State Street Corp. has sued three of its former executives for creating a new rival in securities lending.
The global custodian bank, headquartered in Boston, has sued Craig Starble, its former executive vice president and global head of securities finance, and two more former State Street executives, over their launch of Premier Global Securities Lending, based in Reading, Masss., where Starble lives.
State Street contends that the trio are using “confidential information [from State Street] and trading on its customer good will, potentially resulting in loss of significant business’’ to State Street.
State Street filed its lawsuit on June 23 in Superior Court for the Commonwealth of Massachusetts in Boston. The bank on June 28 also filed an emergency motion for “expedited delivery” asking Starble for documentation on his firm’s business strategy and his correspondence with customers to prevent further damage to State Street.
In a statement, Premier Global said, “We believe this lawsuit is meritless, and we categorically reject any allegation of wrongdoing.” Starble did not return calls left to his home in Reading. Jyotin Hamid, a partner in the New York law firm of Debevoise & Plimpton representing Starble and his firm, says he has filed a motion opposing State Street’s request for expedited discovery. He also says that Starble never signed a non-compete agreement with State Street.
The other two named executives in the case are Peter A. Economou and Paul F. Lynch. Economou was running securities finance at State Street after Starble resigned in March 2009. On June 16, State Street’s executive vice president Nick Bonn was named interim head of securities finance at State Street to replace Economou who left to join Starble. Lynch was the former senior director and head of global trading for State Street.
All told, eight executives from State Street’s securities lending unit resigned on June 15 to join Starble at Premier Global Securities Lending, according to State Street’s suit.
The other executives who left to join Starble were Michael Landolfi, former senior managing director and head of global operations; Michael McAuley, senior managing director and head of product development; Suzanne Lee, senior managing director and head of account management and sales; William Locke, managing director and trading desk manager; Oberon Knapp, managing director and client service manager; and Lawrence Albaugh, managing director and client service manager, according to State Street.
Securities lending – one of the key services performed by custodian banks such as State Street and a growing source of revenue at mutual funds and hedge funds – involves the temporary exchange of securities for either other securities or cash. The principal lenders are institutional investors such as pension funds, insurance funds and mutual funds while the principal borrowers are securities dealers, banks and hedge funds. By offering securities lending services, custodians earn a fee while also generating additional income for their customers.
State Street’s securities lending business is part of its Global Markets division, which also includes portfolio solutions, e-exchange, foreign currency exchange and securities finance. In its first quarter 2010 earnings results, State Street said that revenue from securities finance, which includes the lending business, declined 60% to $72 million from $181 million in the year-earlier quarter.
This was attributed to “compressed spreads, partially offset by slightly higher volumes.” The revenue from securities finance in 2010’s first quarter was also 13 percent lower than the $83 million recorded in the fourth quarter of 2010.
In its suit, State Street alleges that in his amended employment agreement signed in the fall of 2009, Economou pledged that if he left the company, he would not hire any State Street employees within 18 months of his departure. State Street says that Economou has broken his nonsolicitation agreement “by using somebody else to do his dirty work for him.”
State Street also says that given their senior positions within the bank, Economou and Lynch also breached their fiduciary duties not only by failing to prevent the raid of employees but actively soliciting other executives within the bank to leave State Street with them.
Those actions have enabled PGSL to “unfairly compete with State Street’s securities lending division using confidential information and trading on customer good will, potentially resulting in loss of significant business to this direct competitor.”
According to State Street, in April 2010, Starble approached State Street with a proposal to spin off the securities lending operation into a separate business also called Premier Global Securities Lending. According to State Street, Starble proposed that he would run the unit and get an equity stake in the business.
When State Street rejected the proposal on the basis it “had no merit nor benefit to State Street,” Starble began meeting other State Street employees at Starbucks and Sebastian’s Café on Summer Street just steps from State Street’s corporate headquarters in Boston, to induce them to join his startup, State Street contends.
In a statement, State Street spokeswoman Carolyn Cichon said the company “requires its senior managers [to] adhere to their employment and confidentiality agreements to protect the interests of its clients, investors, and employees.” She also said, “State Street believes that these former employees breached their obligations to State Street, and we intend to protect the company against this wrongdoing.”