A new arbitration decision holds a lesson for financial advisors: Be careful when you leap.
A three-member Financial Industry Regulatory Authority panel awarded almost $672,000 to Fidelity Brokerage Services earlier this month after that firm first filed a claim with the independent regulator last October. The conflict came after one of its brokers, Brian Wilder, moved to Morgan Stanley Smith Barney (now known as Morgan Stanley Wealth Management).
Fidelity claims that Wilder violated the rules laid out for him regarding contact with the clients he worked with after he left the firm. The firm's complaint included claims for breach of contract, misappropriation of trade secrets, unfair competition related to certain Massachusetts state laws and interference with contracts. Fidelity also requested that Wilder give up certain compensation plan payments he received while at the firm. Both Morgan Stanley and Wilder denied the claims.
In its complaint, Fidelity alleged that Wilder and Morgan Stanley illegally used Wilder's client list from Fidelity to try and lure those clients to the new firm. Under Massachusetts law, Wilder is permitted to send announcements to clients to announce his new affiliation; after that, he is restricted from soliciting those clients for one year.
With many of those clients, Wilder chose to phone his clients instead of sending them the announcements regarding his move. In his contact with those clients, Wilder allegedly did not stay to the script provided by an attorney, where he was permitted to only disclose that he had changed firms.
In his defense, Wilder claimed that in his conversations, the clients requested more information, including forms and marketing materials.
Fidelity also alleged that Wilder contacted those clients more than the one time permitted to announce his new affiliation. Wilder sent 400 of those clients, who represent part of the total client list, overnight packages with account transfer forms, which the arbitrators also deemed as inappropriate.
In an arbitrators' report signed by the FINRA arbitration panel chairman, the panel rejects Morgan Stanley and Wilder's arguments that the client information was taken only for the purpose of making the announcements, and that they adhered to industry rules for broker transitions.
"While it is true that a departing broker is entitled to announce to his former clients by giving them his new contact information, that right must be exercised in a manner that does not diminish or void any legally binding obligations of the broker not to solicit his former clients nor to misappropriate the trade secret customer contact list of his former employer," the arbitrators' report states.
The panel also concluded that even though Morgan Stanley is a member of the Broker Protocol and Fidelity is not, that does not mean that Fidelity should be expected to adhere to the same standards outlined in the protocol. The Broker Protocol was established to create guidelines for firms to follow when recruiting brokers with the aim on cutting down on ensuing litigation between firms.
"When a Fidelity broker leaves to work for a Protocol firm, Fidelity's proprietary customer information does not thereby lose its confidential status, become vitiated and converted into a Protocol-compliant list, which the ex-Fidelity broker can then use to freely solicit Fidelity customers," the arbitrators' report said.
The arbitrators' awarded a total of almost $672,000 to Fidelity in their decision. The bulk of that award includes $452,432 in attorneys' fees set to be paid by Morgan Stanley. The award also includes $81,661 in compensatory damages to be paid to Fidelity by both Morgan Stanley and Wilder; $81,661 in punitive damages to be paid to Fidelity by Morgan Stanley; $1,821 in compensatory damages to be paid to Fidelity by Wilder; and $54,321 in costs to be paid to Fidelity by Morgan Stanley.
"We strongly disagree and are deeply disappointed with the panel's decision, and are evaluating our options," a Morgan Stanley spokeswoman said of the decision. "In our view, the panel's award is contrary to the law, without precedent, and not supported by the facts."
Fidelity and Wilder were not available for comment on the arbitration panel's decision.
Register or login for access to this item and much more
All On Wall Street content is archived after seven days.
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access