Brokers Resign from Morgan Stanley and Quickly Sue It
(Updated in sixth paragraph with statement from Morgan Stanley.)
Two brokers in San Diego who notified Morgan Stanley on Friday that they were moving to Hilltop Securities took the unusual follow-up step of filing a lawsuit against their former firm in an attempt to get a judge to allow them to solicit their former clients.
The novel move is a mirror image of aggressive legal actions that Morgan Stanley has taken to prevent departing brokers from jump-starting their practices at new firms since it exited the Protocol for Broker Recruiting in November. The wirehouse has sought temporary restraining orders and other emergency injunctions from judges in at least eight cases, according to the new lawsuit, while bringing emergency complaints in Finra arbitration.
Michael J. O’Leary and Connie E. Sanders-Timian, described in the lawsuit as “long-time friends,” filed their complaint in federal court in the southern district of California and also filed a parallel Finra arbitration complaint on Friday. The lawsuit asks a federal judge to void non-solicitation clauses in employment contracts they had signed at Morgan Stanley, calling them “illegal,” “unconscionable” and at odds with California public policy.
The lawsuit similarly front-runs the arguments Morgan Stanley has made about the need to protect client privacy, which the firm cites as well as “trade secrets” that are out of the reach of departing brokers. The lawsuit calls such definitions overly broad.
“We will not hesitate to take steps to ensure that the interests of advisors and their clients are protected,” said Ben Brooks, a spokesman at Hilltop, which joined the veteran brokers as plaintiffs.
Morgan Stanley expressed bewilderment at the lawsuit.
“Claimants seem determined to fight claims that Morgan Stanley has not made, making this action premature in the extreme,” Morgan Stanley spokeswoman Christine Jockle wrote in an emailed statement. “The advisors’ agreements comply fully with California law, and the suggestion that injunctive relief is necessary to prevent an action Morgan Stanley has not even pursued against them defies logic and common sense.”
The Hilltop litigation appears to be the first pre-emptive action initiated by hiring firms and departing brokers since Morgan Stanley and UBS Financial Services bolted the Protocol late last year, said Thomas B. Lewis, a lawyer at Stevens & Lee in Princeton, N.J. who often represents brokers. The firms are believed to have exited the more-than-decade-old agreement in an attempt to retain veteran brokers and avoid the high costs of recruiting, though Morgan Stanley said the pact was being gamed by smaller firms.
Lewis also said that the lawsuit is a risky strategy for smaller competitors since Morgan Stanley has deep pockets that will allow it to engage in prolonged litigation as well as a likely strong defense.
“It’s a difficult case for the plaintiffs because they have to prove that contracts are unenforceable,” said Lewis.
Morgan Stanley is likely to bear down with its legal strategy since losing to departing brokers would have wide consequences in other cases and be a “public relations nightmare” for the firm, he said.
Hilltop’s Brooks did not immediately respond to a request for comment on Lewis’ remarks.
O’Leary is a brokerage industry veteran who retired in 2006 after 30 years with Merrill Lynch, only to be recruited by his “longtime friend and colleague Sanders-Timian” to join her at Morgan Stanley following her arrival there in March 2010, according to the lawsuit. She began her career at Merrill in 1997, where she remained until joining UBS in 2008, according to BrokerCheck.
O’Leary and Sanders-Timian arrived at Morgan Stanley under the protections of the Protocol, allowing them to build their books by contacting former clients and expecting the firm to “continue to be a Protocol member in the future,” the lawsuit says. “The purpose of the Protocol,” it continues, “was for firms to put client needs ahead of their own and allow financial advisers the freedom to move from one firm to another.”
The Protocol’s “principal goal,” it says, is “to further the clients’ interests of privacy and freedom of choice in connection with the movement of their Registered Representatives between the [Protocol] firms.”
Neither Timian nor O’Leary have Morgan Stanley client files or client documents, the lawsuit notes, striking at another of their former firm’s arguments. Its lawsuits have often accused brokers of illegally transferring client contact information to personal files.
Sanders-Timian and O’Connor have “knowledge of certain of their clients’ basic contact information” because of ”years of servicing” them, the lawsuit says, noting that the brokers “intend to announce their new affiliation with Hilltop Securities to their clients.”
The lawsuit also flicks at the ongoing debate that the Protocol exits have sparked as to whether firms or brokers “own” client relationships.
“Many of O’Leary’s and Timian’s clients have been with them many years, prior to their joining Morgan Stanley, and have become their personal friends,” according to the complaint. “O’Leary and Timian have put forth significant time and effort in developing and growing their book of business, both before and during their Morgan Stanley employment.”