Morgan Stanley Smith Barney Eviscerated In Fidelity Unfair Competition Case

September 25, 2012

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in October 2011, Claimant Fidelity asserted

  • breach of contract,
  • misappropriation of trade secrets,
  • unfair competition pursuant to Massachusetts General Laws Chapter 93A, Sections 2 and 11,
  • interference with contracts, and
  • forfeiture of payments under Compensation Plan.

These causes of action arose in connection with the alleged misappropriation of Claimant's confidential customer information, which was then purportedly used to unfairly compete with Fidelity by soliciting its customers to Respondents' benefit in violation of Claimant's Compensation Plan and Respondent Wilder's Employment AgreementIn the Matter of the FINRA Arbitration Between Fidelity Brokerage Services LLC, Claimant, vs. Morgan Stanley Smith Barney LLC and Brian Wilder, Respondents (FINRA Arbitration 11-03937, September 21, 2012). 

Claimant Fidelity sought to enjoin Respondents and anyone acting in concert with them:

  • for a period of one year, from soliciting business from any customer or prospective customer of Claimant who Wilder served or whose name became known to Wilder while in Claimant's employ; and
  • from using, disclosing, transmitting or continuing to possess for any purpose, the information contained in the records of Claimant, including, but not limited to, the names addresses, and confidential financial information of Claimant's customers or prospective customers who Wilder served or whose names became known to Wilder while in Claimant's employ.
Also, Claimant sought an Arbitration Panel Orderrequiring the return to Claimant of any and all records /documents received or removed by Respondent Wilder containing certain customer or prospective customer information.

As to damages, Claimant sought its losses or Respondents' profits, whichever is greater.  Claimant further sought disgorgement and restitution.  Additionally, Claimant sought treble damages or punitive damages, and reasonable attorneys' fees.

Respondents Morgan Stanley and Wilder generally denied the allegations and asserted various affirmative defenses.

On January 12, 2012, the FINRA Arbitration Panel granted Claimant's Motion for Permanent Injunction.


The FINRA Arbitration Panel found Respondents Morgan Stanley and Wilder jointly and severally liable and ordered them to pay to Claimant Fidelity $81,661.00 in compensatory damages.

The Panel found Respondent Morgan Stanley liable and ordered it to pay to Claimant:

  • $81,661 in punitive damages pursuant to Massachusetts General Laws Ch. 93A Section 11 for willful and knowing violations of Section 2 of the statute;
  • $452,431.58 in attorneys fees pursuant to Massachusetts General Laws Ch. 93A Section 11; and
  • $54,321.15 in statutory costs.

The Panel found Respondent Wilder liable and ordered him to pay to Claimant $1,821 in  compensatory damages

Bill Singer's Comment

Wall Streets landscape has always been filled with contentious disputes between and among the likes of Merrill Lynch, Smith Barney, JP Morgan, UBS, Morgan Stanley, Wachovia, Wells Fargo, and so many other names no longer with us, merged into the ranks of competitors, or still hanging in there. Firms come and go but among the constants are the impetus to cannibalize business; to engage in hardball tactics to jam up those who get in your way; and to pull out all the stops, legal or otherwise, compliant or otherwise, ethical or otherwise.

It's a tough Street. Always has been. Always will be. Not the pavement for the faint of heart.

This is as dramatic a FINRA Arbitration Decision as there is on the issue of non-solicitation and unfair competition.  In a commendable effort to get it all right and to explain itself, this Panel issued a 25-page "Arbitrators' Report" that is as articulate and compelling an arbitration document that I have ever had the pleasure to read.

Although FINRA Arbitration Decisions typically have little effect on other arbitrations or court decisions, I suspect that Fidelity v. MSSB will prove an exception.

Of course, there's a larger issue: What, if anything, FINRA will do as a regulator upon reading this unflattering Decision - one which, yet again, calls into question the fairness and integrity of the mandatory arbitration process forced upon hundreds of thousands of registered persons and millions of public customers. When is enough finally enough for Wall Street's self-regulatory organization?

Given the inflammatory and derisive nature of much of this Decision's content, I have opted to present the following solely in the form of verbatim selections from the 25-page Arbitrator's Report and will leave it to my astute readers to draw the necessary inferences:

Here, it was undisputed that Wilder signed an Employee Agreement with Fidelity that contained legally binding non-solicitation as well as confidentiality clauses. The confidentiality clause explicitly stated that Fidelity considered customer lists - including customer contact information - to be its trade secret information. Wilder further signed and acknowledged receipt of a Summary and Acknowledgment form that clearly restated that the customer information enumerated therein was proprietary. Thus, Fidelity clearly asserted trade secret/confidential status in its customer contact information. As such. Wilder was on notice that Fidelity considered this information to be confidential and proprietary.

. . .

First, email documentation sent by Wilder contradicts or is inconsistent with this assertion. Second, the testimony that every single client on the list of customers to whom he sent an overnight package requested the enclosed ACAT forms strains credulity (particularly since most of these customers did not actually transfer their accounts). Third, MSSB provided substantial financial incentives to Wilder to encourage him to bring the Fidelity customers to MSSB. Evidence on the record, including documents admitted with regard to the seven accounts that transferred, clearly indicated that Wilder went far beyond the permissible bounds of simply announcing his new affiliation to his clients by providing only his new contact information.

. . .

However, as a non-signatory. Fidelity's customer contact information remains a legally protected trade secret. When a Fidelity broker leaves to work for a Protocol firm, Fidelity's proprietary customer information does not thereby lose its confidential status, become vitiated and converted into a Protocol-compliant list, which the ex-Fidelity broker can then use to freely solicit Fidelity customers. Yet, this is exactly the position MSSB has adopted in this case.

. .

The fundamental unfairness in this case is the imposition of an uneven playing field by MSSB. In light of the fact that MSSB knew full well that, as a non-signatory, the terms of the Protocol were inapplicable to Fidelity, the heads I win, tails you lose posture adopted by MSSB with regard to its selective use of the terms of the Protocol was particularly opprobrious.

When it suited MSSB's purposes, they invoked those aspects of the Protocol that were advantageous to their interests, namely encouraging the theft of a non-Protocol firms proprietary customer lists by contending that these lists, by the very terms of the Protocol and Massachusetts law permitting announcements, can't be trade secrets, and that the Protocol recruiting methods employed represent best or industry practices. But they didn't comply with those mandatory provisions of the Protocol that would be advantageous to Fidelity, namely leaving with the branch manager the customer list the broker is taking with him to a Protocol firm. Fidelity is then forced to incur costs and attorneys' fees protecting their trade secrets, as they must, and MSSB all the while argues that the action for a TRO is for a tiny sum of money because only a small number of accounts actually transferred in this case.

. . .

In this case, the Panel was mindful of the integral nexus between MSSB and Luboja & Thau - a law firm paid by MSSB and to whom it referred Wilder as well as all but one of the Fidelity recruits in the companion cases for implementation of the "non-Protocol" recruiting strategy referenced herein. The Panel takes note of the fact that every court which considered the "non-Protocol" strategy and the legal issues incidental thereto, including the trade secret status of Fidelity's customer contact information as well as the enforceability of the non-solicitation clauses in the former Fidelity brokers' Employee Agreements, rejected the legitimacy of that strategy.

The subterfuge employed by MSSB, as delineated above, was made all the more egregious by the fact that the theft of Fidelity's trade secret customer information placed Fidelity in the untenable position of inadvertently violating SEC Regulation SP. Fidelity's Chief Privacy Officer testified that the removal of Fidelity's customer list violated federal securities regulations, and this testimony was unrebutted by MSSB.

. . .

The modus operandi of MSSB is evident: make the protection of its trade secret customer information enormously expensive for Fidelity, and then argue to arbitration panel(s) that the damages at stake are ininiscule. Any awards assessed against MSSB are simply viewed by it as the cost of doing business. The Panel observes that the remorseless litigation posture adopted by MSSB in this case is consistent with its conscious business policy to make Fidelity's protection of its trade secrets as costly as possible. Given the dynamics of the litigation/arbitration process for a party seeking injunctive relief with all its attendant and requisite procedures, the cost/benefit ratio has been decidedly favorable to MSSB.

The Panel's award of attorneys' fees is an attempt to address these inequities and to redress the remedial imbalance inherent when Fidelity, a non-Protocol firm, seeks to thwart the repeated attempts by MSSB, a signatory firm, from pilfering its trade secrets and unlawfully soliciting its customers. Such an equitable reapportionment of the attomeys' fees incurred by Fidelity will force MSSB to reassess the financial viability of the cost/benefit calculus they have previously employed.

. . .

The conduct engaged in by MSSB in this case represents an unfair method of competition in the securities industry precisely because it attempted, either explicitly, implicitly or through nefarious and surreptitious means, to impose upon Fidelity, a non-Protocol firm, mles of commerce by which it never agreed to be bound. This isn't fair competition; it's an illicit and improper rigging of the rules - a stacking of the deck - to favor one competitor over another.