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Stifel Nicolaus ‘raiding’ case probes boundaries of Dealer Protocol pact

7 min read

A Stifel Nicolaus “raiding” case towards former associates who left to arrange their very own Indianapolis-based advisory agency is testing the boundaries of the trade’s Dealer Protocol, which is designed to stop recruiting lawsuits.

St. Louis-based Stifel Nicolaus filed suit in February against Sapient Capital, a agency it accused of participating in a monthslong “coup” plot to recruit nearly all Stifel workers at an Indianapolis workplace with roughly $10 billion in belongings below administration for 7,500 purchasers. The founders of Sapient, who embody a brother of former Vice President Mike Pence, have been working a Stifel workplace referred to as the KCP Group till their sudden departure on Feb. 17, once they took roughly 30 workers with them.

The Sapient founders now stand accused of false promoting — for statements on their web site implying all their former purchasers and belongings moved with them. They and the agency are additionally alleged to have interfered with employment contracts and enterprise relationships, unjustly enriched themselves, dedicated fraudulent misrepresentations and concealment, breached their fiduciary duties and engaged in unfair competitors.

It is the most recent case testing how far brokers can go when leaving a present employer to set off on their very own. Business consultants have mentioned departing workers who take greater than 30% to 50% of a agency’s belongings below administration or headcount threat working afoul of legal guidelines barring unfair competitors and “raiding.” The Dealer Protocol, which brokers be a part of voluntarily, permits advisors who’re switching corporations to take alongside sure consumer data — names, addresses, cellphone numbers, e-mail addresses and account titles — with out worry of authorized penalties.

Rob Herskovits, the founding father of New York-based legislation agency Herskovits, mentioned raiding instances are more and more frequent within the trade as advisory corporations and brokerages jockey for prime expertise. He mentioned though there isn’t any hard-and-fast definition of what constitutes stepping over the road, there are tell-tale indicators for regulators to scrutinize. These embody the share of workers who depart and the way their departures have an effect on the guardian firm’s backside line.

“And on this case, there does appear to be a big proportion of the workplace that went out the door,” Herskovits mentioned.

Danny Sarch, the president of wealth administration recruiting agency Leitner Sarch Consultants in White Plains, New York, mentioned he can see how advisors who’re planning to department out on their very own may not know the way far they’ll go. He added that Stifel Nicolaus is way from the one agency with a historical past of recruiting advisors from elsewhere solely to later stage accusations of raiding towards workers who later depart to start out their very own companies.  

“There simply are not any absolutes,” Sarch mentioned. “That makes it very complicated for people who find themselves making an attempt to start out their very own enterprise and seed it with folks from different establishments.”

Sapient Capital, which additionally has places of work in Los Angeles and Miami, has been quick to accuse Stifel Nicolaus of hypocrisy. Stifel, it says, usually makes use of official statements to report on its recruitment of advisors from different corporations. It additionally, in keeping with Sapient’s filings, has “publicly lamented” that some corporations use the courts to limit “dealer motion throughout the trade.”

Stifel Nicolaus’s grievance 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 agency known as McDonald Investments to open what was then referred to as its Indianapolis NW workplace. 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 means to ensure McDonald Investments was handled pretty. The agency, as an illustration, was paid a flat sum of an unspecified quantity, in addition to a charge for each account that was transferred. Stifel, in keeping with the grievance, additionally compensated McDonald for furnishings and different property and agreed to take over the lease of McDonald’s workplace area. 

“In contrast to their sudden departure from Stifel this month, Cohen and David Knall labored with McDonald to realize mutually acceptable phrases of their departure, together with cost phrases and particulars to make sure an orderly switch of consumer accounts,” the grievance says.

Stifel’s grievance is fast to argue that the Dealer Protocol ought to provide Sapient no safety on this occasion. 

“The aim of the Protocol for Dealer Recruiting is to not enable others to flee legal responsibility for his or her tortious conduct. The Protocol for Dealer Recruiting, the place relevant, ‘doesn’t bar or in any other case have an effect on the flexibility of the prior agency to deliver an motion towards the brand new agency for ‘raiding,” it mentioned in a courtroom submitting.

Makes an attempt to achieve Sapient Capital and its lead lawyer within the case, Adam Hirtz of Jackson Lewis in St. Louis, have been unsuccessful.

Stifel Nicolaus has lengthy been a celebration to the Dealer Protocol. Sapient, against this, joined solely minutes earlier than Jamie Knall, Pence and Cohen submitted their resignations, in keeping with the grievance. That, Stifel alleges, implies that nearly none of their actions as much as their departure was coated by the protocol.

The Broker Protocol was established in 2004 for the aim of “purchasers’ pursuits of privateness and freedom of selection in reference to the motion of their Registered Representatives (“RRs”) between corporations.” It numbers greater than 1,800 members, though some distinguished corporations — Morgan Stanley, UBS and Citigroup — have departed in recent years.

 A whole lot of Stifel’s allegations middle on Andrew LeBlanc, who was the chief working officer at Stifel’s KCP Group. As a situation of his employment, LeBlanc signed an settlement in 2021 prohibiting him from soliciting Stifel Nicolaus purchasers within the 12 months earlier than or after his departure from the agency. He was equally barred from recruiting Stifel workers to go together with him.

“(T)he Indianapolis NW workplace’s three Managing Administrators and Chief Working Officer executed a coup, inducing greater than 30 Stifel workers to desert their positions and emptying the Stifel workplace, all in an effort to render Stifel unable to service its purchasers and presenting Sapient as the brand new proprietor of Stifel’s enterprise,” in keeping with the grievance.

Stifel Nicolaus particularly accuses Jamie Knall, Pence and Cohen of working with LeBlanc to increase employment affords on Feb. 16 to all of the brokers within the agency’s KCP Group workplace. Knall, Pence and Cohen resigned by electronic mail the following morning. Eleven minutes later, LeBlanc emailed resignation letters for him and 26 different workers to Malcolm Frost, who labored in one other Stifel workplace in Indianapolis. Frost drove to the KCP Group workplace solely to seek out it empty.

In leaving Stifel Nicolaus, the previous workers took steps clearly meant to make sure they’d be protected by the Dealer Protocol. Pence, as an illustration, despatched an electronic mail on Feb. 17 with an hooked up checklist together with 5 items of consumer data.

His electronic mail, despatched additionally on behalf of Jamie Knall and Cohen, particularly states: “Notice that in accordance with the Dealer Protocol, this checklist does NOT embody any consumer account numbers.” The resignation letters submitted by Knall, Cohen and Pence additionally mentioned they have been solely taking data protected by the protocol.

Stifel’s grievance alleges the Sapient founders have been conspiring to take purchasers with them even earlier than they left. Cohen, as an illustration, is accused of emailing purchasers on Feb. 14 — three days earlier than his resignation — to make plans for the next week to debate their year-end efficiency stories. 

Sapient can also be accused of deceptive the general public through the use of Twitter, LinkedIn and Fb accounts to submit statements like “KCP Group is now Sapient Capital.” Sapient’s web site for a time additionally boasted that the agency had $10 billion below administration — the identical quantity as was managed by KCP Group — and a minimum of 40 purchasers with greater than $50 million in invested belongings. These now-removed claims have been contradicted by the Kind ADV Sapient filed with the Securities Exchange Commission on Feb. 21, displaying no belongings below administration and no purchasers.

Sapient is technically an funding advisory registered solely with the SEC, which has practically 15,000 RIAs below its jurisdiction. However Stifel Nicolaus additionally turned to the Monetary Business Regulatory Authority — which oversees the broker-dealer facet of the trade — on Feb. 28 to file arbitration claims towards Jamie Knall, Pence, Cohen, LeBlanc and two different ex-KCP Group workers: Eduardo Aguirre and Michael Corridor. The arbitration declare lays out related allegations to Stifel’s civil case and seeks greater than $50 million in compensatory damages, in addition to punitive damages in quantity to be determined by the arbitrators. That request is now on the coronary heart of the most recent wrangling between the 2 corporations.

In a movement to dismiss on April 5, Sapient questioned why Stifel Nicolaus determined to deliver its civil claims in federal courtroom in Missouri. In its grievance, Stifel notes that it supplied assist to its former Indianapolis brokers by means of its St. Louis headquarters and that a number of the purchasers solicited by Sapient Capital lived in Missouri. That, in keeping with Sapient’s movement, ignores the truth that the dispute facilities on actions that occurred in Indiana.

Ought to that movement to dismiss the case fail, Sapient Capital is asking the Missouri federal courtroom to both require the case be resolved by FINRA arbitration or a minimum of keep its personal proceedings till the case earlier than FINRA is settled.

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