An arbitration panel ordered Morgan Stanley Smith Barney to pay at least $534,000 to a brokerage unit of Fidelity Investments in a dispute over a broker who tried to solicit former Fidelity clients after he left the firm.
The Financial Industry Regulatory Authority panel decision, which was dated September 21 and posted online Monday, followed an unusually long 15 days of hearings and includes an award of $452,000 in legal fees to Fidelity Brokerage Services LLC.
Fidelity had alleged that broker Brian Wilder took confidential customer information when he left the firm last year to join Morgan Stanley Smith Barney.
Fidelity also alleged that Wilder and Morgan Stanley Smith Barney tried to solicit Wilder's 400 former Fidelity clients, despite restrictions in his Fidelity employment contract that prohibited soliciting for one year after his departure.
Morgan Stanley Smith Barney tried to persuade the panel that Wilder took contact information for the sole purpose of notifying his Fidelity customers about his new affiliation with Morgan Stanley Smith Barney, according the ruling.
Under Massachusetts law, written announcements are the "preferred" way to notify clients about such a change, wrote John Kinsellagh, the arbitrator who wrote the unusually lengthy 25-page opinion. Arbitrators typically do not reveal the reasons behind their awards.
Wilder's strategies, however, included sending account opening forms to his Fidelity clients via overnight mail and making repeated solicitations to clients who said they were not interested in changing firms, according to the ruling.
While departing brokers are allowed to "announce" their moves to clients, "that right must be exercised in a manner that does not diminish or void" other obligations the broker may have to not solicit clients, such as those laid out in Wilder's contract, or to take brokerage trade secrets upon leaving, Kinsellagh wrote.
In addition to legal fees, arbitrators ordered Morgan Stanley Smith Barney to pay Fidelity $82,000 in punitive damages. Morgan Stanley Smith Barney and Wilder` are also jointly liable for $82,000 in compensatory damages. Wilder must pay an additional $1,821 to Fidelity.
"We strongly disagree and are deeply disappointed with the Panel's decision, and are evaluating our options," a Morgan Stanley Smith Barney spokeswoman said in a statement. "In our view, the panel's award is contrary to the law, without precedent, and not supported by the facts," she said.
Morgan Stanley Smith Barney was formed after the merger of Morgan Stanley's (MS.N) wealth unit and Citigroup's (C.N) Smith Barney in 2009.
Wilder, now a Morgan Stanley Smith Barney broker in Framingham, Massachusetts, did not immediately return a call requesting comment.
A Fidelity spokeswoman declined to comment.
The dispute highlights the risks that some securities brokers may take when leaving one brokerage for another.
Fidelity's contract with Wilder prohibited him from soliciting clients he served through the firm for one year after his September 2011 departure, according to the FINRA panel ruling. In addition, a "confidentiality clause" in the contracted protected Fidelity's customer lists, under Massachusetts law, the panel ruled.
Fidelity does not participate in the Protocol for Broker Recruiting, an agreement intended to minimize legal disputes when brokers switch firms by spelling out the limited client information that brokers may bring with them.
Francis Curran, a New York-based securities lawyer, said the FINRA panel's detailed opinion could make it difficult for Morgan Stanley Smith Barney to try to overturn the ruling in court.
Arbitration awards are typically binding, but courts can throw them out in rare instances, such as when an arbitrator is biased.
(Reporting By Suzanne Barlyn; Editing by Tim Dobbyn)