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In Wirehouse Fights with Breakaways, Posturing Holds Sway

By Rita Raagas De Ramos March 13, 2018

Ever since they abandoned the Protocol for Broker Recruiting late last year, Morgan Stanley and UBS have been trying to keep their brokers from leaving with client accounts.

Morgan Stanley, which exited the protocol in November, has filed for temporary restraining orders in various courts against former advisors, arguing, among other things, that the advisors breached contractual obligations that barred them from soliciting the company’s clients.

Morgan Stanley has been granted TROs in four of those cases while one is pending and another was withdrawn and moved to arbitration.

Last month, UBS filed a TRO motion against a former advisor, but it was denied. It also quietly introduced a non-solicitation clause in its advisors’ 2017 bonus payment agreements. Though the Swiss bank retracted that in the face of internal grumblings, it says the clause would be included in 2018 bonus payments.

Thomas Potter, a lawyer with Burr & Forman in Nashville, Tenn., has represented brokerages and advisors in disputes over client accounts. He says much of the legal wrangling that goes on when advisors depart their firms is “posturing” to “get an upper hand” in arbitration or settlement negotiations.

Broker-dealer firms “have to make a judgement on whether going to court is an efficient use of their money,” Potter says.

In Potter’s experience, most litigation related to departing advisors who take or attempt to take client accounts with them get settled out of court. In fact, a TRO triggers a Finra arbitration hearing to be held within 15 days.

Often, broker-dealer firms and advisors use the time in court to “stake out their views” and “gain some discovery” before they proceed to arbitration, says Potter. He estimates cases typically spend 18 to 24 months in arbitration.

“It’s like a game of chicken,” says Potter. “Whoever gets the upper hand can influence the settlement dynamics.”

Examples of settlements include compensation for the broker-dealer firms in exchange for allowing departing advisors to take client accounts.

“The firm that’s taking the broker is paying a percentage of the trailing 12-month commission on the accounts the broker is taking,” says Potter.

The recent cases involving broker-dealer firms and their former advisors include examples of legal posturing, according to Potter.

In the TRO and preliminary injunction motion filed in December by Morgan Stanley against John Fitzgerald, the TRO was granted and a preliminary injunction hearing scheduled. The TRO compelled Fitzgerald to return documents and electronic materials to Morgan Stanley, and barred him from using the confidential information.

The order didn’t stop Fitzgerald from returning phone calls, responding to emails or attending meetings requested by Morgan Stanley customers who knew Fitzgerald from his days at Morgan Stanley, however. Both Morgan Stanley and Fitzgerald agreed to adjourn hearing on the preliminary injunction motion, leaving the case to be decided in Finra arbitration.

“It’s like a game of chicken. Whoever gets the upper hand can influence the settlement dynamics.”
Thomas Potter
Burr & Forman

In the TRO and preliminary injunction motion filed in February by Morgan Stanley against a group of former advisors led by Patrick O’Neill, an agreement was reached to withdraw the motion and proceed to Finra arbitration. In doing so, both parties agreed the defendants didn’t take Morgan Stanley’s confidential information or trade secrets.

In July last year, UBS lost a motion for a TRO and preliminary injunction against a team of former advisors led by Phil Fiore, but the wirehouse welcomed the court’s decision because it spelled out which arguments would help it build a stronger case in Finra arbitration. For example, the court ruling said UBS could possibly succeed with its argument that Fiore violated his non-solicitation agreements.

“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 shortly after the ruling was handed down.

Bill Singer, a New York-based lawyer with Gusrae Kaplan Nusbaum, the court appearance turned out to be a “dress rehearsal for UBS” because it helped the wirehouse prepare a better defense for arbitration.