BankThink

Fed’s stance on trade secrets could mean more banker bans

Historically, bank executives have faced civil liability for breach of contract and violations of state laws governing the misappropriation of trade secrets for misusing their employer’s confidential and proprietary information. However, a recent “notice of intent to prohibit” issued by the Federal Reserve indicates that bank executives may now face a much harsher consequence than mere civil liability for misappropriating their employers’ information — namely, a ban from the business of banking altogether.

In December, the Federal Reserve issued an unprecedented notice of intent to prohibit against two Wyoming bankers that could dramatically change the landscape of trade secret misappropriation and restrictive covenant litigation in the banking industry. In the notice, the Fed alleges that two Wyoming bankers conspired to acquire and misuse the confidential and proprietary information of their former employer, Central Bank & Trust, to benefit a rival bank, Farmers State Bank, with whom the executives sought to gain employment and an ownership interest.

The Fed contends that the bankers’ behavior constitutes unsafe and unsound banking practices and breaches their fiduciary duties to Central Bank & Trust and therefore should result in their permanent ban from the banking industry. And while these two executives were indeed held liable for their conduct in a civil suit brought by Central Bank & Trust in Wyoming state court to the tune of over $2 million, the prospect that they may be forever banned from any future participation in the affairs of a federally insured financial institution likely stings much more.

While it is unclear if this action by the Federal Reserve is a mere one-off or the start of a broader attempt by the agency to punish the unlawful misappropriation of information, the potential impact of the notice on both banks and their executives cannot and should not go unnoticed.

For the employer bank, the impact may well cut both ways. For example, a cease-and-desist letter sent by a bank to a former employee whom the bank knows is misappropriating its trade secrets may make a much stronger impression if — in addition to the threat of filing a lawsuit — the bank also indicates it will report the executive’s conduct to the Fed should the executive not cease his or her behavior. In this regard, banks will have additional weapons in their arsenal to defend against the theft of their confidential and proprietary information. At the same time, a bank hiring a new executive to join its ranks could be saddled with uncertainty if the banker’s former employer accuses the executive of misappropriation, thereby putting the executive’s tenure in the banking industry at risk.

For the banking executive, the impact is of more consequence. Bankers should now proceed with extreme caution to ensure that they do not, whether knowingly or unwittingly, take or misuse the confidential and proprietary information of their employer. This is true now more than ever, as technology has made the transfer of information effortless, and because the workforce has become increasingly mobile. While bankers may take solace in the fact that the conduct by the Wyoming bank executives was particularly egregious, the central bank did not establish a threshold in its notice indicating the level of egregiousness to which conduct must rise to be worthy of a potential ban from the banking industry.

Going forward, executives enticed to utilize their employer’s confidential and proprietary information for their own personal gain are now faced with the question: Is this worth losing my livelihood?

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Enforcement actions Financial crimes Financial regulations Crime and misconduct
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