Brokerage battles

When a broker leaves his current employer for another, battles frequently erupt as the parties scramble to win over the adviser's clients. Such disputes often wind up in court, where judges must adjudicate which practices are acceptable and which are not. Here are a few such cases from Canadian courts.

When a broker leaves his current employer for another, battles frequently erupt as the parties scramble to win over the adviser's clients. Such disputes often wind up in court, where judges must adjudicate which practices are acceptable and which are not. Here are a few such cases from Canadian courts.

Merrill Lynch Canada Inc. v. Pastro and Marshall

On Nov. 26, 1999, two longtime investment advisers with Merrill Lynch in Trail, B.C., suddenly quit and joined rival Nesbitt Burns. Darren Pastro and Scott Marshall promptly opened a new Nesbitt Burns office in nearby Rossland, and began wooing clients. It was bad news for Merrill Lynch: the two men were responsible for about one-third of the office's asset base and the same proportion of its annual revenue. However, it so happened that Pastro had a non-competition agreement that restrained him from soliciting clients for six months following his departure. Merrill Lynch successfully applied for an injunction against both men, and a later appeal by Pastro and Marshall failed. “The public has an interest…in free competition but there is also a principle of law that contractual agreements ought to be enforced,” noted Justice John Hall of the Court of Appeal for British Columbia.

CIBC World Markets Inc. v. MacDonald et al.

The weekend of June 17 and 18, 2000, was a busy one at CIBC Wood Gundy's Kelowna, B.C., branch. Manager Daniel MacDonald and several employees busily accessed client portfolios and other electronic files and boxed up their belongings. At 6 a.m. the next Monday, the crew faxed their resignation letters to CIBC from the offices of their new employer, TD Evergreen. MacDonald said he was unhappy that CIBC had changed the scheme by which CIBC bank branches referred prospective brokerage clients to Wood Gundy.

CIBC later noticed that certain documents were missing, including client lists. MacDonald's group was busily contacting clients; in fact, because one letter was dated two days before the exodus, it seemed that the group had begun soliciting clients days before they'd resigned.

As Justice Linda Loo of the Supreme Court of British Columbia noted while granting a temporary injunction preventing members of MacDonald's group from contacting former clients: “MacDonald was at the starting line and took off before Wood Gundy knew they were in a competition. That surely cannot be described as a fair race.”

RBC Dominion Securities Inc. v. Merrill Lynch Canada Inc. et al.

For much of 2000, discontent wafted through the corridors of the Cranbrook, B.C., office of RBC Dominion Securities and its satellite in nearby Nelson. Senior investment advisers were worried that their flexible and generous compensation packages would be reduced. Unbeknownst to his employer, branch manager Don Delamont had decided to take action: he entered discussions with James Michaud, regional manager with Merrill Lynch, about employment opportunities. Michaud himself had left RBC the previous year amid much acrimony, and happened to be both fast friends with Delamont and related to him by marriage.

Delamont walked out the door on Nov. 20 to join Merrill Lynch, taking with him all of the experienced advisers and their assistants. He left ready for battle; several weeks before leaving, his group seized or copied lots of client documentation, from both computer and paper files. This placed Merrill Lynch in an excellent position from which to seize RBC's clients, while leaving RBC few resources to protect its business. Merrill's new advisers were able to convince between half and 90% of their former clients to move their accounts, while RBC managed to keep just 13.5% of the assets under management. Its Cranbrook branch nearly collapsed.

RBC failed to obtain an injunction. But the Supreme Court of British Columbia found that Delamont's group had breached various terms of their employment contracts with RBC, and competed unfairly with their former employer. Madam Justice Heather Holmes, who observed that Delamont had been less than forthcoming to RBC officials in the months leading up to the exodus, came down hard on the man. “In all these circumstances, it is difficult to conceive of a more fundamental breach of the duty of good faith as branch manager.” A complex judgment saw Delamont and Michaud pay $10,000 each in punitive damages; Merrill Lynch paid $250,000.

Research Capital Corp. v. Yorkton Securities Inc.

In November 2001, Research Capital Corp. and Yorkton Securities Inc. entered preliminary discussions aimed at selling a portion of one company to the other. As is typical in such talks, confidential information changed hands. Both companies agreed that the information would be used only for the matter at hand, that it would not be copied, and that both parties would refrain from recruiting each others' employees for six months.

The talks went nowhere. In July 2002, however, two employees from RCC's Calgary office met with a Yorkton executive and former colleague. This meeting eventually resulted in seven RCC investment advisers joining Yorkton in September 2002. Combined, those employees represented 63% of RCC's business in Calgary. The departees took with them client lists and other information, which they used to solicit clients.

RCC applied for an injunction to prevent its former employees from soliciting clients. The application didn't get very far. Justice Peter Martin of the Court of Queen's Bench of Alberta found that most of the clients in question had come to RCC in 1998, when RCC pulled approximately the same manoeuvre on another brokerage, CM Oliver. Indeed, the clients were in some cases close friends or relatives of their advisers. Furthermore, according to Yorkton, RCC had also attempted to recruit Yorkton brokers in violation of the agreement. “I find it particularly damning that one of the Yorkton managers was recruited with an offer of remuneration based largely on the number of Yorkton employees he could recruit to follow him to RCC,” Martin noted. “I am left with the impression that RCC engaged in the same practice about which it now complains.” Needless to say, RCC didn't get the relief it sought.