Merrill sues placement defectors

Merrill Lynch has filed suit against rival bank Lazard and a group of former placement agents, alleging collusion and the misappropriation of confidential information.

( Merrill Lynch has filed suit against Lazard Freres and a group of former placement agents who left en masse to form a new placement business at the financial services boutique, charging the defectors with collusion and misappropriation of confidential information, according to sources.


In February, nine private equity placement professionals left Merrill Lynch to create a New York-based placement business for Lazard. The professionals, led by Ben Sullivan and William Riddle, also include managing directors Mike Sutka, Scott Church and Tim O’Gara. The nine joined Lazard Private Fund Advisory Group.


The defections left Merrill Lynch’s once-dominant placement division without any senior sales professionals, although the firm is currently in the process of re-staffing the team. Last month it announced that former head of private equity at Abbey National Treasury Services (ANTS), Christian Dummett, would head the bank’s London placement team.


According to a source close to the situation, Merrill Lynch has filed suit against Lazard and the group of former employees, claiming they unfairly colluded to create a competing business while still working at Merrill Lynch.


Senior management at Merrill Lynch is arguing that the former employees should have ceased working at the firm once they decided to join Lazard, the source said. “The theory is that raiding Merrill Lynch’s employees under this set of circumstances constitutes unfair competition,” he said.


One former Merrill Lynch professional said it is considered “bad form” to recruit co-workers to a new firm while still employed at the first firm. “Once you’ve agreed to go to firm B, you can’t stay at firm A and recruit,” he said. “You have to go to firm B and then recruit.”


In the suit, Merrill Lynch is claiming its business was damaged by the alleged collusion.


In addition, Merrill has accused at least one member of the group with misappropriating “confidential information” before leaving the firm. A separate source said the information in question was all or part of Merrill’s investor database – essentially a list of contact and other details regarding people and institutions who commit to private equity funds. After the departure of the team now at Lazard, Merrill management ordered a review of e-mail archives and discovered that one employee had sent all or part of the investor database to his personal e-mail account prior to quitting the firm, the source said.


Merrill has obtained a temporary restraining order preventing the Lazard placement team from using allegedly misappropriated information, a source said.


One placement industry source close described the lawsuit as “sour grapes” and “harassment.”


“Merrill’s been having difficulties,” the source said. “Some guys there must be under pressure” to sue Lazard.


A placement agent source said the line between proprietary investor information and information in the public domain is often hard to discern. “A lot of the names on Merrill’s list are probably in publicly available directories,” he said. “But probably 50 per cent of the names are not in published directories because of staff turnover.”


A source close to the situation said it may be hard for Lazard to prove that it had a pre-existing relationship with many limited partners. “In the placement business, Merrill has a market share of 30 per cent and Lazard has zero,” he said.


Placement agents painstakingly maintain information on LP personnel, contact details, allocations and preferences. While these databases are considered proprietary, the personal or business relationships or individual professionals are not, and the Lazard team could claim that its relationships with hundreds of LPs are not the property of Merrill Lynch.


A placement source said the information allegedly “downloaded” by a former Merrill Lynch placement agent was “not proprietary” and in fact is made widely available by the firm.


Merrill Lynch established the earliest business dedicated solely to helping GPs raise capital for funds. Over the years, many placement professionals have left Merrill Lynch to found or join competing placement businesses.