A North Carolina adviser is asking a federal court to strike down his non-solicitation bond with his former employer Edelman Financial Engines, calling it “overbroad” and “not reasonably tailored to protect legitimate business interests”.
Josh Hederick filed suit last week in North Carolina federal court against Edelman. According to SEC dataHederick first registered with Merrill Lynch in 1999; in 2007, it was listed on the Mutual Fund Store before Financial Engines acquired the Mutual Fund Store in 2016 (Edelman and Financial Engines later merged).
According to Hederick's complaint, as part of an agreement giving him “phantom units” (a deferred employee vesting plan), the adviser was required to sign a non-solicitation agreement with Edelman that would extend 15 months after he was fired or left the company. The agreement would prevent him from communicating with his clients or “any other client receiving services from any branch office or principal business location” where he was located, according to the complaint.
Over time, Hederick became “increasingly uncomfortable” with the way Edelman executives were managing the firm, according to the complaint.
“Each change in ownership at (Edelman) brought new policies and administrative changes — many of which focused on cutting costs at the expense of providing high-quality customer service,” the complaint said.
Hederick pointed to several issues, including the criteria for a promotion that he argued were “inexplicably and arbitrarily changed” before Hederick could be promoted. As a result, he lost the benefits of moving up to an executive director position and the opportunity to hire a dedicated “high-end” customer service associate.
Hederick then said that Edelman forced him to use a CSA, which he believed made numerous mistakes that adversely affected customers, and that Edelman did nothing despite his protests.
The firm also allegedly transferred accounts managed by an adviser who had passed away to two new advisers based in North Carolina without allowing Hederick to work with them.
According to the complaint, Hederick came to believe “changes in company culture” and their unwillingness to listen to him meant he had to leave.
But Edelman had a “well-documented history of aggressively suing” advisers who left and notified clients of their resignations, according to Hederick.
When an adviser leaves, Hederick alleged that Edelman typically tries to assign the adviser's accounts within the company, tells that adviser to inform clients that their previous representative left without notice and does not tell clients where the adviser went.
“Given (Edelman's) past litigation history, Mr. Hederick has good reason to believe that (Edelman) will not allow him to notify the clients he is serving of his departure and/or that he will not participate in the process in good faith,” he argued in the complaint.
In a statement to WealthManagement.comAn Edelman spokesman said the firm disputed “the allegations in their entirety.”
“We continue to invest in our people and the resources of our planning team in order to best serve our clients; and we remain committed to protecting our business and defending against this action,” the spokesperson said.
Hederick resigned at the end of September and said he would inform customers of his resignation (though he emphasized that he had not solicited their business when he did so). He soon joined Prime Capital Investment Advisors.
At the beginning of this year, Tim Dowden and Jennifer Staben filed similar lawsuits to break their restrictive covenants when they left Edelman for the Capital. Like Hederick, Staben felt dissatisfied with the CSA assistance she received from Edelman, according to her complaint in California state court.
Edelman is in a legal battle with Mariner, charging the last firm for stealing trade secrets, breaching confidentiality agreements and helping representatives breach non-solicitation clauses. Edelman argued that Mariner mounted a “calculated campaign” to lure Edelman's planners, losing about $621 million in assets under management.
But Mariner charged Edelman of a “nearly three-year campaign to unlawfully stifle fair competition” in the industry, believing that Edelman's lawsuit was intended to send a “frightening public message” to any employee who would decide to away that they would be a judicial target.
In June, a federal judge was dismissed some of Edelman's claims against Mariner Wealth, although many of the more important allegations are moving forward in court.