive strikes in federal court,” Shustak says. “Instead of waiting around for a firm to start a new TRO motion in state court, we act very proactively.”
Particularly when the individuals work for “the more litigious firms like Morgan Stanley or Merrill Lynch,” the law firm advises that “right before they leave, we file the federal court action,” Shustak says.
If the broker-dealer firm “makes noises or goes into state court, we go to the state court and argue that there’s already action pending in the federal court and it has to be heard there,” he says.
Shustak says the first time the law firm used this strategy, the broker-dealer firm, which he declined to identify, was stuck in federal court proceedings for around three years.
In that particular case, “our clients were able to transition a very significant volume of business without interference,” Shustak says. “That was their objective and we accomplished that objective.”
Shustak says some brokers or advisors are concerned about the costs associated with launching a preemptive strike in court, but he believes it’s a small price to pay compared with the costs of being placed on the defensive side, particularly the cost of the disruption to one’s business.
“It’s like buying fire insurance on your house. If you buy a $2,500 fire insurance policy, and your house doesn’t catch fire, then at the end of the year you’re out of pocket $2,500,” Shustak says. “But if your house catches fire, then that insurance is very much worth it.”
