The San Francisco-based $2.4-trillion broker still isn't swallowing the loss and sent a clear message that it will battle tirelessly

September 4, 2014 — 4:40 PM UTC by Lisa Shidler

4 Comments

Brooke’s Note: Think about just how offensive this raid must have been to Schwab. Morgan Stanley marched right in and lifted out a hoard of Schwab financial advisors in a Schwab San Francisco branch. Chances are Chuck himself knew some of those advisors personally and many of Schwab’s employees depended on those advisors for their own accounts. When I worked in downtown San Francisco, I used Schwab’s branch there and the one time I ever met Chuck was in that branch. But then Schwab’s only recourse was to fight what happened under FINRA, an organization none too beloved by RIAs. Now, presumably, FINRA is not Schwab’s best friend either after it awarded Schwab $72,000 when it asked for $15 million.

Even though Charles Schwab & Co. Inc. just lost a public and nasty $15 million FINRA fight with Morgan Stanley over a raid of its financial advisors, it may have shown the ability to use a new weapon in its arsenal: intimidation.

During the battle, the San Francisco-based brokerage giant sent a clear message to would-be raiders and would-be breakaways internally that it will go to Merrill Lynch-style lengths to mete out retribution in the form of expensive and intensive legal wrangling, says Andrew Stoltmann, a Chicago securities attorney with Stoltmann Law Offices. See: Dynasty Financial Partners ends legal squabble with Bank of America, clearing deck for growth.

“There have been Titanic-like fights between Morgan Stanley and Merrill Lynch and Schwab has always been the big-eyed doe sitting off on the sidelines,” he says. “For them to get into this legal donnybrook is pretty rare. You see them above the fray and not in these cat fights. “This could be a sign that Schwab is getting more aggressive towards poaching of its talent and despite the zero in this case, they’re sending the message that the days of pillaging our firm by wirehouses is over.” See: How Morgan Stanley and a lesbian super-producer came to grief in South Carolina and why she alleges bias.

Test case?

The case with Morgan Stanley was filed as a Financial Industry Regulatory Authority Corp. arbitration case two years ago. Schwab argued that Morgan Stanley had overstepped in its San Francisco office by taking brokers and stealing company “secrets.” Schwab was seeking $15 million in damages. Poaching becomes raiding when a firm loses more than 30% of its production from a branch office.

But a three-person FINRA arbitration panel denied Schwab’s claims on Aug. 22. They did not, however, order Morgan Stanley to pay $72,000 in sanctions. That money goes to Schwab. The three-member panel did not issue an opinion with its decision. The brokers who left Schwab were not named in the ruling either. See: RIA loses $10 million case against Raymond James the old-fashioned way.

A Morgan Stanley spokesman declined to comment for this story.

'Compelling’ claims

John Furey: How are you raiding a branch in San Francisco? FINRA has always been clear that clients have the choice.
John Furey: How are you raiding
a branch in San Francisco? FINRA
has always been clear that clients
have the choice.

Meanwhile, Schwab is not backing down, even in the face of FINRA’s ruling,

“We strongly disagree with the panel’s decision and are evaluating our legal options in this situation,” says Greg Gable, a spokesman at Schwab. “The claims in this case were compelling, including instances of taking proprietary information, manufacturing evidence, and operating a steady raid on staff and clients resulting in significant damage to Schwab.”

There were no public documents available for the hearing.

Gable feels the decision was an “anomaly.”

“We will pursue an aggressive course of legal action should other similar situations occur. I would just reiterate that we disagreed with the finding in this instance and believe the facts were compelling. We’ll continue to protect our rights going forward.” See: How Schwab failed to block one broker’s breakaway and what the legal battle may mean for the future.

Schwab is looking at other legal options. “There are some that we’re looking into. But I can’t say more beyond that,” Gable added.

Watch out

This loss hasn’t slowed Schwab down at all, and if anything it’s made the firm more energized for its next battle, Stoltmann says.

“Schwab appears to be sending the message that we’ll take them to the mat. Win, lose or draw, we’re not the red-headed step-child [just because we are not part of the clubby Wall Street scene].”

Still, this is not the first public battle that Schwab has lost. Schwab sued former broker Kristian Colvin, who left the company in September 2009 to become a solo practitioner with San Mateo, Calif.-based Emerson Equity LLC. Colvin, who says he managed $200 million at Schwab, now has $25 to $30 million in assets under management. See: How Schwab failed to block one broker’s breakaway and what the legal battle may mean for the future.

Marc Dobin: Schwab used to be able to say: "We're Charles Schwab.  We're a discount firm.  Our clients come to us because they want discount rates and no advice.  Our clients have a relationship with Schwab, not an individual broker. Now, Schwab is getting into the advice business.
Marc Dobin: Schwab used to be
able to say: "We’re Charles Schwab.
We’re a discount firm.
Our clients come to us because
they want discount rates and no
advice. Our clients have a
relationship with Schwab, not an individual
broker. Now, Schwab is getting into
the advice business.

Schwab lost the case in both San Diego Superior Court and in a four-day FINRA arbitration hearing in which the three-person panel ordered the company to pay an unprecedented $218,881.86 in legal fees to its former broker.

But Schwab has won these types of cases before and that’s likely spurred them to fight in these instances, says Marc S. Dobin, a securities attorney with Dobin Law Group, P.A. in Jupiter, Fla. But these battles are getting more difficult for Schwab to win.

“Schwab does this for both prophylactic reasons and because they have won,” he says. “It’s becoming a harder claim for Schwab, I think, as they move closer to a full-service model and away from the pure discount model, Schwab’s claims are more difficult now than they were a number of years ago.”

What has changed over the years to make it more difficult for Schwab to win these cases is they’ve become more of an advice firm, Dobin says.

“Because Schwab used to be able to say: “We’re Charles Schwab. We’re a discount firm. Our clients come to us because they want discount rates and no advice. Our clients have a relationship with Schwab, not an individual broker. Now, Schwab is getting into the advice business. This then leads to personal relationships. That is the antithesis of the original discount model.”

Rugged protocol

One reason that Schwab filed this action is because the firm has chosen not to enter the protocol for broker recruiting, says Kevin Conway, an attorney with New York-based Conway & Conway. The protocol — the no-fault poaching truce signed among wirehouses and several hundred other financial firms — has made this kind of legal skirmish rarer than in the old days. See: Which firms are joining the Broker Protocol, and how your firm gets on the list.

Danny Sarch: You never know when an advisor leaves if the accounts are there because of the individuals or because of the firm name.
Danny Sarch: You never know when
an advisor leaves if the accounts
are there because of the individuals
or because of the firm name.

Under the protocol, brokers can bring limited information, such as client names and telephone numbers, with them when switching firms. The protocol must be followed precisely or lawsuits will still be filed. See: The number one obstacle to completing a clean breakaway from a wirehouse.

“You don’t see many of these suits because they’re very costly, difficult to win and leave a lot of bad blood. Since they’re not in the protocol, that’s why they fought. If this had been Merrill Lynch who is in the protocol, you probably wouldn’t have had this fight,” Conway says. See: Fewer companies join Protocol as downsides emerge.

This case, while interesting, isn’t a green light for broker poaching and it also won’t stop employees from leaving for other firms, Conway says.

“I think the arbitration panel felt that Schwab didn’t prove their case,” Conway says. “It’s not precedent setting. You can get a different panel and the same case and they can rule a different way. Schwab felt they were picked on and didn’t want to deal with it. They didn’t have the proof. It’s difficult to say that employees can’t move to another employer. Those days are gone.” See: A $2.3-billion RIA in San Diego continues to grow as it hires talent from national powers — this time a known Schwab quantity.

Brand or advisor?

But it’s one thing to move from another employer and a completely different matter to break a contract, says John Furey, principle and founder of Phoenix-based Advisor Growth Strategies, LLC. Schwab must enforce its employment deals meticulously, he says. “Schwab’s employment agreements are very clear that you agree not to solicit. I think Schwab will continue to enforce their employment agreements as they should.”

But at the same time, Furey thinks the raiding argument may have been a difficult one for Schwab to plausibly make.

“It would be hard to argue raiding in San Francisco. I think the raiding argument was difficult,” he says. “How are you raiding a branch in San Francisco? FINRA has always been clear that clients have the choice. If clients choose to go from one advisor to another, FINRA will uphold interest of investors and that’s always been true.”

It’s surprising that many firms are poaching Schwab brokers because assets don’t always follow Schwab brokers, points out Danny Sarch, president of Leitner Sarch Consultants in White Plains, N.Y.

“You’d think recruiting from Schwab is more risky because you never know when an advisor leaves if the accounts are there because of the individuals or because of the firm name,” he says.


Mentioned in this article:

Leitner Sarch Consultants
Recruiter
Top Executive: Danny Sarch



Share your thoughts and opinions with the author or other readers.

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John F Reutemann, Jr. said:

September 4, 2014 — 6:57 PM UTC

Please…what purple Kool-aid were these ad visors drinking? They obviously whored themselves out to MS for money. Anyone stupid enough to leave Schwab for MS we should be happy to get rid of! What a frighteningly ignorant step backwards in technology, financial transparency, and God forgive us, actually doing the right thing for the client. JFR

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Richard Allison Johnson said:

September 4, 2014 — 8:03 PM UTC

I never even attempted to convince Schwab clients to “follow me” when I left 10 years ago. Not because I was fearful of Schwab, but because my ethics would not allow it. What is wrong with people these days? Doesn’t anyone have any ethics anymore? If you sign a non-compete agreement, then you should abide by its terms. Period, point blank, end of story.

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MisterRIA said:

September 4, 2014 — 8:11 PM UTC

I would never work for either of these organizations. Get out while you can.

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Robert B Rowe Jr. CIMA GFS said:

September 8, 2014 — 4:02 PM UTC

I find this article interesting from the perspective of; once again, a B/D abusing the mandatory FINRA arbitration system. The fact that it is against another well-funded RIA custodian platform adds to the curiosity.

I and many other FA’s have had similar evidence disclosure abuse problems within FINRA arbitrations, where a B/D’s lawyers simply chose to ignore, or otherwise completely abuse and manipulate the discovery/evidentiary due process. Unfortunately, I and most other advisors forced into the mandatory FINRA arbitrations (due to the U-4) do not possibly have the financial depth to fight the legal trickery and manipulations of the very experienced and well-funded B/D lawyers. Additional information and documentation of the <a rel="nofollow" title="E">SHAM</acronym> of the mandatory FINRA arbitration system may be found at www.RJAvsRBRoweFINRAarb.com </a>

<a rel="nofollow" title="E">

Bob Rowe

</a>

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