UBS and Wells Fargo Wage Thumb Drive Warfare

May 20, 2016

Like an artichoke, some lawsuits require you to peel off one leaf after another until you get to the heart of the matter -- and, just like an artichoke, you may choke on that prize at the center if you're not careful. Consider a recent FINRA intra-industry arbitration, which pits Wall Street behemoths UBS and Wells Fargo against each other in a post-employment dispute involving a host of former UBS employees. As you start working your way to the heart of the arbitration, you start forming inferences and likely conclusions. When you get to the arbitrators's Award, you either agree with the result or you don't. But then you may come across a related federal lawsuit. And then you may learn about a related FINRA disciplinary matter. By the time you try digesting everything on your plate, you're not feeling all that great and begin to wonder whether you should have ordered the lasagna.

Case In Point

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in February 2012 and amended thereafter, Claimant UBS alleged violation of the Illinois Trade Secrets Act, violation of the Computer Fraud and Abuse Act, breach of contract, breach of fiduciary duty and duty of loyalty, tortious interference with contractual relationships and prospective economic advantage, conversion, unfair competition, and breach of promissory notes. Claimant UBS sought unspecified compensatory and punitive damages, attorneys' fees and costs.

In the Matter of the FINRA Arbitration Between UBS Financial Services, Inc., Claimant, vs. David Kinnear, Kathleen Bakas, Steven Fryman, Alexander Freund, and Wells Fargo Advisors, LLC, Respondents

-- AND --

David Kinnear, Counter-Claimant, v. UBS Financial Services, Inc., Counter-Respondent

-- AND --

Wells Fargo Advisors, LLC, Counter-Claimant, v. UBS Financial Services, Inc., Counter-Respondent (FINRA Arbitration 12-00554, May 12, 2016).

Confidential Records

Claimant UBS alleged that in the months before his resignation, former employee Respondent Kinnear stole thousands of confidential UBS client and business records and other proprietary information. Upon joining Wells Fargo, Kinnear allegedly used the stolen materials to persuade UBS clients (both those he had personally serviced and those he had not) to transfer their accounts. Claimant UBS asserted that Kinnear was motivated to engage in such conduct because his Wells Fargo compensation depended upon the transfers of UBS clients to his new firm.  

Promissory Notes

Also, Claimant UBS alleged that Kinnear had executed two promissory notes (the "Notes"), which required him to repay the outstanding principal balance on the loans, accrued interest, all costs of collection, including attorneys' fees, and related costs and expenses. Claimant further alleged that Kinnear's February 13, 2012, resignation had triggered the Notes's acceleration clause.

Respondents Counter

Respondents generally denied the allegations and asserted various affirmative defenses.


In his Amended Counterclaim, Kinnear asserted tortious interference with prospective economic advantage, unfair competition, defamation, false light invasion of privacy, malicious prosecution, and violation of New Jersey statutes 2A:47A-1 (False Complaints of Unprofessional Conduct). Kinnear alleged that in order to eliminate his potential competition, his former firm had engaged in post-resignation conduct meant to drive a wedge between him and his high net-worth relationships. Kinnear alleged that UBS made false and malicious statements to his clients and/or potential clients. Moreover, Kinnear asserted that UBS misrepresented that he had continued to work for the firm despite the fact that he had resigned and departed.

Wells Fargo

In its Counterclaim, Wells Fargo asserted unfair competition. Wells Fargo alleged that Claimant UBS had engaged in unfair competition when the firm refused to provide tax information and prevented clients from transferring accounts from UBS to Wells Fargo. Pointedly, Wells Fargo alleged that UBS had changed clients' account numbers, which caused confusion, increased clients' costs, and prompted the rejection of ACAT transfer requests. Finally, Wells Fargo alleged that UBS continued to maintain Kinnear's UBS webpage, thereby falsely and maliciously representing to the public that Respondents Kinnear and Bakas were still employed by UBS.

Dismissals With Prejudice

On or about February 19, 2016, Claimant filed a Motion to Voluntarily Dismiss Respondents Bakas, Fryman, and Freund.

On or about February 21, 2016, Fryman and Freund filed a Response Brief in Opposition to Claimant's Motion to Voluntarily Dismiss Respondents Fryman and Freund "Without Prejudice."

At the hearing, the Panel issued an Order dated February 22, 2016, that all claims asserted by Claimant against Respondents Bakas, Fryman, and Freund were dismissed with prejudice.

Motion To Dismiss

At the FINRA Arbitration hearing conducted sometime around February 29 2016, Wells Fargo and Kinnear made a Motion to Dismiss Counts I, II, V, VI, VII, VIII, and IX of Claimant's Amended Statement of Claim, which was subsequently supported by Respondents Wells Fargo and Kinnear.

By Order dated March 3, 2016, the FINRA Arbitration Panel denied the dismissal of Claimant's Count I. The Panel dismissed Claimant's Counts II, V, VI, VII, VIII, and IX, based on prior dismissal with prejudice in a state court action, payment of the Notes, lack of contract and preemption by the Unfair Trade Practices Act.

Panel Decision

The FINRA Arbitration Panel found as follows:

1. David Kinnear and Wells Fargo Advisors, LLC are jointly and severally liable for and shall pay to UBS Financial Services, Inc. the sum of $1,500,000.00 in compensatory damages.
2. UBS Financial Services, Inc. is liable for and shall pay to Wells Fargo Advisors, LLC the sum of $400,000.00 in compensatory damages.
3. The above amounts are offset. David Kinnear and Wells Fargo Advisors, LLC are jointly and severally liable for and shall pay to UBS Financial Services, Inc. the sum of $1,100,000.00 in compensatory damages.
4. David Kinnear and Wells Fargo Advisors, LLC are jointly and severally liable for and shall pay to UBS Financial Services, Inc. the sum of $1,250.00 in costs as reimbursement for the non-refundable portion of the filing fee.
5. David Kinnear's Counterclaim is denied.
6. Any and all relief not specifically addressed herein, including punitive damages and attorneys' fees, is denied.

Bill Singer's Comment

So . . . let's see here: Kinnear apparently quit UBS in February 2012. The FINRA Arbitration Decision was rendered in May 2016 -- so that's a lapse of some 4 1/4 years from resignation to Award.  Now that's a fairly profitable and sensible use of nearly one-half of a decade, no?

And just exactly what was the bottom line, fully netted out result among all these warring parties? We start with a credit to UBS of $1.5 million but then deduct $400,000 in an offsetting award, so UBS comes out ahead by $1.1 million plus another $1,250 in awarded costs.


Not mentioned at all in the FINRA Arbitration was this 2015 disciplinary settlement that Kinnear had entered into with FINRA:

For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, David Stephen Kinnear submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of David Stephen Kinnear, Respondent (AWC  2012031496901, April 13, 2015).

The AWC asserts that Kinnear was first registered in 1997 and joined UBS in 2005. The AWC asserts that he had no prior disciplinary history in the securities industry.

As set forth under the "FACTS AND VIOLATIVE CONDUCT" section of the AWC:

On February 13, 2012, Kinnear submitted his resignation to UBS and on the same day became associated with Wells Fargo. Kinnear was only permitted to bring limited information about his UBS customers pursuant to a Protocol for Broker Recruiting, of which both UBS and Wells Fargo were signatories. Additionally, UBS's policies and procedures prohibited Kinnear from taking UBS customer information following his resignation. On or about February 9, 2012, in anticipation of his resignation from UBS and his move to Wells Fargo, Kinnear transferred customer account information for approximately 47 of his UBS customers from UBS systems to USB thumb drives, which were encrypted and password protected. On or about February 9, 2012, Kinnear sent these thumb drives to his customers with the expectation that he would retrieve the information after he joined Wells Fargo if he reestablished his relationships with these customers.

Kinnear did not have permission to transfer and send this UBS customer information for the purpose of recapturing it after he joined Wells Fargo. In taking these actions, Kinnear violated UBS's policies and procedures. FINRA Rule 2010 requires associated persons to observe high standards of commercial honor and just and equitable principles of trade. By reason of the forgoing, Kinnear failed to comply with these standards and thereby violated FINRA Rule 2010

In accordance with the terms of the AWC, FINRA imposed upon Kinnear a $5,000 fine and a five-business-day-suspension in all capacities with any FINRA member firm.

Okay . . . so . . . if nothing else we have a bit more color as to what Kinnear purportedly did in terms of leaving UBS. If, in fact, the FINRA arbitration is largely about thumb drives containing customer information of "47 of his UBS customers" and he "sent these thumb drives to his customers," I'm not so sure that I necessarily understand the regulatory action, the fine and suspension, and how that all served to undo Kinnear in the arbitration but we may not necessarily be getting the whole picture. You should feel free to draw your own conclusions and if you disagree with me, that's fine. I'm merely offering you more information on which to form an opinion.

Retroactive Mandatory Arbitration

Speaking of more information, for those of you who still haven't had enough, consider Alexander Freund, Plaintiff, v. UBS Financial Services, Inc., Defendant (Memorandum Opinion and Order, 15-CV-7965, United States District Court for the Northern District of Illinois, October 23, 2015), in which we are offered the following synopsis:

Plaintiff Alexander Freund filed this action against Defendant UBS Financial Services, Inc. ("UBS") pursuant to 28 U.S.C. § 1332 to enjoin an arbitration proceeding before the Financial Industry Regulatory Authority ("FINRA") Office of Dispute Resolution. Plaintiff seeks a declaration that FINRA does not have jurisdiction over him and cannot require him to participate in the FINRA arbitration because there is no valid arbitration agreement between Plaintiff and UBS. Before the Court is Plaintiff's motion for a preliminary injunction and expedited ruling [5]. For the reasons set forth below, the Court denies Plaintiff's motion for a preliminary injunction, but grants the motion for expedited ruling [5].

An interesting aspect of Freund v. UBS is set forth in the Opinion and Order:

UBS argues that Plaintiff agreed to have FINRA decide UBS's claims against him because, approximately two months after leaving UBS, Plaintiff signed a Form U-4 submitting to FINRA's jurisdiction. Plaintiff argues, on the other hand, that the Form U-4 does not apply retroactively to UBS's claims against him, which Plaintiff argues arose before Plaintiff signed the U-4.

. . .

The parties apparently agree that their dispute would be subject to arbitration if Plaintiff had signed the U-4 before their dispute arose, because UBS is a FINRA "member" and Plaintiff would be an "associated person." However, Plaintiff signed the U-4 approximately two months after leaving UBS, while he was an employee at Wells Fargo. Plaintiff argues that by signing the U-4 on April 19, 2012, he did not agree retroactively to arbitrate claims that arose prior to that date. UBS responds that "the timing of an alleged tort or breach is not significant in determining whether a dispute should be submitted to arbitration in FINRA under the Form U-4." [11] at 6. Instead, UBS asserts, the "proper inquiry is whether UBS's claims for relief against [Plaintiff] arose out of his employment or termination of his employment with UBS, which they do." Id. UBS also argues, as a factual matter, that Plaintiff's "misconduct continued after he went to Wells Fargo over many months as Freund worked with Kinnear in illegally soliciting UBS clients, aided by the use of information and records misappropriated from UBS." Id. at 9.

Page 8 and 9 of the Opinion and Order

In attempting to resolve the pre- and post-U4 signing issue, the Court offered this rationale, in part:

[P]laintiff's U-4 requires him to arbitrate his dispute with "any other person" if that dispute is "required to be arbitrated" under FINRA's rules. FINRA requires the arbitration of a dispute if it "arises out of the business activities of a member or an associated person and is between or among: Members; Members and Associated Persons; or Associated Persons." UBS is a "Member" of FINRA. Plaintiff, like Marcus, became an "associated person," at the latest, when he "applied for registration under the Rules of FINRA." UBS's claims "arise out of the business activities" of UBS and Plaintiff: namely, UBS's sale of securities to its customers and Plaintiff's alleged theft and transmission to the Kinnear team of confidential information concerning those customers. No language in the U-4 or FINRA's arbitration rules expressly prohibits the arbitration of disputes that arose before the party resisting arbitration signed a U-4. Considering all of these circumstances, because the Court cannot say "with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute," Seventh Circuit precedent teaches that the proper course is to apply the presumption in favor of arbitration . . .

The proper course is to presume that arbitration is mandated when a former employer is seeking to force a former employee into arbitration when that former employee did not sign the document mandating arbitration until two months after he left the firm?

You know what, my head's about to explode at this point, so, for no other reason than enough is enough, I think that I'll stop here. Some folks won. Some folks lost. Notwithstanding, this dispute seems to go on and on. All of which is a great segue for today's music video:

Some will win
Some will lose
Some were born to sing the blues
Oh, the movie never ends
It goes on and on and on and on