When Christopher Armstrong and Randall Kiefner resigned from Charles Schwab one Friday in March 2019, they didn't waste time trying to solicit clients at their new employer, Morgan Stanley.
The only problems: The pair who together managed a book worth more than $750 million had signed contracts obliging them to give four weeks' notice before quitting and to not solicit their old clients for at least 18 months. They were also under a strict prohibition on using information Schwab maintains on customers — phone numbers, records of the types of financial services they use — to drum up new business.
The case, which resulted in Charles Schwab winning a
Charles Schwab's arbitration filing against Morgan Stanley, Armstrong and Kiefner — submitted days after the pair's departure — was based on claims of breach of contract, misappropriation of trade secrets, breach of the duty of loyalty and unfair competition. In the end,
A spokesman for Charles Schwab said in an email statement: "We expect our representatives and firms in the industry to follow their legal obligations to protect customer information. It became necessary in this case to enforce these obligations. The panel's award — which included significant punitive damages — is a reflection of why we take such conduct so seriously."
Armstrong and Kiefner separately submitted arbitration claims against Morgan Stanley, which fired the pair about a month after it hired them. The brokers, whose terminations occurred after Charles Schwab started raising questions about their access to client information, alleged defamation and breach of contract.
The arbitration panel ordered the firm to pay Armstrong $2.85 million and Kiefner $1.17 million in compensatory damages. They're also getting $700,000 to cover attorney fees and costs. The arbitration panel further agreed to expunge any record of their termination from Morgan Stanley from BrokerCheck, FINRA's online disciplinary database.
"We are deeply disappointed with the panel's decision and are currently considering our options," a Morgan Stanley spokesman said in an email statement.
Jim Eccleston, a lawyer representing Armstrong and Kiefner in a separate case related to the move to Morgan Stanley, said his clients are happy with the arbitration panel's decision. They were particularly pleased, he said, that arbitrators found "it was false and defamatory for Morgan Stanley to state publicly that they had failed to meet Morgan Stanley's expectations and adhere to its policy governing their transition from Charles Schwab to Morgan Stanley."
Eccleston declined to make his clients available for further comment. Clinton Marrs, an attorney at Marrs Griebel Law who represented the pair in the case, couldn't be reached for comment.
But Danny Sarch, president of wealth management recruiting firm Leitner Sarch Consultants, said he's hesitant to argue the Morgan Stanley case discloses the perils of not belonging to the broker protocol. Rather than revealing an industry trend, Sarch said, Charles Schwab and Morgan Stanley's dispute presents a cautionary tale on what brokers should not do when they're thinking about jumping ship.
For one thing, he said, Armstrong and Kiefner appeared to not take the contracts they had signed at Schwab seriously. One question they should have asked their recruiters at Morgan Stanley, he said, is if they had much experience bringing on new hires from Charles Schwab.
"They were given bad advice, thinking they could move their business from Schwab, which is hard to do even in the best of circumstances," Sarch said. "And then there was bad due diligence by the hiring manager at Morgan Stanley who recruited these guys. And then, even though these guys won this case, their careers are destroyed. So it's really a lose-lose-lose."
The FINRA decision is only the latest legal proceeding to arise in the dispute over Armstrong and Kiefner's decision to depart Charles Schwab and begin soliciting clients at Morgan Stanley. Charles Schwab sued Armstrong and Kiefner in U.S. federal court in New Jersey on April 5, 2019, seeking to enjoin them from getting in touch with previous clients and prevent them from using information belonging to Schwab.
The suit, which was settled on April 22, 2019, states, "Kiefner printed out some or all of his entire practice list three times shortly before he resigned, and Armstrong, without any apparent legitimate business reason, reviewed in rapid succession 148 client-overview screens in a proprietary database about a week before he resigned." Under their settlement, the brokers agreed to not reach out to former clients until Sept. 29 of the following year.
Armstrong and Kiefner are separately suing the law firm Shumaker, Loop and Kendrick and one of its lawyers, Michael Taaffe, who were brought in by Morgan Stanely to advise the pair on what they legally could and couldn't do when leaving Schwab. According to the suit, Shumaker, Loop and Kendrick, as well as Taaffe, failed to divulge their history of working with Morgan Stanley on previous cases. The firm "acted more like employees of their preferred corporate client, Morgan Stanley Smith Barney, LLC ("Morgan Stanley"), as opposed to lawyers, by totally disregarding their legal and ethical obligations," according to the suit.
Taaffe did not respond to a request for comment.
According to FINRA's BrokerCheck,
Kiefner,
