Securities Law Blog

Three former State Street Corp. executives are being sued by the securities giant for allegedly breaching terms of their employment contracts and attempting to steal business from their previous employer.

In a lawsuit filed on June 23, 2010 in Superior Court for the Commonwealth of Massachusetts in Boston, State Street alleged that its former securities finance chief, Craig V. Starble, has been luring State Street employees and soliciting its customers to build his own firm, Premier Global Securities Lending.

According to the lawsuit, Starble was employed at State Street until March 2009, at which point he resigned to start his own firm. In early 2010 Starble purportedly approached State Street with the idea of turning the securities lending operation into a separate business under his supervision. State Street, however, rejected the idea as being bad for the company and its shareholders.

Two other executives named in the suit are former senior director and head of global trading, Paul F. Lynch, and Peter A. Economou, who was running securities finance at State Street after Starble resigned.

According to State Street, Economou’s involvement in Starble’s firm is a violation of his amended employment agreement. In the agreement Economou pledged that if he left the company, he would not hire any State Street employees within 18 months of his departure. State Street claims that Economou is breaking the nonsolicitation agreement by having someone else act on his behalf.

State Street alleges that the executives named in the suit are unfairly competing with their former employer “by using its confidential information and trading on its customer good will, potentially resulting in loss of significant business to this direct competitor.”

On June 15, 2010, eight executives in the securities lending division all resigned to join Starble at Premier Global Securities Lending.

State Street has filed an emergency motion for expedited discovery, to secure documents and depositions it says could prevent further damage to the company. They are seeking unspecified damages and funds to cover the cost of attorney fees.

On June 30, 2010 the Securities and Exchange Commission (SEC) approved new rule that will have a significant impact on the ability of investment advisers to make monetary contributions to elected officials or candidates, who are in a position to influence the selection of an adviser for government investment accounts.

There are three key elements of the SEC rule designed to direct political contributions by investment advisers, and prevent ways that advisers may engage in pay to play actions.

According to the SEC, the first part of the rule prohibits an investment adviser from providing advisory services for compensation for two years, if the adviser or its executives or employees make a political contribution to an elected official who is in a position to influence the selection of an adviser.

The second element prohibits an advisory firm and certain executives and employees from soliciting or coordinating campaign contributions from others for an elected official who is in a position to influence the selection of an adviser. It also prohibits solicitation and coordination of payments to political parties in the state or locality where the adviser is seeking business.

The final part prohibits an adviser from paying a third party, such as a solicitor or placement agent, to solicit a government client on behalf of the investment adviser, unless that third party is an SEC-registered investment adviser or broker-dealer subject to similar pay to play restrictions.

When the new rule becomes effective, an investment adviser who makes a political contribution to an elected official in position to influence the selection of the adviser would be barred for two years from providing advisory services for compensation, either directly or through a fund.

One provision to the SEC rule permits an executive or employee to make contributions of up to $350 per election per candidate if the contributor is entitled to vote for the candidate, and up to $150 per election per candidate if the contributor is not entitled to vote for the candidate.

SEC Chairman Mary L. Shapiro said, “These new rules will help level the playing field, allowing advisers of all sizes to compete for government contracts based on investment skill and quality of service.”

The new SEC rule comes at a time when cases related to “pay to play” practices have been popping up all over the nation. Most recently filed was the SEC case against the New York State Common Retirement Fund over alleged kickbacks connected to investments.