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UBS's Legal Fight Against Breakaways Heats Up

By Rita Raagas De Ramos July 26, 2017

In a tense legal battle between UBS and some of its high-profile former brokers, round one has gone in favor of the brokers but both parties are nevertheless claiming victory.

A Connecticut district court has denied UBS’s motion for a temporary restraining order against four of its high-profile former broker-dealers, led by Phil Fiore.

The court rejected the motion because UBS won’t be able to show “irreparable harm” without the injunction, according to the ruling handed down on July 24 and signed by U.S. District Judge Victor A. Bolden.

UBS’s motion was directed at stopping the advisors and their associates from soliciting – directly or indirectly – clients serviced by or known to Fiore and other advisors who were part of the FDG Group at UBS before they formed a new RIA – Procyon Partners, in Shelton, Conn.

UBS filed the TRO against Fiore, Jeff Farrar, Louis Gloria and Thomas Gahan on June 16. The four defendants operated as partners of FDG.

“The court’s sweeping decision is a welcome development, and the principals of Procyon look forward to continuing to focus on the growth of Procyon Partners and its two operating businesses, Procyon Institutional Partners and Procyon Private Wealth Partners, both of which were launched on June 2,” says a spokeswoman for Procyon.

While the denial of UBS’s TRO motion lets Procyon proceed with business as usual, the court’s 40-page ruling has provided UBS with a blueprint for building a better case, according to lawyers who spoke with FA-IQ.

A lawsuit filed on June 16 by UBS against the same defendants, as well as a Finra arbitration initiated by UBS, remain pending. At stake in the pending litigation and arbitration is the strength of the Protocol for Broker Recruiting and the interpretation of solicitation, both of which will impact brokers considering jumping ship with their clients in tow.

The recent court ruling says UBS could possibly succeed with its argument that Fiore violated his non-solicitation agreements. But the court wasn’t persuaded by the wirehouse’s assertion that Farrar, Gloria and Gahan violated the protocol.

“UBS is pleased with the court’s specific finding that UBS was likely to succeed on the merits of its claim that Mr. Fiore violated his non-solicitation agreements. Even though the court denied our motion for a preliminary injunction, UBS looks forward to vindicating its rights on its claims for monetary damages in the Finra arbitration against Mr. Fiore,” a UBS spokesman told FA-IQ.

UBS has alleged the defendants engaged in breach of contract, misappropriation of trade secrets under the Connecticut Uniform Trade Secrets Act, violations of the Connecticut Unfair Trade Practices Act, breach of fiduciary duties owed to UBS and unfair competition as identified in the ruling.

While at UBS the defendants 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. Chris Foster was also with FDG and is also now with Procyon, but he has not been named as a defendant in the TRO motion.

The court appearance has turned out to be a “dress rehearsal for UBS, because based on the very detailed ruling, UBS can now prepare for a better performance,” says Bill Singer, a New York-based lawyer who is of counsel at Gusrae Kaplan Nusbaum. Singer, who is not involved in the case, has also been an independent financial industry arbitrator for more than 20 years.

The defendants filed their response to UBS’s TRO motion July 10 and the court held a hearing on July 17, with the decision published Monday.

At the hearing, UBS said its TRO motion argues Fiore isn’t protected by the Protocol and remains bound by the non-solicitation provisions of his agreements with UBS – both points the defendants conceded at the hearing.

The wirehouse also argues Fiore communicated with present or former FDG Group clients – both before and after the June 2 opening of Procyon – and that this communication constitutes solicitation, thus violating his non-solicitation obligations. The defendants dispute this assertion.

Farrar, Gloria and Gahan had been collaborating with Fiore prior to their June 2 resignations from UBS, the bank claims, and thus violated their fiduciary and other duties to UBS – a claim the defendants also reject.

Finally, UBS says after Farrar, Gloria and Gahan resigned on June 2, Procyon communicated with clients who were not included on their protocol lists, which violates the protocol and justifies the court imposing injunctive relief. The Procyon team also disagree with this allegation.

In rejecting the TRO, the court says it considered a range of legal agreements between UBS and the brokers: the protocol – which since 2004 has permitted brokers under certain circumstances to take some client information with them without getting sued – and agreements signed separately by the defendants and UBS. The court also said it considered events prior to the defendants’ employment at UBS, clients that the defendants allegedly introduced to UBS, and the alleged solicitation of UBS clients.

The protocol governs the use of client information when registered representatives move between firms that are signatories. 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 on May 26.

The protocol states that when registered representatives move from one firm to another, and both firms are signatories to the protocol, they may take the following account information: client name, address, phone number, email address, and account title of the clients 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 the agreement are free to solicit customers they serviced while at their former firms – but only after they have joined their new firms.

In court both parties agreed the protocol doesn’t apply to Fiore, and so he was instead deemed bound by his non-solicitation agreements with UBS. Among the evidence presented by UBS against Fiore to show he violated the protocol were several text messages he sent UBS clients before he became the owner of Procyon on May 26.

One example was a text message Fiore sent to Lori Disbrow, the chief investment officer and plan administrator for the New Jersey State Employees Deferred Compensation Plan, which had been a significant client of the FDG Group.

In a text to Disbrow on January 25, according to UBS, Fiore wrote: “Hey buddy, so I’m feeling like 90% so I’m on track getting rid of whatever I had!! Thanks for caring!! I also signed with Dynasty last night just wanted you to know buddy!! Hope you are well pal!!”

Given that Fiore was deemed no longer bound by the protocol, the main issue considered by the court in his case was whether any of his communications with FDG Group clients rose to the level of solicitation and thus violated his agreements with UBS.

The ruling says Fiore’s transition agreement with UBS defined “solicit” as communicating in any way with a client that “may have the effect of inviting, encouraging or requesting a client” to transfer accounts to Fiore or his new employer, open a new account with Fiore or his new employer, or otherwise discontinue existing business relationships with UBS.

Monday’s ruling also says Fiore breached the non-solicitation agreement when he sent an email and other communication announcing his new firm to a targeted recipient list that included UBS clients.

“The blast email rose to the level of solicitation,” the ruling says, adding the email was targeted at clients of UBS that Fiore and the other defendants “clearly hoped to attract to Procyon.”

The email was sent June 2, with the subject line: “Exciting News: The Team of FDG Group is Now Procyon Partners.” In that email, the defendants wrote: “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.”

In the case against Farrar, Gloria and Gahan, the court ruled that the protocol applies because these defendants complied with the rules of the protocol.

The ruling says that while “there is some evidence in the record of questionable behavior” on the part of these defendants, such behavior did “not rise to the level of violating the spirit of the protocol.” An example of the questionable behavior cited by the court is an email that said: “I sorted the [private client] list by zipcode just to [expletive] with them a little. It’s the small things.”

Gusrae Kaplan Nusbaum’s Singer says UBS’s legal team is likely considering its next move, and the options include proceeding with the lawsuit against Fiore and the three other defendants while building a stronger case, or dropping the three other defendants and focusing on Fiore, following the “blunt opinion of the court.”

(Getty)

Finra Panel Rules For UBS on Promissory Notes Battle

In separate legal action against another breakaway, a Finra arbitration panel has ruled in favor of UBS in a dispute with a former broker over promissory notes, according to AdvisorHub.

Shawn William Hanna, who worked at UBS from 2010 until 2014, must pay back the full $611,453 in compensatory damages UBS had requested in 2015 alleging violations of five promissory notes, the industry website reports.

In addition, the panel ordered Hanna to cover UBS’s $31,891 in lawyer fees, according to AdvisorHub. Hanna had submitted a counterclaim accusing his former employer of misrepresentation and fraudulent inducement, seeking $1.6 million from the firm, according to the website. Hanna did not respond to AdvisorHub’s request for comment. The website did not disclose whether it had reached out to UBS for comment.

Labor lawyers tell the website it’s hard for advisors to win cases involving signing bonuses when they voluntarily leave early from their firms. Meanwhile, three of Hanna’s former employers —Merrill Lynch, Morgan Stanley and UBS — have stopped offering large signing packages to experienced brokers in recent months. All three also diligently pursue brokers on forgivable loans when they leave before the loans mature without repaying them, according to the website. In May a Finra panel ruled in favor of Morgan Stanley, ordering a former advisor to pay back over $500,000 in promissory notes. And a panel that ruled in favor of a former Morgan Stanley advisor in a defamation case last summer still ordered the broker to pay back $1.26 million in promissory notes.

Additional reporting by Alex Padalka.