Schwab Chases Another Former Broker with Lawsuit
(Corrects headline and story to indicate that Schwab is seeking a preliminary injunction, not a restraining order.)
Charles Schwab & Co. asked a federal court on Wednesday to prevent a broker who left a branch in New Orleans from contacting customers about joining him at Gulf Coast Wealth Management, a hybrid registered investment advisor affiliated with LPL Financial.
The litigation continues a trend by discount brokers such as Schwab and Fidelity Investments against brokers who try to contact former clients, in alleged violation of their employment contracts, using information that the firms say they own.
Brokers like Martinez work with wealthier customers seeking higher levels of service than average discount broker investors, according to the lawsuit, and are more dependent on referrals than are advisors at firms that do not have self-directed investing models.
“Martinez did not develop a ‘book’ of business through cold calls, marketing efforts, or his own connections, like brokers at other brokerage firms do,” the filing said. “Instead, Schwab provided Martinez with pre-existing clients or qualified leads to service.”
Motions to enjoin brokers from soliciting business were commonplace from large full-service firms before they formed the Protocol for Broker Recruiting more than ten years ago in order to lower legal costs. The pact lets advisors take limited client contact information if they move to other signatory firms.
Morgan Stanley and UBS dropped out of the agreement in late 2017 in order to rein in broker movement, and the former has been selectively filing for injunctions and temporary restraining orders against breakaway brokers. (Morgan Stanley won a restraining order in May against a broker who joined Janney Montgomery in Pennsylvania and lost a bid last month to gag a California broker who migrated to Wells Fargo Advisors.)
Schwab, which was never in the Protocol, has stepped up litigation as it expands from its core discount commission business into selling more fee-based advisory products and financial planning services to the wealthy.
“Schwab considers the protection of customer information and confidentiality to be of utmost importance, and expects that its representatives will comply with their contractual and legal obligations concerning customer information,” Peter Greenley, managing director of corporate reputation said in an e-mail. “If it becomes necessary, Schwab will not hesitate to enforce those obligations in a court or arbitration proceeding.”
Martinez, who worked at Schwab for 10 of his 18 years as a registered representative, resigned in March after giving one month’s notice, according to the lawsuit. Two customers recently reported to the firm that they received calls from him, the lawsuit said.
Unlike other similar lawsuits, the Schwab filing does not specify the size of his practice nor allege that he illegally copied or otherwise absconded with confidential client information.
Reached at his Gulf Coast Wealth office, Martinez declined to comment and appeared surprised to hear about the filing. A spokeswoman at LPL, which is not named as a defendant, declined to comment.