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UBS Lawsuit Hinges on Definition of Solicitation

By Rita Raagas De Ramos July 12, 2017

Legal strife between UBS and some of its former brokers has brought into sharp focus the risks advisors face when leaving a wirehouse and taking clients with them – and might serve as a cautionary tale for other advisors with itchy feet.

At issue is whether a departing team violated non-solicitation agreements, among other things, to poach clients from UBS. That UBS would take such high-profile legal action against former brokers is notable because the wirehouse was one of the founding signatories of the Protocol for Broker Recruiting, which since 2004 has permitted brokers under certain circumstances to take some client information with them without getting sued.

UBS “definitely has a leg to stand on” with the lawsuit and temporary restraining order request it has filed separately against a team of four ex-UBS advisors who have decided to go independent, says one expert securities lawyer and longstanding industry arbitrator. But the ultimate ruling could swing either way and both parties will be hurt in the process, he says.

The defendants in the UBS lawsuit and TRO request – Phil Fiore, Jeff Farrar, Louis Gloria and Thomas Gahan – operated as partners of the FDG Group at UBS prior to forming their new RIA, Procyon Partners, in Shelton, Conn. While at UBS, the advisors oversaw $8 billion in institutional assets and more than $400 million in private wealth assets on both a non-discretionary and discretionary basis, according to Dynasty Financial Partners. Procyon is now part of the Dynasty RIA network, which means Procyon relies on Dynasty for analytics and operational support. Chris Foster was also with FDG and is also now with Procyon, but he is not named as a defendant in the UBS lawsuit and TRO request.

“The protocol doesn’t trump all sins ... It won’t protect you if you’re misrepresenting the situation.”
Dennis Concilla
Carlile, Patchen & Murphy

Fiore founded Procyon earlier this year and was joined by the other ex-UBS advisors in early June. Fiore was apparently fired from UBS in November 2016 after the wirehouse supposedly concluded that while on heightened supervision he violated various firm policies – including not disclosing he served as an unpaid director of a not-for-profit entity, not seeking approval to run a charity golf tournament or write blog posts, and “not disclosing that a new client had an investment” in his “approved outside business,” according to Finra’s BrokerCheck records.

UBS filed the lawsuit on June 16 before a District Court in Connecticut – three days before Dynasty’s announcement that Procyon has joined its network.

In the lawsuit UBS claims the four advisors breached non-solicitation provisions, misappropriated UBS’s trade secrets, violated Connecticut’s unfair trade practices act, breached their own fiduciary duties and engaged in unfair competition. UBS says in the lawsuit that the four advisors’ non-solicitation agreements were valid for one year after the end of their employment from the wirehouse.

UBS’s TRO request is directed at stopping the four advisors “and all persons acting in concert with them” from soliciting – whether directly or indirectly – clients serviced by or known to Fiore and other advisors who were part of FDG.

UBS has also initiated Finra arbitration proceedings against the defendants.

Bill Singer

“Forgetting that [the plaintiff] is UBS and it’s a multimillion dollar company, it’s still a garden-variety employment dispute that not only occurs on Wall Street but also occurs in many other industries,” says Bill Singer, a New York-based lawyer who is of counsel at Gusrae Kaplan Nusbaum. He says he also has been an independent arbitrator for more than 20 years, including with the National Association of Securities Dealers, the New York Stock Exchange and the American Stock Exchange arbitration panels.

He says the crux of the case will be proving that solicitation has taken place – and that hinges on how the court defines solicitation. Singer defines it as the act whereby a broker initiates a communication with a client at a former firm to persuade the client to leave the former firm and join the new firm.

“If you sign the non-solicit agreement, you can’t communicate with somebody for the purpose of inducing them to come over to your new firm,” he says – but “the courts and a lot of high-priced lawyers understand that solicitation doesn’t mean every communication.”

In the present case UBS takes umbrage with a June 2 email with the subject line “Exciting News: The Team of FDG Group is Now Procyon Partners” that the four advisors sent to “clients, friends and family.”

Singer says it’s “open to interpretation” whether or not the email was solicitation.

“Given the nature of these client relationships – particularly when you’re dealing with institutional accounts or high net worth individuals – it’s always possible to explain away a communication,” he says, by arguing the advisor wrote or called the client simply to say he was no longer at the firm and has a new firm.

While most of the contents of the email served simply as an introduction to Procyon, Singer says one particular paragraph is most open to interpretation: “Our team will be reaching out to you in the coming days to discuss any questions you may have about this change, including details about the smooth transition of your accounts to our new custodian partner, Schwab Advisor Services, if applicable.”

For his taste, Singer says that section goes “a little bit too far over the line.” But he can see how the defendants can argue it’s not solicitation. A strong argument could be made the communication was generic; the advisors were simply letting their clients, friends and family know that “they’re available to help with transitions, but they are not pressuring clients to follow them.”

“They haven’t sent clients an account transfer package. There’s nothing in this letter that says they are going to offer cheaper services or better services. So to some extent this is like getting a notice from a family friend that their daughter is marrying. It’s not an invitation, it’s a notice,” he says, intimating that this is an argument the advisors might make in defense of the suit.

He adds that if the email is proven not to be a communication of solicitation, then any response from UBS clients also would not constitute the product of solicitation; if clients switch from UBS to Procyon no law or agreement has been broken.

However, UBS claims that in addition to the email, the defendants “have made phone calls to UBS clients, including multiple clients defendants Farrar, Gloria and Gahan did not introduce, soliciting the clients to move their business to Procyon,” according to the complaint.

UBS also claims the defendants are misleading clients by giving them the impression that the entire FDG Group has moved to Procyon, citing the text “The Team of FDG Group is Now Procyon Partners” in the subject of the June 2 email, references previously made by Procyon on its LinkedIn page, and phone conversations with clients.

Looking forward to possible outcomes of the lawsuit, Singer believes the case will hurt both UBS and the defendants. But he thinks it’s more harmful to UBS.

“I think it poses a problem for UBS. This is immolation; UBS and the industry are pouring lighter fluid, setting it on fire and standing in the middle of it when they pursue actions like this against ex-high-producing advisors,” he says.

Singer says brokers and advisors at UBS are most likely wondering about this case and contemplating what to do when their relationship with UBS is up for renewal. “It sows fear of reprisal rather than serves as a deterrent,” he says. And the lawsuit could also make individuals considering joining UBS – especially high-producing advisors – think twice about joining the wirehouse.

A solution is already in place to help protect financial advisory firms and registered representatives from what had become excessive recruitment-related litigation in the early 2000s, and that’s the Protocol for Broker Recruiting. The protocol governs the use of client information when registered representatives move between firms that are signatories to the protocol. It was originally signed in 2004 by UBS Financial Services, Citigroup Global Markets, and Merrill Lynch, Pierce, Fekner & Smith. There are currently more than 1,600 signatories to the protocol – including Procyon, which joined May 26, 2017.

The protocol states that when registered representatives move from one firm to another, and both firms are signatories to this protocol, they may take the following account information: client name, address, phone number, email address, and account title of the clients that they serviced while at the firm, and nothing more. Brokers are prohibited from taking any other document or information.

The protocol also states that registered representatives that comply with this protocol would be free to solicit customers that they serviced while at their former firms – but only after they have joined their new firms.

Dennis Concilla, Columbus, Ohio-based head of Carlile, Patchen & Murphy’s securities litigation and regulation practice group, says the protocol “serves as a covenant not to sue” and it “overrides” non-solicitation agreements.

Concilla, who specializes in employment arbitration and regulation, spoke to FA-IQ about the protocol in general terms but declined to comment specifically on the lawsuit and TRO filed by UBS against the defendants.

“There has been a substantial reduction in the amount of litigation that takes place because of the protocol but it hasn’t eliminated it. There are still issues that are raised,” he says.

Concilla says the protocol could be set aside if any of the rules weren’t followed correctly, if there was any misrepresentation to clients, or if the departing brokers solicited clients they weren’t responsible for bringing to their old firm. He adds that there are also “additional considerations” that could overrule the protocol – such as when firms require their brokers to sign agreements that state they are waiving their right to be covered by the protocol.

(Getty)

“The protocol doesn’t trump all sins,” he says. “For example, the protocol won’t protect you if you’re misrepresenting the situation of your departure from a firm because that would violate the fair and equitable principles of trade rules.”

Concilla says Finra’s arbitration panel “will determine if the protocol was followed correctly”.

Singer says in the UBS case the arbitration panel could decide either way, and it would be “pointless to speculate” on how they would rule.

In April a Finra arbitration panel ruled against Wells Fargo Advisors in its claim against a broker who solicited clients after leaving the firm. The panel, which did not give an explanation for the decision, awarded $384,000 in damages to Joel Jacobs of Omaha, Neb., who left Wells Fargo Advisors in February 2015. The firm claimed Jacobs violated the so-called broker recruitment protocol when he sent an unauthorized letter to Wells Fargo Advisors customers in a bid to grow the list of clients he could potentially solicit. Jacobs – a former pro football player who had played for the New England Patriots and St. Louis Rams before becoming an advisor – accused the brokerage of causing him loss in income by unjustly stripping him of clients. He also said he was harassed by James Pekelder, a Wells Fargo Advisors manager and his former partner, who also allegedly “took unreasonable inflammatory actions against Jacobs”.

FA-IQ reached out to UBS, Dynasty, and Procyon for comments for this article. UBS and Dynasty declined to comment, while Fiore and others at Procyon were unavailable to comment as of this writing.