Robert W. Pearce, a Florida based securities lawyer with a practice that includes representation of broker-dealers and financial advisors answers one of the more frequently asked questions: What are stockbroker raiding cases?
My name is Robert Pearce, and I’m asked the question often about what are stockbroker raiding cases. Well, raiding cases generally involve recruiting a large number of brokers from one firm to another, or business lines or books of business, where the business line or gross production represents a substantial portion of the business of the company that is allegedly being raided. The impact on smaller firms can be devastating, and in some instances, run them out of business altogether. Now, recruiting large numbers of brokers or substantial portion of competitor’s business is not always raiding, but numbers do count, and numbers always raise suspicions, especially when 40 to 50% of the brokers leave from one firm to another, or 40 to 50% of a business line, or maybe a complete business line such as the fixed income department moves to the new firm.
Poaching a stock broker here and there over the last 15 years has not been a problem since the Broker Protocol agreement came into effect, but raiding has never been protected by the Broker Protocol.
So what makes a good raiding case? Raiding cases generally fall under the tort of unfair competition; that is, the way the brokerage firm recruited was unfair to the firm that they recruited from. Generally, what’s unfair competition also involves facts that give rise to claims against the brokers recruited and exist independent of the unfair competition claim, such as claims against the brokers who had a contract that prohibited them from working in a certain geographic area, or they had an agreement that prevented them from soliciting clients, soliciting other employees to join the new firm. And where there are brokers, departing brokers, particularly branch managers, who have a fiduciary duty of loyalty to the employing firm leave and take brokers with them the claim against the recruiting firm gets better. When the raiding company tortuously interferes with another’s employment contract, by lying to the brokers that they’re recruiting about the other firm or engaging in some other conduct to interfere with the contractual relationships that departing brokers had, the unfair competition claim becomes even stronger. If the hiring company induces the departing brokers to take with them, trade information, confidential trade secrets, or other proprietary information, these facts can lead to great raiding cases. Cases with all of those facts and claims, collectively, will make an excellent unfair competition case and help you persuade the arbitrators that your firm was raided wrongfully and entitled to damages.
Now, there are defenses, and the defense is usually raised by the firm that is recruiting goes like this: “Well, these employees would have left anyway. They had been looking around. They contacted us. We didn’t contact them. We dotted our i’s, we crossed all our t’s. We acted in good faith. We didn’t do anything to induce these folk to come over to us. It just so happened, they didn’t like their former employer, and if they didn’t go into us, they would’ve went to some other brokerage firm.”
Now, because these cases, these raiding cases between brokerage firms are all subject to arbitration, there are only arbitration awards which do not give reasoned opinions so you don’t know why the arbitrators made the award to the raided company or how it calculated the amount of damages. So it’s difficult to predict what’s going to happen. Now, the good news is that in the last few years, there was a study done that indicated that over 50% of the cases brought by firms that have been raided were successful! The bad news is those firms that won didn’t win a lot of money. That’s because the damages are difficult to prove.
You will need an expensive expert witness to prove the amount of lost profits you suffered. The calculations that come into play are not only the amount of profits that you lost, but the amount of expenses you avoided, that get deducted. The present value of the lost profits that were lost over the years impacts the damage calculation. You can ask for and recover disgorgement of the compensation that was paid to the departing employees while they were conspiring with the recruiting firm to leave your firm. Another set of damages that are difficult to measure but recoverable is the loss of business value and goodwill that you suffered as a result of these brokers or business lines being recruited away from your firm. Of course, there are litigation expenses, attorney’s fees that you can recover.
These are very complicated cases. You definitely need a securities attorney, one experienced with FINRA’s practices, procedures, as well as knowing the business. You can find an attorney that knows all the laws, knows all the rules, knows all the regulations, but if he/she doesn’t understand your business you are going to have a problem. I’ve been at this for 40 years and believe that I can help clients with any stockbroker raiding case.