Schwab accuses ex-employee of taking data from closed office

A new lawsuit by Charles Schwab against a California RIA highlights the risks firms can run when they announce employee layoffs months in advance.

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Schwab sued Davies Financial Advisors, an advisory firm in Temecula, California, in federal court in California this week, alleging it colluded with one of Schwab’s ex-employees to misappropriate trade secrets and poach clients. Schwab accused Davies Financial Advisors of hiring its former financial consultant Brett Griffin with the goal of taking over some of the investors he had been serving at Schwab. 

Schwab says Griffin, who is not named as a defendant, used its client data to move $85 million in client assets to Davies Financial Advisors. 

“Schwab’s competitors, such as DFA, can unfairly benefit from this information because it enables them to target their financial products, services, and marketing efforts to a pre-selected elite group of clients without the need to spend the significant amount of time, money, and resources Schwab has spent to identify and develop such clients,” according to the suit.

Schwab said in a statement that it “considers the protection of client information and confidentiality to be of utmost importance and expects that its representatives will comply with their contractual and legal obligations.”

Davies Financial Advisors, which was bought by San Diego-based Centura Wealth Advisory this year, did not return a request for comment. Griffin, who is no longer a registered investment advisor and no longer at Davies Financial, could not be reached for a comment.

Why the case differs from other recent recruiting disputes

Schwab’s suit is the latest to raise the question of how much client information employees should be allowed to take with them when they leave one firm for another. But unlike many other such disputes, this one doesn’t center on an advisor who was recruited by an industry rival. Griffin instead joined Davies Financial Advisors after learning two months in advance that his position at Schwab was going to be eliminated.

Griffin, who had been at Schwab since 2005, learned in October 2023 that the Temecula branch office he was working at was going to be closed. Rather than being let go immediately, he was granted a two month “notice period” and continued paying his salary and employee benefits during that time. It also provided him with $100,000 as part of a severance agreement in which he assented again to his previous commitments to not take Schwab client information with him, according to the suit. 

Griffin started at Davies Financial Advisors on Jan. 10, 2024, five days after his employment at Schwab had ended. Even before then, Schwab alleges, he had reached out to one of his clients on his own phone, allegedly violating an internal policy requiring business discussions to always be done on company-issued devices. Griffin also, according to Schwab, posted his personal email address to his LinkedIn page.

Schwab alleged that step on LinkedIn was taken “so that clients could contact him directly and so that Griffin could circumvent his contractual, statutory, and common law obligations to Schwab.”

Blurred lines and confusion over affiliation

After leaving Schwab, Griffin continued reaching out to his former clients, encouraging them to move their assets over to Davies Financial Advisors after he joined that firm, according to the suit. He was also supposed to disconnect from his ex-clients on LinkedIn, a step Schwab alleges he never took.

Several of the clients who were contacted said Griffin left them wondering if Davies Financial was somehow working with Schwab, the suit says.

“Client LW reported that Griffin called her to solicit her to move her accounts to DFA,” according to Schwab’s complaint, which uses initials to avoid identifying clients. “LW told Schwab that Griffin said that many of his Schwab clients are transferring to DFA, and that LW could keep her assets at Schwab while Griffin nonetheless serviced them from DFA.”

A regulatory filing with the Securities and Exchange Commission lists Charles Schwab as one of the custodians Davies Financial Advisors uses for the safeguarding of client assets. The Form ADV shows Davies Financial was holding nearly $100.5 million of its nearly $288.2 in total assets at Schwab as of March 12.

Two months ‘a lot of runway’

Rob Herskovits, the founder of the New York-based Herskovits law firm, said it’s unusual for a wealth management firm to give advisors so much advance notice before severing their employment. Two months, he said, is a “lot of runway” to give someone who will most likely be seeking to find his next job at an industry competitor.

“It used to be standard operating procedure, when a firm said they were letting you go, was usually, ‘Oh by the way, there’s this big guy over there who is going to escort you out of your office and help you bring your things down the elevator,'” he said.

Brian Hamburger, the founder of the wealth management and regulatory compliance firm MarketCounsel Consulting and The Hamburger Law Firm, said he can understand why Schwab would want to keep employees around while it’s closing an office. An abrupt closing with immediate layoffs would leave many clients wondering what had happened to their accounts.

“You have to balance those interests,” Hamburger said. “And in this case, Schwab appears to have reconfirmed by a very specific severance contract the commitments the employee had previously made.”

With no Broker Protocol or nonsolicit allegations, Schwab tests its reach

When advisors move one firm to another, their ability to take client information with them is often governed by a voluntary industry pact known as the Broker Protocol. Schwab does not belong to the protocol, giving it far-reaching ability to sue over alleged misappropriations of confidential data.

Schwab’s suit accuses Davies Financial of hiring Griffin under the assumption that he could poach high net worth clients from Schwab and alleges it knowingly violated Schwab’s employment agreements in helping him move over proprietary investor data. It says Griffin would have had no way of reaching out to his former clients without having misappropriated Schwab’s proprietary data.

Similar to what JPMorgan has said in recent suits against its former advisors, Schwab maintains that Griffin did little on his own to build up his client relationships.

“It bears emphasis that Griffin did not develop a ‘book’ of business through cold calls, marketing efforts, or his own connections like brokers at other brokerage firms do,” according to the suit. “Instead, Griffin was assigned a practice of preexisting Schwab clients or qualified leads to service on behalf of Schwab. These clients have millions of dollars in assets in their accounts at Schwab. Each year, they generate hundreds of thousands of dollars in revenues and profits.”

Hamburger noted that many industry disputes also involve contractual provisions known as nonsolicitation agreements, which often forbid advisors to solicit their ex-clients for a year after switching firms. Schwab’s case against Davies Financial Advisors, though, was filed in California, whose courts tend to look unfavorably on nonsolicitation, noncompete and similar clauses. Hamburger said Schwab’s suit could present a significant test case showing whether wealth management firms can succeed in suing former advisors without invoking nonsolicitation agreements. 

Besides misappropriation of trade secrets, Schwab accuses Davies Financial Advisors of tortious interference in contractual and business relationships, unfair business practices and civil conspiracy. It seeks a temporary injunction that will prevent Davies Financial from using its confidential information at least until the dispute is resolved, along with monetary damages.