LOS ANGELES -- Two former investment bankers of First California Capital Markets Group have settled a lengthy dispute with the firm over the underwriting of a bond transaction, thereby halting an appeal of a lower court judgment.
In January, a Contra Costa County Superior Court judge concluded that the investment bankers had interfered with First California's "contractual relations" with the Stockton-East Water District.
First California had alleged that R. Thomas Westhoff, its former president, and Kenneth R. Martin, a former vice president, breached a fiduciary obligation in connection with a $52.75 million certificate of participation sale for the water district.
The water district initially had appointed First California as its underwriter. But the district subsequently hired Westhoff-Martin Associates to handle the sale after Westhoff and Martin left First California in September 1989 to form the firm.
In his January ruling, Judge William A. O'Malley decided that Westhoff-Martin "was not free to take [First California's] work product" and deny the firm its share of underwriting revenue.
Westhoff and Martin had contended that the work they did on the transaction at First California was not proprietary information. Furthermore, they strongly disagreed with the notion that First California and the water district had a contractual relationship.
But O'Malley concluded otherwise and awarded First California $293,216 after deducting commissions of $68,991 for Westhoff and Martin. The total judgment slightly exceeded $300,000, including court costs.
Westhoff-Martin pursued an appeal after O'Malley declined to rehear the matter. Earlier this month, however, the appeal was dropped after both sides agreed to a settlement.
Westhoff-Martin agreed to pay "a significant sum," though it was less than the judgment amount, Westhoff said yesterday in an interview.
Westhoff said the lower court decision "just didn't make any sense to us," adding that he still considers the ruling improper.
But even if an appellate court agreed that the issuer and First California did not have a contract, uncertainty remained over whether it would also would overturn the ruling as it pertained to the fiduciary relationship, Westhoff said.
"The appeal process got very sticky" in trying to assess how the appellate court might view the fiduciary question, Westhoff said. Such a decision hinges essentially on a "judgment" call by the justices, he said.
In the face of mounting legal fees, the bankers decided to "get it behind us and move on," he said.
Such disputes occasionally arise in the municipal bond market and other industries when employees leave to form a new firm. They are often settled before a court decision is reached.
"Our contention all along was that even if it is common for bankers in this industry to do what Martin and Westhoff said, that does not make it right, and the court agreed," Charles B. Klinedinst, First California's lawyer, said in a press release about the case.
Daniel C. Young, First California's vice chairman, said in the same release that he views the ruling as "significant since it assures employers that binding agreements reached with clients cannot be undermined by former employees."
But Westhoff said the lower court ruling raised puzzling questions. One key point of contention, he said, is whether an issuer's adoption of a resolution to appoint an underwriter constitutes a contractual relationship.
In some other instances, investment bankers have left a firm just days before a pricing and then handled the sale at their new firm.
By contrast, the Stockton-East transaction did not close until several months after Westhoff and Martin left, which Westhoff points to as proof that it was not "a piece of business we stole." Westhoff also noted that First California had an opportunity to make a presentation when the water district decided to review the underwriting situation after the bankers left.
But Westhoff said many arguments could not be raised because "the issues got tried on such narrow bases" in the court. There is also "no case law" to point to in such disputes involving municipal bond underwritings, Westhoff said.
The press release on behalf of First California called the decision "precedent setting."
From a legal standpoint, the decision cannot be cited as a precedent because it did not reach the appellate level. According, another judge could view a similar case differently.
But at least one industry participant said the ruling could leave an impression.
"This case will affect relationships between investment bankers and investment bank firms for years to come," said Gerald P. McBride, executive vice president and manager of the tax-exempt division at Prudential Securities Inc. "For large firms, the First California case means greater protection of proprietary information, which in turn means greater protection of greater revenues."
McBride's comments appeared in the press release about the case. McBride, who is also the president of the Public Securities Association, was not in his New York office yesterday and could not be reached for additional comment.
Westhoff called the press release "replete with wrong impressions." saying it fails to convey "the full story" surrounding the dispute.
Judge O'Malley also considered and rejected allegations that Westhoff-Martin owed First California money in connection with underwritings involving Atwater, Calif., and the Calaveras County Water District.
"Atwater may have been a prospect," but Martin did not hide that from First California, the judge wrote. "Prospects which may or may not give rise to business were not proprietary" to First California , he said.
