The dispute between Arnold C. Schneider and his former partners at Wellington Management Co. L.L.P. is headed to court March 18. The action has escalated, with clients getting in the fray.
The suit by four Wellington partners against Mr. Schneider and a resulting countersuit have been consolidated in a Massachusetts court. The trial, expected to last two weeks, is expected to settle whether former clients of Wellington's all-capitalization value strategy, run by Mr. Schneider, can follow him to his new firm, Schneider Capital Management.
Mr. Schneider is asking the court to overturn an injunction barring him from accepting more Wellington clients. His attorneys presented statements from two clients challenging the claim that Mr. Schneider sought to poach accounts from his former employer.
Mr. Schneider headed Wellington's Wayne, Pa., satellite office, where he and his team ran $2.3 billion using the all-cap style. After giving a six-month notice last summer, he was expelled as a partner Dec. 4.
His six-person team was given notice in October they would be terminated Dec. 31 after Wellington decided to no longer offer the all-cap strategy.
Four Wellington partners - Duncan McFarland, Robert W. Doran, John R. Ryan and Paul D. Kaplan - filed suit against Mr. Schneider Dec. 13 in Middlesex County Superior Court in Cambridge, for breaching his fiduciary duty and a non-compete clause in his partnership agreement. They also seek damages of $1 million.
On Dec. 20, Mr. Schneider countersued Wellington in a Chester County, Pa., court, claiming Wellington acted improperly and in bad faith by expelling him as a partner and that Wellington violated the partnership agreement and its fiduciary duty.
He seeks his year-end profit participation, expected to exceed $500,000; more than $300,000 in performance-related compensation; his $50,000 equity stake in the partnership; and a 10-year payout of a percentage of partnership profits, payable to withdrawing partners under the partnership agreement. Those benefits could exceed $1 million, according to the countersuit.
The partners were granted a preliminary injunction Dec. 30 by Massachusetts Justice Wendie I. Gershengorn allowing Schneider to retain four former Wellington clients that had expressed interest in moving to Mr. Schneider's new firm but preventing him from accepting new business from any Wellington client.
According to the partners' lawsuit, any withdrawing partner needed a waiver from managing partners to solicit business from any Wellington client or hire any Wellington partner or employee. A waiver Mr. Schneider rejected would have precluded him from soliciting or accepting business from Wellington clients for five years, but permitted him to hire employees being terminated.
Schneider Capital Management attracted $1.3 billion in assets in its first month. Wellington's suit said the assets came from four former Wellington clients: the RJR Nabisco Inc. pension fund; the Utah Retirement Systems; Frank Russell Trust Co.; and Frank Russell Investment Management Co. Russell officials confirmed hiring Schneider but declined further comment.
Officials at Utah and RJR Nabisco did not return calls.
Mr. Schneider obtained affidavits from Utah and Russell executives saying they moved to the new firm without any solicitation from Schneider officials. In his statement, Richard Cherry, chief investment officer of the Utah fund, stated Wellington offered the fund other options for the $500 million account, but officials found them unacceptable and chose to move the assets.
"Currently, URS does not want anyone other than Mr. Schneider to manage this portion of the URS pension fund," he said in the sworn statement.
In the other deposition, Dennis J. Trittin, portfolio manager for FRIMCO and Frank Russell Trust, said the two Russell units would not leave their money - $800 million in four separate portfolios - with Wellington.
"Russell does not intend to employ Wellington as manager for those investment funds whether or not Wellington's motion currently before the court is granted," Mr. Trittin said in the statement.
Clients clearly were drawn to Mr. Schneider's track record. The approach earned a total return of 36.2% for the year ended Dec. 31 and a compound-annual 23.7% for the five years. Those returns far exceeded the Standard & Poor's 500 Stock Index's respective 22.95% and 15.2%.
Joining Mr. Schneider in forming the firm were his brother, John, formerly director of research at Newbold's Asset Management; Louis Gitlin, former trader at Delaware Management Co.; John Conlin, director of marketing for Schneider and formerly with PNC Bank; four analysts from Wellington; and three support staff.
Mr. Schneider joined Wellington in 1983, became a portfolio manager in August 1987 and a partner in January 1992.
Mr. Schneider's lawsuit said that in June, he proposed the formation of an affiliate of Wellington that would be free of the firm's internal trading restrictions. When officials rejected the idea July 12, he gave notice he would withdraw as a partner effective Dec. 31.
Wellington's suit said that while Mr. Schneider said he would re-enter the investment advisory business in some capacity, he indicated he had no specific plans.
Mr. Schneider's suit said he was upfront with Wellington about his plans.
According to his suit, he became concerned about the "crowding out of his clients by several substantially larger funds managed at Wellington," a firm with more than $100 billion in assets from pension funds and mutual funds for the Vanguard Group. He was concerned about how securities were allocated among portfolio managers and at what price. He also said Wellington's cap on certain stock positions to control risk for the firm sometimes had an adverse effect on his clients.