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Wall Street job moves spur billion-dollar trade secrets fights

The Silicon Valley Bank logo is seen through a rain covered window in front of the SVB headquarters on March 10, 2023, in Santa Clara, California.    (Justin Sullivan/Getty Images North America/TNS)
By Rachel Graf Bloomberg News

For Silicon Valley Bank’s rescuer last year, Easter Sunday evening was a disaster.

Shortly after First Citizens Bank & Trust swept in to save the teetering California lender from oblivion, 42 members of SVB’s prized technology and life sciences departments defected en masse to a new platform at HSBC Holdings Plc — in one of the financial world’s largest talent lifts in recent memory.

At First Citizens, the loss of so many star bankers stung. The North Carolina-based firm fired back with a $1 billion lawsuit in California that accuses HSBC of an illegal scheme to plunder, in the words of the raid’s chief architect, the “core of SVB’s profitability engine.”

The case is just a taste of the bitter corporate battles starting to proliferate as authorities across the U.S. seek to dismantle how industries prevent talented workers from jumping ship to competitors dangling higher pay, better benefits or stronger job security. Until a few years ago, most states let employers routinely stitch non-compete agreements into employment contracts, blocking workers from defecting — without at least taking some down time.

Now, with regulators and others challenging and banning those restrictions, more groups of employees are defecting in droves — and jilted companies are fighting back. Some are claiming in court that departing workers took proprietary information — trade secrets — that will give their new employers unfair advantages. In the financial industry, where rules vary by regulator, no niche is immune from the legal battles — not mortgage lending, wealth management, insurance or dealmaking.

“Companies start to worry that when you have wholesale raiding of large groups of people, it’s highly likely or at least possible that they’re taking information with them,” said attorney Jennifer Baldocchi, an employment law specialist at Paul Hastings LLP.

While the scale of the exodus from First Citizens to HSBC turned heads, it’s hardly the only high-profile raid to recently blow up into a court fight.

In April, Jane Street Group accused two of its former traders of taking a proprietary $1 billion trading strategy to Millennium Management. The high-frequency trading shop claimed that a sudden $150 million drop in profits could only be attributed to Izzy Englander’s hedge fund stealing its playbook for options trades in India — which Millennium and the two traders have strenuously denied.

In March, Barings LLC, the $406 billion asset manager, claimed it was a victim of a 22-person poach by an upstart in the private credit industry, Corinthia Global Management, which is backed by Nomura Holdings Inc. Barings alleges that after it was betrayed by some of its top managers absconding with client lists and plans for developing new business, Corinthia went so far as to try to recruit one of Barings’ in-house attorneys who was actively engaged in fighting back against the talent raid.

One of the former Barings executives accused of orchestrating the defection argued in a May court filing that the claims against her are “frivolous” and said her former employer is just “sad” that it didn’t have non-competes in place to stop her at-will colleagues from leaving.

An HSBC spokesperson said the bank will vigorously defend itself against the First Citizens suit and “is strongly committed to the innovation banking space and to our employees.”

Barings declined to comment, as did Millennium and Jane Street. First Citizens and Corinthia had no immediate comment.

All three closely watched cases are testing the use of trade secrets laws to fight back against employee departures. But even as poaching becomes more brazen, proving the practice crosses a line legally poses challenges, legal experts say.

First Citizens and others have alleged violations of the Defend Trade Secrets Act, which was borne out of a 1996 law intended to stem foreign theft of U.S. intellectual property. To successfully bring such a claim, plaintiffs have to prove that the information was highly valuable to both employers and that proper steps were taken to keep it secret — be it through encryption, secure portals or similar means. Often, cases fall apart when these requirements aren’t met.

Based in California, the SVB employees were relatively easy targets for a raid. The Golden State has long restricted most non-compete agreements, making it an outlier until about five years ago, when a handful of other states instituted bans and others imposed restrictions.

Shifting the landscape further, the Federal Trade Commission in April approved a nationwide rule on non-competes that largely bans them. The FTC measure doesn’t go into effect until September and faces a number of legal challenges that could delay it further.

But if employees do seize the moment to jump to competitors more freely, as the agency intends, legal experts expect more litigation will follow. Without non-competes to delay employees joining competitors, allowing information to grow stale in the meantime, defectors are more likely to be in possession of sensitive knowledge on day one at the new job.

“I think almost by definition you’re likely to see more instances of folks who are making use, to some degree, of information they shouldn’t be making use of,” said Linda Jackson, a lawyer at ArentFox Schiff LLP who specializes in poaching disputes.

Jackson said she has been advising clients to “batten down the hatches” by ensuring the proper protection of confidential information and by putting other nondisclosure and confidentiality agreements in place.

The recruiting coup by HSBC — which was internally dubbed “Project Colony” — helped the London-based banking behemoth launch a new franchise, HSBC Innovation Banking, that June. In a press release, UK Prime Minister Rishi Sunak boasted the business would “cement our position as a science and tech superpower.”

First Citizens alleges in its suit that the former senior SVB executive principally responsible for the mass defection was David Sabow, who had recently transferred from SVB’s U.S. offices to its UK business, which HSBC UK bought for about £1 ($1.16) following its collapse.

Sabow allegedly took proprietary information from SVB that included market share data, client information, loan analyses and employee salaries. He then used that and other confidential data to estimate that “Project Colony” would generate $66 million in profits in its first year and almost $1.3 billion by its fifth year, according to court documents.

First Citizens further alleged that HSBC Chief Executive Officer Noel Quinn and Michael Roberts, the head of the bank’s Americas unit, were among those who knew about the plan. The North Carolina lender warned that if there are no repercussions for HSBC’s raid, financial institutions may be discouraged from rescuing failed banks in the future.

“In addition to causing economic harm and loss, the defendants have eroded the integrity of the auction process and diminished the trust that future buyers will have in the fairness and reliability of such transaction,” the bank’s lawyers wrote in their complaint.

But veteran observers of the talent wars caution that just because the First Citizens lawsuit makes 150 references to “Project Colony” as if it were a sinister plot, that doesn’t mean HSBC’s conduct was unlawful.

Hiring plans are given code names all the time for a variety of benign reasons, said Julian Bell, head of the Americas at executive search firm Sheffield Haworth.

If for example, First Citizens had gotten wind of the plan, it might have offered bonuses or otherwise tried to incentivize the employees to stay. A leak could also tip off competitors that there’s a team for hire, complicating the process. Or, an employee at the hiring firm who might not want a new team joining his or her company could leak the plan to the media and subvert the whole process.

Code names “are the kinds of things juries get excited about,” said Mark McCareins, a business law professor at Northwestern Kellogg. “But you have to satisfy the legal requirements before you start making arguments like that to a jury.”

In addition to the alleged trade secrets violations, First Citizens claims the ex-SVB employees breached company contracts governing confidential information and the solicitation of coworkers to leave the company.

HSBC has countered that it “lawfully extended job offers” to former SVB employees whose employment status was up in the air after the First Citizens acquisition. First Citizens had only agreed to pay the employees temporarily until it decided whether to officially hire them, HSBC said in court filings, adding that a one-page “New Hire Acknowledgment” form the employees signed didn’t constitute an offer letter.

HSBC also pointed out that First Citizens’ stock price rose about 120% in the two months after it bought SVB assets “at a steep discount.”

“Contrary to the picture First Citizens attempts to paint, First Citizens is not a victim,” HSBC’s lawyers wrote.

The case is poised to move soon into the all-important fact-finding phase in which First Citizens will need to show exactly what secrets it’s claiming were stolen. U.S. Magistrate Judge Laurel Beeler in San Francisco called the initial 67-page suit “confusing” in a January ruling, but said at a May 30 hearing that a 94-page amended complaint is “much better.”