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Schwab Wins $957K Award From RBC; Panel Rules that Broker Violated Terms of Employment Agreement

Investment News - Dan Jamieson

Charles Schwab & Co. Inc. has won a nearly $1 million award in an unusual raiding case against RBC Wealth Management Inc.

The case erupted after Philadelphia broker Scott Karpiak, who was part of San Francisco-based Schwab's advice unit, left to join the Minneapolis firm, previously known as RBC Dain Rauscher.

He ended up transferring about $24 million in assets to RBC, said Michael Greco, a partner at Fisher & Phillips LLP of Philadelphia, who represented Schwab.

An arbitration panel of the Financial Industry Regulatory Authority Inc. of New York and Washington late last month awarded $957,000 to Schwab.

The panel upheld Schwab's employment agreement, which specified that Mr. Karpiak would owe Schwab 4% of any client assets he took from the company.

That type of clause is known as a ``liquidated damages'' provision and is unique to Schwab, Mr. Greco said.

The case could raise the stakes for Schwab brokers who change firms and solicit clients.

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Typically, similar cases against wirehouse brokers are settled for a fraction of a broker's annual production. Brokers typically produce about 1% or less of assets under their control.

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Legal observers doubt that other firms will follow Schwab and put liquidated-damages provisions in their broker contracts. ``The problem is that a liquidated-damages clause in a contract may prevent firms from obtaining temporary restraining orders against their former employees,'' said Brent Burns, a lawyer at Lax & Neville LLP in New York.

Courts usually will grant restraining orders only if the plaintiff brokerage firm can argue that it will be irreparably harmed if a broker isn't prevented from taking clients.

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The arbitration panel in Mr. Karpiak's case didn't explain its reasoning.

``So it is impossible to tell why the panel felt giving Schwab liquidated damages was proper in this case or why awarding such damages together with injunctive relief was proper,'' said Larry Moy, an employment lawyer and partner at Outten & Golden LLP in New York.

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In court testimony given in response to Schwab's request for an injunction against him, Mr. Karpiak admitted preparing a spreadsheet of customer names, addresses and account titles from information that he got in part from the firm's databases. He gave the information to RBC prior to departing Schwab.

Mr. Karpiak ultimately contacted about 90 clients, 17 of whom transferred their accounts to RBC.

He claimed that he was one of 200 individuals who were selected by Schwab to assist in developing a fee-based advisory program in 2001.

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