In a recent decision, Mr. Justice Corbett of Ontario ’s Superior Court described the investment industry as follows: “Investment firms make money from assets under management. Investment advisors are paid to cement relationships with clients.” Competition is fierce among investment firms for top producing brokers and, more importantly, their books of business. Often this competition rears its head in the form of litigation against departing brokers and the new firms that employ them. Recent cases have highlighted the intensity of this battle.
Injunction against soliciting clients denied despite broker’s breaches
Earlier this year, Corbett J. refused an injunction to prevent a former BMO Nesbitt Burns broker, D’Souza, from soliciting former clients for his new employer, TD Waterhouse. However, Corbett J. did not refrain from criticising Mr. D’Souza and TD. Calling the debate about how permissible notification of clients regarding a broker’s pending departure differs from improper client solicitation “almost comical,” Corbett J. found that the broker had breached his duties to Nesbitt by not giving advance notice of his departure and new position with TD. This deprived Nesbitt of the chance to take steps to retain Mr. D’Souza’s clients when he left. Corbett J. found that TD was complicit in this breach by, among other things, agreeing to pay Mr. D’Souza a bonus tied to the number of clients who followed him. In the words of Corbett J., TD “was not going to pay that money because Mr. D’Souza [and another broker] are good with debt-equity ratios or predicting market trends. TD was going to pay this money for their book of business.”
Corbett J. ultimately denied an injunction because Nesbitt could not show irreparable harm from the solicitation of its clients, however, he went on to deny D’Souza and TD the immediate payment of their costs of the motion, given the breaches he found against both of them.
Pillaging practices improperly pleaded
In another departing employee case, BMO Nesbitt Burns sued Wellington West Capital and several ex-employees regarding what it called the aggressive recruitment of those employees by Wellington and breaches of confidence by the former employees. In response, the defendants attempted to invoke the “clean hands doctrine” against Nesbitt by pleading that Nesbitt had engaged in similar aggressive recruitment practices and should not be able hold them liable for conduct it commits itself. Last year, the Court of Appeal upheld an order striking portions of the statements of defence that purported to mount a defence of “clean hands,” finding that “resort to similar conduct in the marketplace to support the defence of clean hands is not tenable at law.” However, the Court did allow Wellington West to plead BMO Nesbitt Burns’ aggressive recruiting practices as a defence to its claim for punitive damages.
Punitive damages awarded after solicitation of key staff and clients from RBC branch
Probably the most egregious example in recent years of the battle between investment firms over brokers and their clients occurred when Merrill Lynch Canada virtually shut down the Cranbrook , B.C. branch of RBC Dominion Securities by luring away most of its key employees. Further, those departing employees appropriated confidential client lists and documentation that they and Merrill Lynch used to solicit RBC’s clients. These solicitations took place both before and after the employees left RBC without prior notice. In his 2004 decision on damages, Holmes J. of the B.C. Supreme Court ordered Merrill Lynch to pay damages to RBC approximating five years of lost profits from its Cranbrook branch, plus punitive damages of $250,000.00. Compensatory and punitive damages were also awarded against the departing employees.
Published November, 2006
article keywords: confidentiality, departing employees, fiduciary duties, Merrill Lynch, RBC, Wellington West, investment advisors, registered representative, investment firm, stock broker, brokerage firm, restrictive covenant, non-solicitation, non-competition, clients, customers, clean hands, injunctions, interlocutory injunctions, Nesbitt, Dominion