In the past year, a number of Australians have left their posts at financial services groups to set up on their own. But a recent court case in the US shows the kind of difficulties this course of action can bring about.
The success of boutique funds management outfits such as Portfolio partners has lead to a number of senior funds management executives to have a crack at their own operation. Contango Asset Management set up by a group of former HSBC executives and backed partially by the financial muscle of Kerry Packer is a recent case in point.
But while there are huge rewards for a business that gets it right, there are also a number of significant pitfalls for the unwary. One important issue, as a recent case testifies, is to ensure all branding, staffing and contractual issues have been resolved with former employers.
In the US, the phenomenon is far more widespread. Last month, US Trust Corp announced it would sue fund manager James Cowperthwait just weeks after he had left the group to start up on his own.
US Trust said it would sue Cowperthwait and his new investment company for allegedly stealing his former firm’s name, trade secrets and key employees.
Cowperthwait headed up US Trust’s Campbell, Cowperthwait funds management arm until he resigned to start his own New York-based company. Cowperthwait’s departure spurred the defection of 22 of the division’s 26 employees to Cowperthwait Partners LLP, according to the US Trust suit.
US Trust acquired Campbell, Cowperthwait & Co in 1992 when it had $US450 million in funds under management. The firm, which invests in large-company growth stocks with above-average earnings, was managing $US6 billion when Cowperthwait resigned, according to the lawsuit filed in New York State Supreme Court. US Trust manages about $US75 billion in total.
Cowperthwait and his fellow former US Trust employees “embarked on a course of contacting and soliciting business from (U.S. Trust’s) customers through the misappropriation of confidential customer data … and by misrepresentation that US Trust no longer offered certain financial products to its customers,” the suit said.
The US Trust suit is similar to a suit filed by Mellon Bank Corp’s Boston Co Asset Management subsidiary against Boston Partners Asset Management LP in 1995, after 34 employees, including CEO Desmond Heathwood, left to start the new company.
Boston Partners, which in four years has increased its assets under management to $15 billion from zero, made a payment of an undisclosed amount in December 1995 to settle the case through mediation.
By leaving US Trust en masse, Cowperthwait Partners employees: “have robbed US Trust of the opportunity to service their customers and to recruit new employees to transition the business,” the suit said.
William Campbell, who formed Campbell, Cowperthwait in 1972, died several years ago, a US Trust spokeswoman said.
The suit, which names James Cowperthwait, Cowperthwait Partners, and the 22 former US Trust employees, seeks unspecified damages. It also seeks an order preventing the fund from using the Cowperthwait name because “it has created a likelihood of confusion and mistake on the part of members of the investment advisory industry.”
And it seeks to bar Cowperthwait from encouraging US Trust employees to join his new fund and from accepting or soliciting US Trust clients for six months.
The suit claims Cowperthwait sent out a mass mailing to US Trust’s customers.
He also told Prudential Securities, Lockwood Financial Services, PaineWebber and Morgan Stanley Dean Witter & Co. that US Trust no longer offered its advisory services in a wrap service, the suit said.
The wrap service is a substantial portion of Campbell, Cowperthwait’s business, the suit said.
The suit accuses Cowperthwait and the former US Trust employees of breach of contract, misappropriation of trade secrets, breach of fiduciary duty, unfair competition and trade name infringement.
Pension funds and other institutional investors, including mutual funds, often stick with the people who manage their money, even if those managers change firms.
Lockwood Financial, which employs Campbell, Cowperthwait to invest a “substantial” amount of the $4 billion it oversees in assets has ordered an “immediate review,” according to spokeswoman Kate Monaghan.
A fund company’s “strength lies in its people,” she said, adding that Lockwood Financial hasn’t made any decisions.
Pennsylvania-based Lockwood Financial employs more than 50 fund companies to manage the money it oversees for customers investing at least $100,000.
Monaghan declined to specify the amount managed by Campbell, Cowperthwait.
Among Campbell, Cowperthwait’s assets under management are $900 million for Illinois Municipal Retirement Fund and $1.4 billion for the California Public Employees’ Retirement System. Officials at those pension funds said they’re reviewing the situation.
In the earlier case of Boston Co, the breakaway unit called Boston Partners accumulated $5 billion within six months after leaving, mostly from former Boston Co clients.
