CAMBRIDGE, Mass. - The slate of planned witnesses in the trial of four Wellington Management Co. partners against Arnold C. Schneider is expected to raise issues that could affect managers striking out on their own as well as prospective clients.
Wellington presented its witnesses starting March 21 to 27 and Mr. Schneider began to lay out his defense the following week, but trial was postponed until April 17 because of a conflict with another trial in the same court.
Attorneys representing Mr. Schneider and his new firm, Schneider Capital Management, are expected to argue in Middlesex County Superior Court that partnership agreements barring money managers from competing with former employers for clients tamper with sponsors' fiduciary duty to select managers.
One former client of Mr. Schneider's filed court documents seeking to overturn an injunction that kept the client from hiring Schneider Capital, arguing the court's enforcement of a non-compete agreement is a breach of fiduciary duty.
The board of trustees of the Colonial Williamsburg Foundation, Williamsburg, Va. - a group that includes U.S. Supreme Court Justice Sandra Day O'Connor and Paul Miller Jr., a founding partner of money manager Miller, Anderson & Sherrerd - filed the friend-of-the-court brief.
Trustees of the foundation, whose $320 million endowment and $90 million employee retirement plan both had assets managed by Wellington, argue enforcement of the covenant prohibits the foundation from hiring the manager it chooses and interferes with the management of its assets. The portfolios, $50 million in endowment assets and $17 million in pension assets, have been held in custody by State Street Corp., and not actively managed, since the foundation terminated Wellington in December.
Two other clients - the Utah Retirement Systems and Frank Russell Co. - filed affidavits with the court claiming they moved assets on their own with no urging from Mr. Schneider.
The judge heard arguments on the motion March 24 and took it under advisement, reserving a ruling for later.
Mr. Schneider's first witness March 30 was John W. MacMurray, vice president pension and benefit investments of RJR Nabisco Inc., a former Wellington client that followed Mr. Schneider to his new firm. Mr. MacMurray testified Mr. Schneider had not solicited his fund's business after leaving Wellington.
Richard Cherry, chief investment officer of the Utah Retirement Systems, another Schneider client, was scheduled to testify April 1, but court was closed because of the blizzard that paralyzed several cities in the Eastern Seaboard.
Besides his clients, Mr. Schneider's other witnesses are expected to include DeWitt Bowman and Paul Quirk. Mr. Bowman, former chief investment officer of the California Public Employees' Retirement System, and Mr. Quirk, former executive director of the Massachusetts Pension Reserves Investment Management Board, will be there to buttress Mr. Schneider's argument that barring his firm from accepting former Wellington clients would interfere with clients' fiduciary duty to select the best managers for their funds.
Mr. Schneider and his team ran $2.3 billion in Wellington's Wayne, Pa., office. The all-capitalization value investment style earned a total return of 36.2% in the one year and a compound-annual return 23.7% in the five years ended Dec. 31, a firm official said, far exceeding the Standard & Poor's 500 Stock Index returns of 22.95% and 15.2%, respectively.
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 as of Dec. 31, after Wellington decided to no longer offer the all-cap strategy.
In court filings, Wellington maintains Mr. Schneider already had started his own firm in late 1996 and kept his plans from the other partners. The suit claims Mr. Schneider was offered and rejected a waiver from his non-compete clause that would have allowed him to start his firm, but precluded him from soliciting or accepting business from Wellington clients for five years.
Industry observers are watching the fate of the injunction barring Schneider from taking in former Wellington clients.
One industry executive noted that if clauses barring solicitation of former clients are struck down by the court, the action will have a major effect on the activities of people starting their own firms or teams being wooed by competitors.
Non-compete clauses are seen as too difficult to enforce - and nearly impossible in some states such as California - but non-solicitation clauses keeping them from accepting former clients are widely used to prevent loss of assets.
Other cases in which managers or teams of managers left to start their own firms were settled before getting to court.
An executive of a money management acquisition company that has done spinoffs of money management firms said his firm was watching the trial.
"If they just let this guy go, the whole firm could unravel - if everyone thinks you're not going to enforce your non-compete (agreements)," he said.
The trial is expected to last another week after testimony resumes, and the judge will issue his decision at a later date.