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Morgan Stanley Post "Prexit" (Broker Protocol Exit)

By Erwin J. Shustak, Esq. of Shustak Reynolds & Partners, P.C. posted on Friday, December 15, 2017.

Erwin J. Shustak

Erwin J. Shustak

Managing Partner

LocationSan Diego, California
New York, New York
Phone: (619) 696-9500 (Ext. 109)
(800) 496-5900 (Ext. 109)
Email[email protected]

Erwin J, Shustak, Esq.
619.696.9500 ext. 109
[email protected]

At the end of October, Morgan Stanley, with a mere several weeks’ notice to all its thousands of brokers- many of whom joined Morgan when Morgan was a long-time member of the Protocol for Broker Recruiting (“Protocol”) and who entered Morgan themselves following the Protocol and bringing with them, from their prior firms, client information- exited the Protocol which it had signed back in 2006.   Smith Barney, with whom Morgan merged many years ago, had been one of the original three signatories to the Protocol back in 2004.

The ostensible reason Morgan gave for exiting the Protocol was to provide better focus on its existing brokers and avoid the recruiting efforts of smaller, independent firms that Morgan alleges abused the Protocol solely to poach producers from Morgan and other wire houses.  What many believe to be the real reason, however, is to “pull up the drawbridge” and essentially trap its brokers as captives.  Morgan’s recent legal skirmishes since its “Prexit” on November 3rd, however, has shown it intends to vigorously and aggressively pursue defectors who either take client information or attempt to solicit those clients.

Since the November 3, Prexit, Morgan has initiated at least two court actions seeking Temporary Restraining Orders and Preliminary Injunctions against brokers who left Morgan after its Prexit and who, Morgan alleges, took client information and solicited clients to move with them to their new firms.  Morgan obviously wants to send a loud and clear message to its now captive brokers- if you leave, you cannot take anything with you nor solicit your former clients or we will bring the heavy hand of the law down on you like a ton of bricks.

John Fitzgerald, a New Jersey former Morgan broker, left Morgan in early December, one month after Prexit, to start his own firm.  Morgan immediately sought- and obtained- a temporary restraining order from a New Jersey Federal Court judge ordering him to return client information and relevant emails to Morgan; and restraining him from contacting Morgan clients- even those clients he obtained and serviced while at Morgan.  The court order does allow him to respond to Morgan clients who initiate contact with him and directs him to keep a log of such calls.

Morgan, like virtually all wire houses and other broker-dealers, routinely performs computer forensics on the computers used by departing brokers.  They can quickly determine, through forensic analysis, if and what the broker may have emailed to his personal email account; what was printed out, copied or downloaded to a thumb drive or other memory device.  Morgan obviously determined that Fitzgerald had taken the bare-bones client information allowed by the Protocol- client name; address; contact information; title of account- and was actively soliciting his former Morgan clients.

Fitzgerald’s defense- which had some appeal- was that Morgan gave him no clients and no leads when he joined the firm 9 years before, and he had obtained all his clients on his own following his own leads, introductions and sources.  But the Court rejected his defense on the grounds that he took prohibited information; Morgan no longer was a Protocol firm and departing Morgan brokers could not take Protocol information with them when leaving and ultimately decided to enforce the typical Morgan agreement Fitzgerald had signed containing a one-year prohibition on soliciting Morgan clients after leaving the firm.

This was the second TRO Morgan sought, and obtained, since Prexit on November 3rd.  We expect Morgan to continue to aggressively pursue claims and seek TRO’s against departing brokers who either take any information with them or violate the non-solicitation agreement.

Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes. We represent many broker-dealers, registered representatives, investment advisors, investors and businesses. For more information, or if you or your company require counsel in these areas, contact us today for a confidential, complimentary consultation.

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