When Gerald Randisi joined American Express Financial Advisors' Rochester, N.Y. office as a broker 20 years ago, he signed a boatload of documents. They included — significantly, it turns out — a non-compete contract enforceable nationwide with no cut-off date. “It was put in front of me with all of the other paperwork to get licensed,” recalls Randisi, who at the time was leaving a career as a self-employed baker. “Who knew what a non-compete was? I didn't think that I had a choice in signing it.”
In 1998, Randisi left American Express Financial Advisors to establish his own firm and was promptly sued over the noncompete (the case, eventually, was settled). Randisi is not alone — or even unusual — in having failed to properly scrutinize his employment documents. In fact, according to securities industry employment attorneys and headhunters, a large percentage of brokers sign first and only ask questions when it's too late.
But there is good news on the horizon: Even though a brokerage firm may file a temporary restraining order against a former employee for violating non-compete or non-solicitation agreements, three developments in the last two years make these agreements less enforceable, the attorneys and law school professors claim.
These developments include:
An enforcement action against Smith Barney by Utah securities officials, filed there two years ago over allegedly illegal customer account transfer practices.
A NASD regulation concerning the same issue adopted during the litigation.
Some federal courts have ruled that if a broker simply informs clients that he is moving on, that does not constitute solicitation.
The Utah civil suit was filed against Smith Barney in the Third District Court in Salt Lake City in 2001 by Utah securities regulators. In the Brandenburg case, as it is called, they alleged that the firm refused to submit transfer forms for nearly 200 clients who wanted to follow former Smith Barney brokers to new firms, says Anthony Paduano, partner at New York City-based Paduano & Weinstein. While not admitting the allegations, SB stopped its practice of issuing temporary restraining to block transfers. Morgan Stanley, Merrill Lynch and UBS PaineWebber abandoned this practice as well after being approached by other state securities regulators. The Utah case was dismissed for failure to prosecute in Oct. 2001.
In December 2001, NASD adopted a regulation prohibiting any NASD member firm from taking action interfering with customer rights concerning account transfers. Although a NASD press release at the time said the regulation would not affect actions against former employees or other firms, attorneys say that is exactly what the regulation has done.
“Arbitrators are pointing to the NASD notice to members,” says William Jacobson, a Providence, R.I. securities and employment attorney (he also writes a column for Rep.). “You're going to find more panels and judges who will want to make sure that customers aren't harmed through any of these injunctive actions brought by firms against brokers. Panels, in particular, will be hesitant to tie up a broker for any lengthy period of time.”
Paduano says that balance of power has shifted toward brokers. “The Brandenburg case, and the NASD notice to members that followed, changed the landscape dramatically concerning non-compete clauses,” he says. “Now, if you leave a firm, you don't have to worry about not having a livelihood.”
The third recent development is technical, but significant. In a footnote in a 2001 Ohio Federal District Court case, Merrill Lynch v. Hageman, the Court found that mere “information contact” between Hageman, a former Merrill Lynch broker, and any former client will not constitute “solicitation.” It cites another Merrill Lynch case in support. Lawyers say that this case has been cited in Arizona and California decisions with similar rulings.
“When the broker leaves his former employer, he may send his former clients an announcement phrased in the manner of a tombstone ad,” says Dana Pescosolido, partner at Balitmore-based Saul Ewing. Typically such an ad says the new firm is pleased to announce the broker is joining its firm. “There is no account transfer form, or note from the broker that he'd like to continue doing business with the former client — that's why technically it isn't a solicitation,” says Pescosolido.
These recent developments don't prevent firms from suing departing brokers or from prevailing in some cases. And their impact is not clear when it comes to bank-owned brokerages, which are covered by the Graham-Leach-Bliley Act, the legislation that allows banks and brokerages into each other's business. “According to that act, a bank must protect its clients' confidentiality,” says Paduano. “You try to leave a bank and take your clients, the bank always wins.”
This is likely to become more of an issue as banks get more involved in the retail securities business. “When good producers who have contracts leave, they still must count on being sued when they begin to move their clients' money,” says Paduano. “Nothing has changed that, and I can't imagine anything ever will.”
Beyond the legal rulings and regulations, brokers are also benefiting from a softer stance on non-competes than in the days when Gerald Randisi first entered the business. “You can easily go to many firms without a non-compete,” says John O'Neill, a partner with Houston-based Clements O'Neill. “If you refuse to sign, many brokerages will negotiate this with you on the front end.”
Of course firms are not likely to advertise this fact. Non-competes and non-solicitation agreements are usually hidden in documents outlining policies and procedures an incoming broker must follow. “The broker needs to be cautious,” O'Neill warns. “An attorney should review all of the employment documents before he signs them.”
Pescosolido, the Baltimore attorney, says he has seen wirehouses that recruit experienced brokers and tell them that they won't have to sign non-competes. Then, they hit them with a non-solicitation agreement, after they've started working, and threaten to fire them if it's not signed. “I tell people to stand their ground and don't sign it,” Pescosolido says. “Some states invalidate laws concerning ‘afterthought’ convenants. Many times firms back down when brokers refuse to sign on the basis they were told there were no non-competes.”
What about brokers, who want to leave their present employers, but who signed non-compete and non-solicitation agreements? They may have safeguards, as well, attorneys and professors agree.
“Courts have been fairly consistent in their application of these provisions — they don't like them,” says Prof. Jerry Markham, a University of North Carolina securities professor and co-author of a 1,500-page securities law treatise. “Courts have a tendency to knock them down or to allow the broker to move,” says Markham. “There's a general view that these are a restraint on trade and on the individual.”
What about brokers who signed non-competes and non-solicitations at the same time they sign upfront “forgivable” loans as signing bonuses? “Usually the non-compete is tied to the note, which makes it virtually impossible to pay the note and the resulting taxes after you leave,” claims O'Neill, the Houston attorney. “It's the ultimate golden chain.”
In California, Erwin Shustak, managing partner of the San Diego office of Shustak Jalil & Heller, uses three strategies to thwart non-compete damage claims. “In wooing brokers, some firms promise them additional support and other perks as inducements to leave,” he says. “Instead, because of cutbacks, the broker's accounts may be Schwabicized. The firm didn't fulfill its part of the bargain.”
Pescosolido advises: If you take upfront money, put it in an interest-bearing account. Then, only withdraw that portion of the money that's forgivable after you've paid taxes on it. “If you're going to spend it all right away or invest it in high risk investments, don't take the money,” Pescosolido says.
Crossbridge Financial Group, the firm that Randisi started in 1998 after leaving American Express, did not incorporate non-competes, non-solicitations or employee forgiveness loans into broker employment agreements. One broker already has left and taken her book of business with her. Does Randisi have any regrets? “Absolutely not,” he says. “She can compete against us all that she wants. Clients should be able to do business with anyone they want. They should be able to vote with their feet.”
The No Nos of Bye Bye
Things to avoid when changing jobs.
The period between making a decision to switch firms and actually making the jump is fraught with legal danger. Here are a few items lawyers suggest adding to the not-to-do list.
Keep it quiet: “Do not tell customers ahead of time,” says Dana Pescosolido, partner at Baltimore-based Saul Ewing LLP. “Do not tell former employees, and don't solicit your sales assistant to join you in your new job.”
Don't get mad, get a lawyer: They can prevent you from doing something you'll regret,” says Byron Keeling, partner at Houston-based Holman & Keeling. “Don't send e-mails disparaging your former boss. Don't take customer lists, which could be considered a trade secret.”
Go to the source for records: “Never remove original records. Even photocopies are an iffy proposition,” says Pescosolido. “Get customer phone number from publicly available sources. Ask them to send you their most recent statement. That will have the cost-basis, the frequent reason brokers give for taking customer files.”
Smile as you leave: “A broker who leaves on reasonably good terms may be able to generate enough good will where the brokerage is disinclined to enforce a non-compete,” Keeling says. “The less that an employee takes away from a job, the better.”
— Ann Therese Palmer