Since the Protocol for Broker Recruiting was established in 2004, the practice of firms routinely suing one another when advisers defect has largely faded away.
However, some highly publicized cases over the past few weeks have advisers and their attorneys wondering if the bad old days of claims and counterclaims — with clients stuck in the middle — are returning.
The protocol permits advisers switching from one firm to another to take basic client contact information with them. This includes names, addresses and phone numbers, for example, but not account numbers or positions. It essentially allows advisers switching firms to contact their clients once they leave their prior firm to see if they also want to switch their accounts.
The protocol has more than 400 signatories, according to Thomas B. Lewis, a partner-in-charge of the employee litigation group at Stark & Stark. But only around 30 of those are national firms, he said; the rest are small firms with just a few advisers.
The "boutique" firms have been especially reluctant to sign the agreement, and appear to be paying the consequences. Last week Goldman Sachs filed a claim against five former advisers and two employees who jumped to Credit Suisse, accusing them of taking confidential information with them. The firms quickly came to a settlement, but not before suffering through some unwanted publicity.
Neither Goldman Sachs nor Credit Suisse is a signatory to the protocol, according to Lewis, and Goldman Sachs, in particular, takes the attitude that clients belong to the firm, not the adviser, and therefore should not move if an adviser defects. In addition, Goldman Sachs does not poach many advisers from other firms, Lewis said, so it doesn't feel it needs the protection of the protocol. Instead it generally hires graduates from the top business schools.
The lawsuit filed against the defecting advisers hints at Goldman's attitude. In the firm's nonsolicitation agreements, it said that advisers may develop business with people they knew before they joined Goldman Sachs, but "in developing such business, you will be acting as a representative of Goldman Sachs and will be utilizing and benefiting from Goldman Sachs' goodwill, reputation, name recognition and other assets and resources." That means these clients, except direct relatives, also are subject to the nonsolicitation clause.
However, while the high-end boutiques may deliberately avoid signing the protocol to be able to enforce their own noncompete clauses, Wachovia Securities, which is now Wells Fargo Advisors, is taking advantage of one regional firm's delay in jumping on the protocol bandwagon.
Wachovia has aggressively pursued former advisers who jumped to Stifel, Nicolaus after Wachovia's takeover of AG Edwards in October 2007. Stifel Nicolaus was not a signatory to the protocol at the time of the acquisition but signed up in August 2008.
Wachovia brought some claims before Stifel signed the protocol and others afterward, but so far Wachovia has not been successful in most of its claims. Still, a number of arbitrations remain pending.
But it is not just nonsignatory firms that are facing these actions. Last week Morgan Stanley brought a case against HighTower advisers Steven Ayer, Roman Ciosek, John Lang, Peter Lang and Jeffrey Sullivan, accusing them of breaching the protocol when they moved from Morgan Stanley. On Monday a New York Supreme Court judge denied Morgan Stanley's request for a temporary restraining order against the advisers.
Elliott Weissbluth, HighTower's chief executive, vigorously denied the claims and said they are a remnant of the preprotocol era, when firms brought the lawsuits to intimidate advisers trying to switch firms and prevent their clients from following them. "We respect the integrity of the protocol because it's a contract among market participants, and everyone needs to respect it to make it work," he said.
Alan Foxman, a securities attorney at Fred Chikovsky & Associates in Boca Raton, Fla., said he would be surprised if there was a sustained increase in claims at the moment, given all of the movement among brokers over the past year. "I can't imagine we'll return to the days when the same pattern was repeated over and over again," he said. "They used to spend money, time and effort and aggravate their clients."