Funds News

REFILE-UPDATE 1-Schwab loses $15 mln arbitration case against Morgan Stanley

(Refiles to add Aug 26 in dateline)

Aug 26 (Reuters) - Charles Schwab Corp. has lost a $15 million arbitration case against Morgan Stanley, which it accused of improperly recruiting brokers from a Schwab San Francisco branch who left with confidential information.

The ruling by a Financial Industry Regulatory Authority arbitration panel in San Francisco, dated Monday, ends a two-year-long dispute.

Schwab accused Morgan Stanley of maliciously organizing an “actionable raid” of the branch. Schwab also accused Morgan Stanley of inducing Schwab brokers to breach their contracts.

Claims involving the practice of so-called “raiding” are typically made when a firm loses 30 percent to 40 percent of the production, the amount brokers generate in revenue during a year, from a branch office to another firm in one swoop or over a short period of time, according to lawyers.

“We strongly disagree with the panel’s decision and are evaluating our legal options in this situation, a Schwab spokesman said. “The claims in this case were compelling, including instances of taking proprietary information, manufacturing evidence, and operating a steady raid on staff and clients resulting in significant damage to Schwab.”

A Morgan Stanley spokesman declined to comment on the ruling and did not immediately respond to requests to comment on Schwab’s statement.

While the arbitrators denied Schwab’s claims, they ordered Morgan Stanley to pay Schwab $72,000 in sanctions. The three-member panel, as is customary, did not provide reasons for the decision.

The ruling did not identify the brokers who left Schwab.

Schwab has a reputation in the securities industry for taking legal action against brokers and the firms that hire them, said Thomas Lewis, a lawyer in Lawrenceville, New Jersey who advises brokers about moving between firms. The cases typically arise against brokers who take clients’ contact information or send out announcements about their affiliation with new firms, said Lewis, who was not involved in the case.

Schwab can use that strategy because it does not participate in an industry agreement intended to minimize legal disputes when brokers switch firms, known as the Protocol for Broker Recruiting, Lewis said.

The agreement allows brokers to bring very limited information when switching firms, but only if both firms involved in the transition participate. Details typically include client names, telephone numbers and email addresses.

Schwab, last month, filed a lawsuit in a Seattle federal court against former Schwab adviser Christopher Canorro and the firm he started in May, Basilica Wealth Management in Bainbridge Island, Washington. Canorro, whose firm employs two other former Schwab advisers, breached contracts with Schwab, in part, by taking confidential client information, Schwab said in its complaint.

“Schwab’s claim is a strategy of intimidation designed to protect its parochial business model at the expense of fair competition,” said Clinton Marrs, Canorro’s lawyer in Albuquerque, New Mexico. “There are no merits and we are confident that the court will agree.” (Additional reporting by Elizabeth Dilts; Editing by Grant McCool)