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Invoking the doctrine of unclean hands, a federal judge has ruled that a brokerage house cannot win an injunction against a stock broker who induced his clients to follow him to a different company if it helped him do the same thing when it recruited him away from another company years before. In Salomon Smith Barney Inc. v. Vockel, U.S. District Judge Harvey Bartle III was asked to restrain broker Stewart M. Vockel from using, disclosing, or misappropriating Smith Barney’s customer information, to compel Vockel to undo account transfers for any former Smith Barney accounts he successfully caused to be transferred to his new employer, Paine Webber Inc., and to require Vockel to return all documents containing Smith Barney client information. Bartle refused, saying “it is undisputed that in 1994 Smith Barney secretly encouraged and aided Vockel to engage in the same unconscionable behavior of which it now complains,” when it recruited him away from Merrill Lynch. “For over five years, Smith Barney has shared in the gains of its unconscionable conduct,” Bartle wrote. “At the time it hired Vockel, Smith Barney showed no respect for the confidential nature of Merrill Lynch’s client data.” The ruling is significant in part because it did not involve a restrictive covenant. Instead, Smith Barney’s lawyer, Chad T. Wishchuk of McAleese McGoldrick & Susanin, alleged only that Vockel had misused confidential client information. Although the matter is currently before an arbitration panel of the National Association of Securities Dealers, Wishchuk filed suit in federal court to get an interim injunction. But Vockel’s lawyers, Stephen J. Mathes and C. Scott Spear of Hoyle Morris & Kerr, argued that Smith Barney has no right to complain of a practice that it, too, uses in recruiting successful brokers away from other houses. “In the brokerage industry, it is a universally accepted practice for a broker to transfer his or her clients to his or her new employer,” Mathes and Spear wrote in their brief. “All of the major brokerage firms routinely hire brokers from their competitors and encourage them to transfer their books of business in conformance with this industry practice. The brokerage firms do this even though the broker may be violating the literal terms of a restrictive covenant agreement,” they wrote. Smith Barney, they said, “follows these industry practices in its recruitment of brokers from the competition. In fact, Smith Barney has this process down to such a science that it has created a ‘Do’s and Don’ts’ hand-out for brokers coming over from other firms.” Bartle found that the events surrounding Vockel’s move from Smith Barney to Paine Webber followed an almost identical pattern to his move from Merrill Lynch to Smith Barney. In both cases, the new employer asked Vockel to turn over his client information prior to his move so that “solicitation packages” could be prepared by the new employer and mailed to clients on the day that Vockel resigned. Both times, Vockel resigned on a Friday and spent the weekend calling clients to let them know he was moving and that they would be receiving a package from his new employer. As a result, Bartle found that Smith Barney came to court with unclean hands and therefore lacked standing to seek equitable relief. Bartle said the 3rd U.S. Circuit Court of Appeals has held that the doctrine of unclean hands focuses solely on the plaintiff and is “a self imposed ordinance that closes the doors of a court of equity to one tainted with inequitableness or bad faith relative to the matter in which he seeks relief, however improper may have been the behavior of the defendant.” But the doctrine is a limited one, Bartle said, in which courts “are not to consider misconduct that has no connection to the case at hand.” To succeed as a defense, he said, the “unconscionable act” of the plaintiff must have “immediate and necessary relation to the equity that he seeks in respect of the matter in litigation.” Bartle found that Vockel met the test by showing that Smith Barney had engaged in the same conduct it was complaining of when it first hired Vockel. “Smith Barney seeks the help of a court of equity to prevent the same conduct by Vockel which it had previously abetted and from which it has handsomely profited. Now it wants the court to prevent the loss of that profit. If what Vockel is doing in 2000 is wrong, it is hard to see why Vockel’s and Smith Barney’s conduct in 1994 was not wrong,” Bartle wrote. Vockel has worked as a bond trader or financial consultant for years. Merrill Lynch hired him in 1991, and Smith Barney recruited him away in November 1994. At the time he left Merrill Lynch, he had been managing accounts worth approximately $23 million. In January 2000, Vockel approached his long-time acquaintance Elliott Goodfriend, who is the Philadelphia Branch Manager for Paine Webber Inc., about the possibility of moving from Smith Barney to Paine Webber. In late March, Paine Webber made Vockel an offer of employment, which included a sizable signing bonus. When he left Smith Barney on April 28, 2000, Vockel was managing approximately 470 accounts worth a total of approximately $70 million, which generated over $500,000 in annual commissions. About a week after Vockel received the offer, the administrative manager in Paine Webber’s Philadelphia office, Jim Checksfield, told Vockel that Paine Webber needed his Smith Barney client account statements. While still employed by Smith Barney and without asking for permission from it or any of his clients, Vockel provided to Paine Webber the account statements for 254 of the 470 accounts he was servicing. Paine Webber forwarded the material to an outside firm, which, at Paine Webber’s expense, prepared solicitation packages and then mailed them to the account holders. The solicitation package contained a cover letter drafted and signed by Vockel, an account transfer form with each client’s Smith Barney account numbers preprinted on it, and a Paine Webber “new account” form. The solicitation packages were mailed on Friday, April 28, 2000 — the same day that Vockel had submitted his letter of resignation to Smith Barney. When he left, Vockel took with him newly printed gain-and-loss statements for all of the Smith Barney accounts he had serviced and a “household list,” which showed the total assets, monthly activity, and gains and losses for each of his Smith Barney accounts. Vockel spent the weekend calling his clients. He told them about his move to Paine Webber and explained that they soon would be receiving solicitation packages that would enable them to transfer their accounts to his new employer. Bartle found that when Vockel had left Merrill Lynch to join Smith Barney in 1994, he had used a nearly identical letter to solicit his clients to follow him. In fact, he said, the first letter was used “as a model” for the second. Nearly all of Vockel’s Merrill Lynch clients transferred their accounts. About 60 percent of the accounts he oversaw at Smith Barney followed him from Merrill Lynch, and another 30 percent resulted from referrals from those clients who had followed him from Merrill Lynch to Smith Barney.

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