Two brokers who left Morgan Stanley on Friday to work at another brokerage firm took the unusual step of filing a lawsuit against their former employer in an attempt to prevent the wirehouse from suing them over their clients.
The two registered reps, Michael J. O'Leary and Connie E. Sanders-Timian, have a combined 65 years of experience in the financial services industry, and both have worked at Morgan Stanley since 2012, according to the complaint. Joining the two reps in the lawsuit is their new employer, Hilltop Securities Inc.
The lawsuit takes aim at two of the most discussed and debated issues in the brokerage industry ever since Morgan Stanley
last October pulled out of an industry agreement called the protocol for broker recruiting.
First, is client information easily available to brokers really a trade secret? And next, what is the standing legality of brokerage contracts reps signed while Morgan Stanley was a member of the recruiting protocol now that the firm is no longer part of that agreement?
The two brokers, who work in San Diego, Calif., and Hilltop "seem determined to fight claims that Morgan Stanley has not made, making this action premature in the extreme," said Morgan Stanley spokeswoman Christine Jockle. "The advisers' 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 protocol for broker recruiting made it easier for reps and advisers to stop working at one brokerage firm and start at another by allowing them to carry a limited amount of client information with them when they left one employer for another. When Morgan Stanley withdrew from the agreement, it told its 15,700 reps and advisers it "would begin strictly enforcing its client confidentiality and purported non-solicitation agreements," according to the complaint.
Morgan Stanley's decision to leave the protocol — UBS Wealth Management Americas
followed a few weeks later — has set off a flurry of litigation, and the firm has "filed no fewer than eight other actions against" former brokers seeking temporary restraining orders and preliminary injunctions, according to the complaint.
Once Morgan Stanley left the protocol, which was created by large brokerage firms in 2004 as a truce from suing each other when a broker started work at a new firm, Mr. O'Leary and Ms. Sanders-Timian "understood that to mean that Morgan Stanley would consider suing them for injunctive and other relief if they left the firm and undertook the efforts to transition their clients and accounts to a competing broker-dealer," the complaint alleges.
Along with the lawsuit, which was filed in U.S. District Court for the Southern District of California, Mr. O'Leary and Ms. Sanders-Timian have also filed an arbitration claim against Morgan Stanley with the Financial Industry Regulatory Authority Inc.
An attorney for the two brokers, George C. Miller, declined to comment. A spokesman for Hilltop Securities, said: "Hilltop Securities' culture is centered on supporting advisers. We will not hesitate to take steps to ensure that the interests of advisers and their clients are protected."
The complaint focuses on a key argument that firms use when they sue brokers when they move to a new employer: that client information like telephone numbers and addresses are trade secrets rather than common pieces of information.
"Morgan Stanley's purported definition of a 'trade secret' is overly broad and includes information that does not constitute a legally protectable trade secret," the complaint alleges. "While Morgan Stanley was a member of the [recruiting] protocol, including the majority of the time O'Leary and Timian were employed at the firm, it did not attempt to enforce these contractual provisions when advisers left the firm."
The plaintiffs argue that the brokers' employment agreements are "illegal, void, and unenforceable as against California public policy."
