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Mississippi underwriter awarded $6 million

Duncan-Williams pleased with arbitration panel’s decision

MEMPHIS — Earlier this month, a three-member National Association of Securities Dealers (NASD) Dispute Resolution arbitration panel appointed to resolve the case brought by Memphis-based securities firm Duncan-Williams Inc., against Houston-based Coastal Securities, LP, awarded the Mississippi underwriter more than $6 million in damages.

Last March, Duncan-Williams alleged that Michael T. “Mac” McGinnis, Sessions Brown, John Jumper and three other former employees of Duncan-Williams had conspired to raid Duncan-Williams’ public finance department and had misappropriated confidential and proprietary business records including the widespread deletion of computer files.

After 19 days of hearings, the NASD panel voted 2-1 to award Duncan-Williams damages totaling $6.08 million, including $2.5 million against Coastal Securities and McGinnis in compensatory damages, $2 million in punitive damages against Coastal Securities and $370,031 against Coastal Securities and McGinnis representing the return of compensation earlier paid to McGinnis during the period when Duncan-Williams alleged he was acting in breach of his fiduciary duties and in conspiracy with Coastal Securities.

In addition, the panel awarded Duncan-Williams $1.1 million in attorneys’ fees and costs. NASD is the world’s leading private-sector provider of financial regulatory services.

“I’m delighted by NASD’s decision,” said Duncan F. Williams, president of Duncan-Williams. “This totally vindicates our company. It’s been a long 18 months. It wasn’t a cheap thing to do, but it’s something we had to do.”

Last March, McGinnis and 12 other members of Duncan-Williams’ public finance unit and three salesmen abruptly resigned from the privately owned company to join Coastal Securities. When the group left the firm, Duncan-Williams alleged it took or copied files, including contact lists, pricing documents and bond underwriting transactions still in progress, and attempted to delete and copy them for use at Coastal Securities.

A special master appointed by the Shelby County Chancery Court discovered that numerous Duncan-Williams records had been placed on the Coastal Securities computers. Computer forensic experts retained by Duncan-Williams were also able to recover many of the files that respondents attempted to permanently delete.

“Among the grounds to obtain attorneys’ fees under the Trade Secrets Act is when there has been a ‘willful and malicious misappropriation’ of protected documents,” said Shepherd D. Tate of Tate, Lazarini & Beall, PLC. “We argued that the respondents’ conduct rose to this level and are pleased that the panel determined in its award to assess attorneys’ fees against all of the respondents.”

Williams said “this portion of the award was particularly gratifying in that it recognized the proprietary nature of our firm’s business records which we spend significant amounts to create and protect for the benefit of our business and our customers.”

The pattern of conduct by Coastal, McGinnis and the others in organizing and executing the raid on Duncan-Williams was particularly egregious, particularly aggressive, was fraught with deceit and violated fundamental standards of industry conduct and fairness, said Howard Berg, a nationally-recognized raiding expert from Stamford, Conn.

“The panel obviously agreed when it assessed the $2 million in punitive damages against Coastal,” he said.

Dwayne Whitehead, president of Coastal Securities, said the firm disagrees with the decision made by the NASD arbitration panel.

“The majority of the panel issued an award resulting from the Duncan-Williams arbitration that Coastal and others named in the matter are required to pay unsupported monetary damages of about $6 million,” he said. “We are reviewing our options, including our appeal rights. The size of the awarded damages does not make any sense, but such damages will not affect business at Coastal.”

A. Duncan Williams founded Duncan-Williams Inc., in 1969. The firm specializes in the underwriting, sale and trading of fixed income securities, primarily in Mississippi, Tennessee and Louisiana.

“We were the number one underwriters in Mississippi in public finance in the late 1990s,” said Williams. “The public finance group was the one that left, and it was a major deal for them to do what they did. Basically, Coastal did zero business in the state of Mississippi, and all of a sudden, they have in one day what we spent five years developing. They took quite a bit of Mississippi business from us.”

Whitehead said the group contacted him in early 2001 seeking employment.

“I talked with them over a year with varying degrees of intensity,” he said. “They’d all decided they wanted to stay with each other and were going to leave Duncan-Williams as a group. They interviewed four other brokerage firms, so if not us, then someone else. They decided Coastal was the best fit for them. Coastal did nothing wrong except be home for these people.”

Whitehead said the group had not signed non-compete agreements at Duncan-Williams. “In the closing statement, our lawyer said this case is all about whether people are chattel, whether people are required to stay with the firm where they are, that if you even think about going to another firm, you have to quit before you talk to anyone,” he said.

Williams said they had signed non-compete agreements with Duncan-Williams. “Yes, the majority of them did,” he said.

Tommy Siler, an employment lawyer with Phelps Dunbar, LLP, in Jackson, said it is disconcerting that employees who do not sign confidentiality agreements or covenants not to compete may be hampered in their ability to take their experience and ply their trade for another employer for fear of getting themselves or their new employer sued.

“By the same token, if upper-level managers, who have confidential information and a fiduciary duty to the company for whom they work, essentially do something that could potentially destroy a business, that’s disconcerting, too. I am sure the arbitrator was trying to fashion a balance between these competing concerns.”

Jackson employment attorney John M. Mooney said the case “clearly sends a message that employees cannot conspire along with their new competing employer and its management team, to raid the files of their employer and breach those duties of trust for personal gain without consequences.

“Even the lack of a non-compete agreement does not protect this type of activity,” he said. “It is one thing to want to move forward and make advancements in your career but it is another thing to engage in a concerted effort along with your new employer to destroy your current employer and breach those duties of trust as was found in this case.

“There was also apparently a concerted effort to cause Duncan-Williams to suffer damage and loss as well as an element of ‘personal gain’ on the part not only of former employees of Duncan Williams but employees of Coastal Securities, thus resulting in the awards against not only Coastal but certain individuals in this case.

“From an employment standpoint, the decision to leave Duncan-Williams and to take business with them was not the problem. The problem was the raiding the files and the actions of Coastal, and its management team old and about to be new; the individuals participating in these actions; and their knowing of the violations and the damage that would result from these their acts that resulted in the substantial award and punitive damages.”

Whitehead said the award has nothing to do with the firm’s sales or business practices, but rather has to do solely with employing several individua
ls in th
e southeast U.S. from a competing securities firm.

“As has been pointed out on a consistent basis, Coastal is financially strong and can and will weather this setback,” he said. “On a profo

About Lynne W. Jeter

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