State Street Suit Spotlights Risk In Launching or Joining Upstart Rival

A lawsuit by State Street Corp. against three former executives of its securities lending division provides a fresh illustration that employees who jump ship to join a newly formed direct competitor need to plan ahead for the possibility of litigation.

News of the suit Wednesday echoes another high-profile legal battle that erupted at the end of 2009, between Trust Company of the West and its former star bond fund manager Jeffrey Gundlach. Such hostilities often crop up for asset management and wealth management businesses, where close ties between individual portfolio managers and their clients mean a top producer's defection will translate immediately to lost revenue for the jilted employer. But other kinds of launches carry legal risks too, as the State Street case shows.

According to Pensions & Investments, the bank's complaint accuses Craig V. Starble, Peter A. Economou and Paul F. Lynch of raiding its securities lending business and violating confidentiality agreements to establish a rival firm, Premier Global Securities Lending. Starble, who launched PGSL last October, had led State Street's global securities finance division until leaving the company in March 2009. He later recruited eight of his former colleagues to join him. P&I reports:

According to court documents, Mr. Starble in April proposed that State Street "carve out" its securities-lending business and set it up as a separate business in a joint venture with PGSL. After State Street rejected the offer, the complaint alleges that Mr. Starble persuaded Mr. Economou, who replaced Mr. Starble as executive vice president and division head of securities finance in March 2009, and Mr. Lynch, senior managing director and division head of trading management, to join PGSL.

The claim that Starble first proposed to buy a part of his former employer's business and raided it after his offer was turned down, also echoes allegations that TCW made against Gundlach.

State Street's complaint, filed June 23 in Massachusetts Superior Court in Boston, goes on to accuse Economou and Lynch of actively recruiting six other high-level securities-lending employees to join PSGL. All eight resigned June 15.

An attorney for Starble and PGSL told P&I the suit was without merit, and said none of the eight employees had signed a non-compete agreement with State Street.