A Stifel Nicolaus "raiding" case against former associates who left to set up their own Indianapolis-based advisory firm is testing the limits of the industry's Broker Protocol, which is designed to prevent recruiting lawsuits.
St. Louis-based Stifel Nicolaus
The Sapient founders now stand accused of false advertising — for statements on their website implying all their former clients and assets moved with them. They and the firm are also alleged to have interfered with employment contracts and business relationships, unjustly enriched themselves, committed fraudulent misrepresentations and concealment, breached their fiduciary duties and engaged in unfair competition.
It's the latest case testing how far brokers can go when leaving a current employer to set off on their own. Industry experts have said departing employees
Rob Herskovits, the founder of New York-based law firm
"And in this case, there does seem to be a significant percentage of the office that went out the door," Herskovits said.
Danny Sarch, the president of wealth management recruiting firm Leitner Sarch Consultants in White Plains, New York, said he can see how advisors who are planning to branch out on their own might not know how far they can go. He added that Stifel Nicolaus is far from the only firm with a history of recruiting advisors from elsewhere only to later level accusations of raiding against employees who later leave to start their own businesses.
"There just are no absolutes," Sarch said. "That makes it very confusing for people who are trying to start their own business and seed it with people from other institutions."
Sapient Capital, which also has offices in Los Angeles and Miami, has
Stifel Nicolaus's complaint acknowledges that the KCP Group was itself born from its recruitment efforts. In early 2005, Stifel recruited a pair of brokers, Jeffrey Cohen and David Knall, from a firm called McDonald Investments to open what was then known as its Indianapolis NW office. Cohen would later go on to run KCP Group with Tom Pence (Mike Pence's brother) and Knall's son, Jamie Knall.
Stifel argues that it went out of its way to make sure McDonald Investments was treated fairly. The firm, for instance, was paid a flat sum of an unspecified amount, as well as a fee for every account that was transferred. Stifel, according to the complaint, also compensated McDonald for furniture and other property and agreed to take over the lease of McDonald's office space.
"Unlike their sudden departure from Stifel this month, Cohen and David Knall worked with McDonald to achieve mutually acceptable terms of their departure, including payment terms and details to ensure an orderly transfer of client accounts," the complaint says.
Stifel's complaint is quick to argue that the Broker Protocol should offer Sapient no protection in this instance.
"The purpose of the Protocol for Broker Recruiting is not to allow others to escape liability for their tortious conduct. The Protocol for Broker Recruiting, where applicable, 'does not bar or otherwise affect the ability of the prior firm to bring an action against the new firm for 'raiding," it said in a court filing.
Attempts to reach Sapient Capital and its lead lawyer in the case, Adam Hirtz of Jackson Lewis in St. Louis, were unsuccessful.
Stifel Nicolaus has long been a party to the Broker Protocol. Sapient, by contrast, joined only minutes before Jamie Knall, Pence and Cohen submitted their resignations, according to the complaint. That, Stifel alleges, means that virtually none of their actions up to their departure was covered by the protocol.
A lot of Stifel's allegations center on Andrew LeBlanc, who was the chief operating officer at Stifel's KCP Group. As a condition of his employment, LeBlanc signed an agreement in 2021 prohibiting him from soliciting Stifel Nicolaus clients in the 12 months before or after his departure from the firm. He was similarly barred from recruiting Stifel employees to go with him.
"(T)he Indianapolis NW office's three Managing Directors and Chief Operating Officer executed a coup, inducing more than 30 Stifel employees to abandon their positions and emptying the Stifel office, all in an effort to render Stifel unable to service its clients and presenting Sapient as the new owner of Stifel's business," according to the complaint.
Stifel Nicolaus specifically accuses Jamie Knall, Pence and Cohen of working with LeBlanc to extend employment offers on Feb. 16 to all the brokers in the firm's KCP Group office. Knall, Pence and Cohen resigned by email the next morning. Eleven minutes later, LeBlanc emailed resignation letters for him and 26 other employees to Malcolm Frost, who worked in another Stifel office in Indianapolis. Frost drove to the KCP Group office only to find it empty.
In leaving Stifel Nicolaus, the former employees took steps clearly meant to ensure they'd be protected by the Broker Protocol. Pence, for instance, sent an email on Feb. 17 with an attached list including five pieces of client information.
His email, sent also on behalf of Jamie Knall and Cohen, specifically states: "Note that in accordance with the Broker Protocol, this list does NOT include any client account numbers." The resignation letters submitted by Knall, Cohen and Pence also said they were only taking information protected by the protocol.
Stifel's complaint alleges the Sapient founders were conspiring to take clients with them even before they left. Cohen, for instance, is accused of emailing clients on Feb. 14 — three days before his resignation — to make plans for the following week to discuss their year-end performance reports.
Sapient is also accused of misleading the public by using Twitter, LinkedIn and Facebook accounts to post statements like "KCP Group is now Sapient Capital." Sapient's website for a time also boasted that the firm had $10 billion under management — the same number as was managed by KCP Group — and at least 40 clients with more than $50 million in invested assets. Those now-removed claims were contradicted by the Form ADV
Sapient is technically an investment advisory registered only with the SEC, which has nearly 15,000 RIAs under its jurisdiction. But Stifel Nicolaus also turned to the Financial Industry Regulatory Authority — which oversees the broker-dealer side of the industry — on Feb. 28 to file arbitration claims against Jamie Knall, Pence, Cohen, LeBlanc and two other ex-KCP Group employees: Eduardo Aguirre and Michael Hall. The arbitration claim lays out similar allegations to Stifel's civil case and seeks more than $50 million in compensatory damages, as well as punitive damages in amount to be decided by the arbitrators. That request is now at the heart of the latest wrangling between the two firms.
In a motion to dismiss on April 5, Sapient questioned why Stifel Nicolaus decided to bring its civil claims in federal court in Missouri. In its complaint, Stifel notes that it provided support to its former Indianapolis brokers through its St. Louis headquarters and that some of the clients solicited by Sapient Capital lived in Missouri. That, according to Sapient's motion, ignores the fact that the dispute centers on actions that took place in Indiana.
Should that motion to dismiss the case fail, Sapient Capital is asking the Missouri federal court to either require the case be resolved by FINRA arbitration or at least stay its own proceedings until the case before FINRA is settled.
