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After Morgan Stanley Raised Serious Questions in Failed TRO Against Former Employee, The Parties Stipulate to Preliminary Injunction
October 19, 2021
In a recent federal case, Morgan Stanley raised a number of serious questions about a former employee, but those questions didn't help the firm win a TRO. On the other hand, the former employee is now handicapped in the ensuing race and laboring under the weight of those same questions. Making matters worse, the employee seems to have conceded that some alleged misconduct was an honest mistake. Not unexpectedly, the parties reached an agreement in the form of a Stipulated Preliminary Injunction Order.
Case in Point
On July 30, 2021, Morgan Stanley Smith Barney LLC filed an action in the United States District Court for the District of Oregon ("DOR") against former employee Robert Sevcik asserting breaches of contract and of the duty of loyalty. Morgan Stanley sought a temporary restraining order ("TRO") and a preliminary injunction.
Morgan Stanley Smith Barney LLC, Plaintiff, v. Robert Sevcik, Defendant (Opinion/Order, United States District Court for the District of Oregon, 21-CV-01120 / August 6, 2021)
http://brokeandbroker.com/PDF/SevcikOpOrdDOR210806.pdf
Solicitation and Information
In furtherance of its action, Morgan Stanley sought an Order:
that prohibits Sevcik, "directly or indirectly, and whether alone or in concert with others," including others affiliated with D.A. Davidson, from doing the following:
- Soliciting or attempting to solicit any Morgan Stanley client serviced by Sevcik or any other Active Advisor in connection with the FAP, or whose names became known to him in connection with the FAP, while working for Morgan Stanley, with respect to any line of business in which Morgan Stanley or any of its affiliates is engaged (excluding Sevcik's immediate family);
- Soliciting any Morgan Stanley clients or household accounts that are subject to the Policy (excluding Sevcik's immediate family);
- Using, disclosing, or transmitting for any purpose, any records, documents, or information relating to Morgan Stanley's clients, business or marketing strategies, or business operations; or
- Retaining such information in any form.
at Page 10 of the DOR Opinion/Order
BrokerCheck Disclosures
Online FINRA BrokerCheck records as of August 11, 2021, disclose that Sevcik was first registered in 2008 with Citigroup Global Markets and, thereafter, with Morgan Stanley from June 2009 to July 26, 2021, and, then with D. A. Davidson & Co. BrokerCheck asserts that on July 12, 2021, "MSSB" had "discharged" Sevcik based upon allegations that:
[T]he representative submitted transactions under production numbers that were inconsistent with agreement with another representative resulting in a shortfall of revenue credited to the other representative.
The DOR Opinion/Order asserts that former Morgan Stanley financial advisor James Maddux had retired from the firm in 2017, and entered into its Former Advisor Program ("FAP"):
As part of the FAP, Maddux agreed to give up his license and encourage his clients to remain with Morgan Stanley after his departure. His client accounts would be serviced by active Morgan Stanley financial advisors and, for a five-year period, Maddux would receive a declining portion of the revenue generated by the accounts.In the summer of 2017, Sevcik signed a memorandum of understanding in which he agreed to serve as an active advisor for some of the Maddux accounts through the FAP (the "FAP Agreement"). Doc. 1 Ex. A. These included accounts previously serviced under five "Joint Production Number[s]." Id. at 2. The FAP Agreement includes a non-solicitation provision that provides:
following the termination of your employment for any reason, for a period of one year or the remainder of the Payment Period, whichever is longer, you will not solicit or attempt to solicit, directly or indirectly, any of the Clients who were served by you or any other Active Advisor in connection with this FAP Arrangement, or whose names became known to you in connection with this FAP Arrangement[.]"
Id. at 3. It also includes provisions protecting "Confidential Trade Secret Information," including client contact information, which prohibit Sevcik from using or retaining such information after "the suspension or termination of [his] employment relationship with Morgan Stanley for any reason[.]" Id. Sevcik also agreed that Morgan Stanley "will be entitled to injunctive relief" for a breach of those provisions and "will suffer immediate and irreparable harm and that money damages will not be adequate to compensate Morgan Stanley or to protect and preserve the status quo." Id. at 4.
at Pages 2 - 3 of the DOR Opinion/Orders
Subsequent to signing the MOU referenced above, Sevcik purportedly signed additional documents memorializing his agreement to serve as an active advisor in the FAP program subject to similar non-solicitation and client information provisions; and he also agreed to abide by Morgan Stanley's "Code of Conduct," which, inter alia, promulgated a client confidentiality obligation.
Secret Diversion of Commissions
Following Sevcik's July 2021 termination, Morgan Stanley alleged that:
at Pages 4 - 5 of the DOR Opinion/Orders[S]evcik "began secretly diverting commission income away from" the FAP arrangement "including by improperly executing client trades outside of the" arrangement. Id. Sevcik's conduct started "almost immediately around the time of the consummation of" the FAP Agreement, "depriving Mr. Maddux of tens of thousands of dollars of retirement income." Id. "It took years for Morgan Stanley to uncover" Sevcik's conduct, but when it did, it terminated him as soon as it had completed its investigation. Id.
In its litany of alleged abuses perpetrated by Sevcik, Morgan Stanley alleges, in part, that he:
- improperly communicated with his former clients,
- made disparaging statements about the firm,
- solicited the migration of former clients' Morgan Stanley accounts to D.A. Davidson,
- may have wrongfully retained client information
- engaged in wrongful solicitation.
Honest Mistake
Sevcik disputed Morgan Stanley's allegations and to the extent that any of his conduct violated the FAP Agreement, he argued that:
at Page 7 of the DOR Opinion/Ordershis conduct was an "honest mistake based on [his] misunderstanding" of the scope of the FAP Agreement. Sevcik Decl. ¶ 17. When he signed the FAP Agreement, Sevcik believed "that new transactional business after retirement was outside the FAP agreement and should be ticketed under the current existing team's rep code." Id. He continued operating under this understanding for four years, during which time no one told him that he was violating the FAP Agreement. Id. When Morgan Stanley did confront him about the issue, Sevcik "offered to pay back . . . any money received that was incompliant with" the FAP Agreement, but Morgan Stanley rejected his offer and terminated him. Id. Sevcik also asserts that because "[t]ransactional business is a very small part of [his] business, the amount involved is not anywhere close to 'tens of thousands of dollars.' " Id.
Additionally, as to any cited client communications, Sevcik alleged that they were largely in response to queries from clients seeking to continue their relationships with him after his departure from Morgan Stanley, and that many of his clients had evolved from solely business relationships to personal or social ones outside of his financial advisor role. Pointedly, Sevcik asserts that he did not retain Morgan Stanley's confidential information.
The Four-Part TRO/Preliminary Injunction Test
Consistent with similar tests used by federal courts around the country, DOR enunciated the standards by which it decides whether to invoke the "extraordinary remedy" of granting a TRO/Preliminary Injunction:
at Pages 11 - 12 of the DOR Opinion/OrdersA plaintiff seeking such relief generally must show that: (1) the plaintiff is likely to succeed on the merits; (2) the plaintiff is likely to suffer irreparable harm in the absence of preliminary relief; (3) the balance of equities tips in the plaintiff's favor; and (4) an injunction is in the public interest. Winter, 555 U.S. at 22 (rejecting the Ninth Circuit's earlier rule that the mere "possibility" of irreparable harm, as opposed to its likelihood, was sufficient, in some circumstances, to justify a preliminary injunction). . . .
Serious Questions
Although DOR conceded that Morgan Stanley had raised "serious questions" about Sevcik's cited conduct; however, merely raising mere questions, albeit serious ones, does not satisfy the Court's requirement that a party moving for injunctive relief prove that its case will likely succeed on the merits. Pointedly, the Court asserts in part that:
at Pages 14 - 15 of the DOR Opinion/Orders[M]organ Stanley has not met its burden to show that Sevcik used or retained client contact information after his termination, in violation of the confidentiality provisions. Sevcik denies Morgan Stanley's claim that he "may have" taken client contact information with him and asserts that he has not personally reached out to any former clients. Sevcik offered affirmative evidence contradicting Morgan Stanley's assertions that Sevcik "reached out" to two clients. The only indirect communication with Morgan Stanley clients, the D.A. Davidson postcard sent to Maddux, was accomplished using a commercial mailing list that D.A. Davidson bought. On this record, the Court cannot find that Morgan Stanley's belief that Sevcik took and used client information is anything more than speculation.Additionally, on this record, the Court is not prepared to reach conclusions regarding Morgan Stanley's claim for breach of the duty of loyalty. Morgan Stanley offers no authority or legal argument supporting this claim. And, like Morgan's Stanley's claims that Sevcik took client information and solicited its clients, its claim that Sevcik misrepresented the circumstances of his termination in a way that harms Morgan Stanley's reputation is hotly disputed.
Irreparable Harm
Just as the Court emphasized the need to show a "likelihood" of success on the merits, the same burden was imposed on Morgan Stanley's allegation of irreparable harm:
In sum, the Court cannot find that Morgan Stanley has shown a likelihood, rather than a mere "possibility," that it will suffer some irreparable harm in the form of lost client relationships and accompanying financial damage in the absence of temporary injunctive relief that prohibits Sevcik from soliciting its clients. . . .
at Page 16 of the DOR Opinion/Orders
The Balancing Test
Finally, DOR seemed persuaded by Sevcik's argument that the mere "possibility" that Morgan Stanley could suffer economic harm prompted by the loss of his relatively "miniscule" commissions should not warrant the imposition of an injunction -- all the more so given the asymmetric and crushing impact that would cripple him in the form of losing his ability to pursue his livelihood. Sevcik argues that the "equities" and the "public interest" for not awarding injunctive relieve to Morgan Stanley are stacked in his favor. In response, the Court finds that the balance of equities favors Morgan Stanley; however, the Court concedes that scales are only tipped slightly in the former employer's favor -- similarly, the Court does not find that the public interest is weighted strongly in either party's favor.
Conclusion
In summing up its conclusions, DOR offers this:
On this record, the Court finds that, at most, Morgan Stanley has shown "serious questions" going to the merits of the case and that the balance of equities weighs slightly in its favor, but it has not shown a likelihood of irreparable harm, and the public interest does not favor either side. Morgan Stanley has, therefore, failed to show that it is entitled to preliminary injunctive relief and Morgan Stanley's Motion for a Temporary Restraining Order (doc. 4) is DENIED.The Court will contact the parties to schedule a telephonic status conference to discuss a briefing schedule for Sevcik's Motion to Compel Arbitration (doc. 18) and whether and how Morgan Stanley wishes to proceed on its request for a preliminary injunction.
at Page 18 of the DOR Opinion/Orders
Bill Singer's August 2021 Comment
The DOR Opinion/Order may seem a victory for Sevcik because the Court declined to impose a TRO or preliminary injunction. A better understanding of the Opinion/Order is that the Court is being meticulous about following well-established jurisprudence that reserves the imposition of a TRO/preliminary injunction for circumstances where a victim will be irreparably harmed on a pre-trial basis absent such intervention. Essentially, a TRO is an extraordinary remedy that should be sparingly used in cases where the party seeking the relief might well be irreparably harmed before a judge or jury has time to rule in their favor.
Sevcik secured an important victory by defeating Morgan Stanley's TRO application. He gets to live another day and to continue to earn a living, which he will likely need to do in order to pay his ongoing legal bills. That being said, Sevcik should note the Court's repeated references to its belief that Morgan Stanley raised "serious questions" about his conduct. Similarly, Morgan Stanley should also take notice that the Court distinguishes between a litigant raising questions about an adversary's conduct and that same litigant being able to satisfy its burden of proof. Frankly, no matter how high you stack a pile of "serious questions," they will rarely rise to the level of a preponderance of the evidence standard.
UPDATE: October 2021 -- Stipulated Preliminary Injunction Order
Lo and behold, a couple of months pass after the August 2021 DOR Order and the parties stipulate to a Preliminary Injunction. Morgan Stanley Smith Barney LLC, Plaintiff, v. Robert Sevcik, Defendant (Stipulated Preliminary Injunction Order, United States District Court for the District of Oregon, 21-CV-01120 / October 15, 2021)
https://brokeandbroker.com/PDF/SevcikStipOrdDOR211015.pdf
As set forth in the Stipulated Order:
1. Defendant Robert Sevcik ("Sevcik" or "Defendant") is hereby enjoined from initiating, whether directly or indirectly, including in concert with any D.A. Davidson & Co. ("Davidson") representative or other person, any contact or communication of any kind with any Morgan Stanley client that is subject to the Financial Advisor Program Agreement entered into by Defendant ("FAP Client") and/or the Joint Production Policy and any related Joint Production Agreement entered into by Defendant ("JPA Client").2. Nothing in Paragraph 1 of this Order shall prohibit Defendant from: (a) processing account transfer requests received from FAP and JPA Clients; (b) doing business with FAP and JPA Clients after they transferred their accounts to Davidson; or (c) responding to communications from FAP and JPA Clients that are initiated by the FAP and JPA Clients, provided that Defendant shall keep a log of all such clients who initiate contact with him including the identity of the client, the date on which the contact was made and the mode of contact3. Defendant is enjoined from using, disclosing, and transferring to any person or entity any Morgan Stanley confidential information which he created, developed, received, used, learned of or had access to by virtue of his employment with Morgan Stanley, that Defendant retained upon his departure from Morgan Stanley, including, but not limited to, all documents (whether in hard copy or electronic form) containing client names, contact information, account numbers, and/or account information ("Confidential Information").4. Within two business days of the execution of this Stipulated Preliminary Injunction Order, to the extent he has any, Defendant will return to Morgan Stanley any Morgan Stanley Confidential Information in his possession custody or control, and all other information Defendant retained upon his departure from Morgan Stanley which was not voluntarily disclosed by clients to Defendant after he joined Davidson. If Defendant contends he is not in possession of any such Confidential Information, he shall certify in writing, under penalties of perjury, that after a diligent search of his personal effects and electronic devices, Defendant does not have any such Confidential Information in his possession, custody or control.5. Any FAP and JPA Clients who inquire of Defendant's whereabouts shall be advised he works with Davidson. Morgan Stanley will provide contact information for Defendant at Davidson upon request by any FAP and JPA Clients.6. Plaintiff and Defendant understand and agree that they have an obligation to preserve all evidence related to the claims and defenses in this case, including but not limited to evidence of Defendant's communications with Morgan Stanley clients, specifically those communications that occurred after July 12, 2021.7. By stipulating to this Preliminary Injunction Order, the parties waive their right to a temporary restraining order and/or preliminary injunction hearing and, other than the execution of this Order, the Court shall take no other action on Plaintiff's request for such relief.8. Plaintiff acknowledges that by Defendant stipulating to this Preliminary Injunction Order and consenting to a Preliminary Injunction, Defendant is not agreeing to or admitting liability or acknowledging any wrongdoing. Nothing in this Stipulated Preliminary Injunction Order makes any findings of fact or any determination as to liability and, further, it is not making any findings as to whether Defendant violated his agreements with Morgan Stanley. This Stipulated Preliminary Injunction Order is not a decision on the ultimate merits of this dispute, and is without prejudice to the rights, remedies, claims, or defenses of any party hereto, and no party hereto shall argue in the FINRA arbitration that this Order precludes the making of any substantive argument in the FINRA arbitration.9. This Preliminary Injunction Order is entered without bond by agreement of the parties and remains in effect until the FINRA arbitration panel issues an order resolving Morgan Stanley's claim for permanent injunctive relief. . . .