Schwab Pursues Texas Broker Who Started His Own RIA

Charles Schwab & Co. for the second time in a week has sued a former broker in an attempt to block him from contacting former clients.

The San Francisco-based broker-dealer on Tuesday asked a U.S. District Court judge in Texas’ western district to issue a preliminary injunction against John A. VanEngelenhoven, who had worked at Schwab for 14 years before leaving last September to open a registered investment advisory firm in Austin. If approved, the injunction would be in effect until FINRA arbitrators resolve a complaint filed concurrently by Schwab that seeks damages and a permanent injunction.

The lawsuit was filed five days after Schwab sued another former broker, Andy W. Saeger, with similar claims. Saeger left for BMO Harris Financial Advisors in Wisconsin in October.

In its complaint on Tuesday, Schwab said it was informed by one client that VanEngelenhoven solicited him about transferring assets to his new RIA, Verity Financial.

VanEngelenhoven, who had been a broker for 16 years, did not respond to a request for comment on the lawsuit. He launched Verity in March.

A Schwab spokesman declined to comment on its growing litigation calendar, but as in previous cases reiterated that it expects current and former representatives to comply with their contractual and legal obligations regarding data on customers and their accounts.

“If it becomes necessary, Schwab will not hesitate to enforce those obligations in a court or arbitration proceeding,” Peter Greenley, managing director of corporate reputation, wrote in a e-mail..

The suit is the latest in a series of claims that Schwab, Fidelity Investments and independent registered investment advisory firms such as Mercer Advisors have revved up against former advisors who allegedly took client information or called their former clients as they sought to restart their practices.

Non-solicitation violation cases appear to be on the rise since Morgan Stanley and UBS withdrew from the Protocol for Broker Recruiting almost two years ago, said several employment lawyers.

“With a little bit of the erosion of the Broker Protocol, there’s sort of an uptick in these types of claims happening,” said George G. Miller, a partner at Shustak Reynolds & Partners, P.C. in San Diego, who is not involved in the case. “They’re obviously interested in protecting what they consider to be their assets and their revenue streams.”

Morgan Stanley has brought claims against over a dozen brokers who allegedly took and used firm-owned client-solicitation data since leaving the Protocol in late 2017, with mixed success.

Schwab has never been a member of the Protocol, which allows brokers to take limited client contact information with them to their new firms. The firm said in the filing that it is particularly sensitive to client solicitation because its in-house brokers get most of their referrals from the self-directed channel, in contrast to brokers who build their books through cold-calling and personal contacts.

In addition to the claim against Saeger, Schwab in July filed for an injunction alongside an arbitration claim against Alfredo J. Martinez, who set up a hybrid RIA practice in New Orleans after working for a decade at Schwab. A judge has not yet ruled on whether to grant the injunction.

Schwab’s willingness to bring a claim over even one allegation of client solicitation can have a strong deterrent effect on advisors considering leaving, said James Heavey, a partner at Barton LLP in New York, who often represents brokers in employment disputes

“Suing somebody and letting the advisors know that you will be litigious if you believe that client documents were taken or they’re soliciting clients is a great way to keep people believing,” said Heavey.

As in the case of VanEngelenhoven and Saeger, firms can take months to bring a claim as they wait for damages to accumulate, he said.

Schwab did not specify the size of VanEngelenhoven’s practice but said his clients had “hundreds of millions” in assets with the firm.