Vermont Judge Rules Against a Merrill TRO

A federal judge in Vermont has ruled against Merrill Lynchs attempt to prevent two former brokers from contacting clients they held while at the firm. Merrill had requested a temporary restraining order after the brokers left its Burlington, Vt. branch for Wachovia, charging the brokers were soliciting their old clients improperly. In denying the TRO and injunction, the court noted that Merrill encourages

A federal judge in Vermont has ruled against Merrill Lynch’s attempt to prevent two former brokers from contacting clients they held while at the firm.

Merrill had requested a temporary restraining order after the brokers left its Burlington, Vt. branch for Wachovia, charging the brokers were soliciting their old clients improperly. In denying the TRO and injunction, the court noted that Merrill encourages essentially the same practice from which it is asking the departed brokers to be barred.

"Merrill Lynch’s concern about client confidentiality related to client names and contact information is belied by its own practice of expecting recruited financial advisors to contact their former clients," wrote Judge William Sessions in his order denying the request. "Given that Merrill Lynch has admitted to engaging regularly in the same kind of behavior it seeks to enjoin, the Court will not use its equitable powers to enjoin such behavior."

In this case, Cornelius Callahan and John Polanshek, Merrill brokers for 15 and 18 years with a combined $80 million in assets, according to court documents, left the firm at the end of April and started contacting clients soon after. Merrill, in its response to Sessions’ order, is arguing that the two violated non-solicitation agreements by taking files of client information.

Other attorneys say there is no real issue of precedence at issue, as these types of cases tend to swing on the court’s estimation of the individual cases. "A lot of these cases are decided based on how they smell," says Providence, R.I.-based attorney William Jacobson, a columnist for Registered Rep. "If it smells like the broker did something wrong, the judges react and find a way to enjoin them. If it smells like same old stuff the firm is doing, the law is vague enough that judges can rule that way."

In recent years, brokerage firms have found it harder and harder to hang onto the clients departing brokers. The NASD passed a rule prohibiting firms from sitting on transfer statements, for example.

However, the use of injunctions remains prevalent, and Merrill, in its statement to the court, makes it sound as if the precedent set by this ruling would be rather grave—suggesting that the judge is trying to create legislature through his position. "It would essentially mean the end of enforceable restrictive covenants," wrote attorneys Stephen Norten and Timothy Cole, representing Merrill.

"We think an injunction was warranted and is warranted, given the specific facts of this case," adds a spokesman for Merrill Lynch.

Greg Mertz, who is representing Callahan and Polanshek, was unavailable for comment.

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