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Handle with Care; Doing lift-outs can be tricky, especially if banks don't follow proper procedures.

Investment Dealers' Digest - Joshua Hamerman

The current recruitment environment for individual bankers, as well as whole teams, is one of the best Wall Street has ever known. However, with abundance comes responsibility, and when performing lift-outs, hiring institutions have to be extremely careful.

If they aren't, they could find themselves in a situation similar to that facing Deutsche Bank and a former employee, Eric Heaton. Bank of America Merrill Lynch is suing the German bank over its lift-out of 12 bankers from BofA Merrill's financial institutions group in New York, London and Hong Kong, which Deutsche announcedFeb. 3. The new hires included managing directors Venkat Badinehal, Richard Gibb and Richard Slimmon, director Jason Braunstein and Eric, David and Seth Heaton (Eric and David are identical twins). Before B of A's Jan. 1 acquisition of Merrill Lynch, Eric Heaton had been Merrill's treasurer and David Heaton had beenits head of global asset management investment banking.

The lawsuit, filed March 3 in New York State Supreme Court, is seeking $100 million in damages and an injunction preventing Eric Heaton from starting work at Deutsche until Jan. 31, 2010, when dividends on his restricted Merrill shares will vest. According to the noncompete agreement Heaton signed with Merrill, he must wait six months from the day of his notice before starting at a competitor, not the 90 days Deutsche stated he would observe. According to BofA Merrill's complaint, nine out of the 12 bankers signed noncompete, nonsolicitation and confidentiality agreements.

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Though David Heaton is not being sued, the complaint alleges he "repeatedly e-mailed to his personal e-mail address highly proprietary information" shortly before giving his notice. Between Jan. 23 and Feb. 1, it charges, he e-mailed himself materials designated "confidential," including revised term sheets and an e-mail from BofA counsel K&L Gates related to investment banking transactions.

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Most recruiters agree that when conducting lift-outs it is important to approach every banker individually and to communicate primarily with the team leader.

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When lift-outs are taken to court, the plaintiffs likely have concrete evidence of wrongdoing.

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The Merrill-Deutsche Bank dispute illustrates several trends in the investment banking industry.

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Not only are group moves occurring more frequently, but they increasingly involve offices in multiple countries. In addition, at least one team member has a lengthy notice provision during which he or she is supposed to be paid (garden leave). Courts are split on whether to enforce those garden leave provisions.

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Financial services firms do not want departing employees working with clients. In the case brought by Invesco against Deutsche Bank in 2007 (in which Invesco accused Deutsche Bank's Americas investment management business of poaching four fixed-income professionals), the court ruled that Invesco had to give the departing employees duties that were commensurate with the responsibilities they held before giving notice, although the judge determined it was "likely" the employees breached "their common law and contractual fiduciary duties to Invesco."

As for noncompete and nonsolicitation agreements, New York law has evolved. Until the mid-1990s, noncompete and nonsolicitation agreements would only be enforced if cases involved trade secrets, especially in the financial services industry. In Maltby v. Harlow Meyer Savage (1996), the six-month noncompete clauses for stockbrokers in that case were upheld by the U.S. Court of Appeals for the Second Circuit.

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If it is determined that Eric and David Heaton were actually competing against Merrill while they were employed there - giving information to Deutsche Bank, hiring colleagues and preparing to move clients- that would be considered competition under New York law, says Wendi Lazar, a partner and co-head of the executives and professionals practice group at Outten & Golden.

"New York has a reasonable test," Lazar says. "A noncompete agreement has to be reasonable in time and scope, and it has to be necessary to protect the legitimate business interest of the employer, and each industry has different standards. The general tenor of the country is similar to New York except for California, where noncompetes are against public policy."

Lazar has represented employees involved in many lift-outs from Merrill, Deutsche Bank and other investment banks, though she is not counseling on this case. "Everybody does it, and firms wind up suing each other over it all the time," she says. "No bank in New York has not lifted out, at one time or another, a group of employees - it's a very inexpensive way of buying a business. It's just a question of how much evidence the old employer has against the employees and/or the new employer, and those agreements don't have to be in writing."

The good news for recruiters is that institutions losing employees rarely go after the executive search firms that facilitated the poaching. One reason is a fear of developing a reputation for suing recruiters.

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In addition, plaintiffs such as BofA Merrill need to prove that defendants like Deutsche Bank committed "tortious interference" by actively encouraging and working with employees to break their nonsolicitation agreements, and did so with malicious intent. Recruiters, on the other hand, are merely acting as contracted agents of the new employers, with no legal obligation not to poach, Lazar says.