BOSTON -- Wellington Management Co. lost the latest round in its yearlong battle with former partner Arnold Schneider when a judge ruled against it in a suit brought by Frank Russell Co.
Attorneys for Wellington have appealed the decision.
Meanwhile, Wellington executives are believed to be discussing a settlement with Mr. Schneider, allowing him to keep Russell, Utah Retirement Systems and the pension fund of RJR Nabisco Inc. as clients, despite the noncompete clause in his Wellington contract.
On April 13, a U.S. District Court judge in Philadelphia ruled that Wellington's enforcement of a contract with Mr. Schneider could not be allowed to interfere with Russell's efforts to hire the manager of its choice.
He issued an injunction that puts at bay the April 17 deadline of the Massachusetts court, by which time Mr. Schneider was required to give up Tacoma, Wash.-based Russell as a client.
Wellington officials said the Philadelphia decision doesn't negate the Massachusetts one.
Still, lawyers for Wellington informed the Massachusetts court that considering all the activity, it would not seek contempt motions against Mr. Schneider until after May 1.
Russell, Utah and RJR Nabisco moved their accounts to Mr. Schneider's new firm when he left Wellington in late 1996. Wellington sued Mr. Schneider in state court, and won. Then Russell filed a lawsuit against Wellington March 31, claiming Wellington was interfering in its business.
While not commenting directly on whether negotiations are under way with Mr. Schneider, Wellington spokeswoman Lisa Finkel said: "We have high confidence this situation will be resolved to our satisfaction. We are always open to negotiation."
Mr. Schneider's spokesman John Conlin also said: "We've always been open to negotiations."
Industry observers call the court battles a rare public power struggle.
Russell's lawsuit claimed Wellington's interference prevented Russell from performing its fiduciary duty of selecting the best manager, as outlined in the Employee Retirement Income Security Act. And by not telling Russell about the noncompete agreement before the firm moved its business to Schneider, Wellington failed to be forthcoming in a way that is required by the Investment Advisers Act of 1940, Russell claimed.
The Russell filing included a request for $1 billion in punitive damages -- a figure that raised hair on the necks of investment managers nationwide.
The decision of U.S. District Court Judge John P. Fullam upheld all of Russell's contentions.
"It is undisputed that severance of the business relationship between Schneider's firm and plaintiffs will impose very substantial burdens upon the funds in plaintiff's fiduciary care," Judge Fullam stated in his decision.
And not only would Russell experience transition costs of between $13 million and $25 million, but participant investors also would face adverse tax consequences, the ruling states.
"Neither in the state court nor in this court has Wellington shown or even attempted to show that it would suffer any financial detriment if the Schneider firm continues to serve plaintiffs," the judge said.
"Plaintiffs' business has been lost irretrievably, not because Mr. Schneider solicited it -- he did not -- but because, with his departure from Wellington, Wellington could no longer provide the services plaintiffs wanted.
"Wellington intentionally avoided disclosing to plaintiffs the existence of the noncompetition clause in its partnership agreement," the judge noted. "When plaintiffs contracted with Wellington and chose Mr. Schneider as portfolio manager, they had no idea that the arrangement would not in fact be terminable 'without penalty,' as its language provided.
"This nondisclosure is inconsistent with Wellington's obligations under the Investment Advisers Act, and the attempts to actually impose those penalties by disrupting the relationship between plaintiffs and Mr. Schneider (are) at odds with (Wellington's) fiduciary obligations under ERISA."
The only justification Wellington had for not letting Mr. Schneider out of his contract was "wounded pride or a desire to punish an upstart or ingrate who failed to show proper deference to his seniors, or a desire to set an example so that other Wellington partners will remain on board," said the judge. "Given the substantial financial incentives for staying with the firm, however, this latter justification seems quite superfluous."
The $11 billion Utah Retirement Systems, Salt Lake City, also sued Wellington late last month asking to be released from the April 17 deadline; like Russell, Utah is asking for $1 billion in punitive damages.
The Utah judge has heard arguments in the matter but has not made a decision.
Russell, Utah and RJR make up the bulk of assets managed by Mr. Schneider at this time, about $1.7 billion.
In February, Middlesex Superior Court Judge James McHugh ruled Mr. Schneider had deceived his partners and was not entitled to the business due to his noncompete agreement. Judge McHugh ordered the clients to leave Mr. Schneider's firm. Mr. Schneider is appealing that decision.
Boston-based Wellington has about $175 billion in assets under management. There are about 50 partners in the firm.