POST-EMPLOYMENT PROMOTIONS FOR BAIRD DEFENDANTS

[[Update and Editor's Note -- November 10th, 2006

This was the second item about the Robert W. Baird & Co. v. Red Granite Advisors, LLC. dispute to have been posted on this website. It created a bit of a stir in the investment community, and then came to the attention of the Wall Street Journal, which ran a story about the contretemps on page C1 of today's newspaper. Milwaukeeworld will have an item about that story posted on this site later today. -- Michael Horne]]

Gentlemen Become Officers
Want to Get Ahead?
Nearly Half of Baird Staff are VPs

By Michael Horne

“After never mentioning once in its original complaint that defendants were officers of Baird, in the Amended Complaint Baird does so within the first seven words of the first paragraph, and then goes on to repeat that allegation more than a dozen times.”

-- from Memorandum In Support of Defendants’ Amended Motion to Dismiss and for Sanctions; Robert W. Baird & Co. v. Red Granite Advisors, LLC, July 12^th 2006

In the “Verified Complaint” filed by Robert W. Baird & Co. on May 8^th, 2006, defendants Joel D. Vrabel, David W. Bowman and Robinson Bosworth III were described as having been “employed by Baird Investment Management” [BIM] as “senior portfolio managers.”
However, by the time Baird attorneys filed their “First Amended Verified Complaint,” dated June 27^th, the three had received a post-employment promotion and were described as “officers of Baird and senior portfolio managers. … As senior officers and employees of Baird, the Individual Defendants owed Baird a fiduciary duty of loyalty.”
Red Granite attorneys seized on this change, saying in the memorandum quoted above that between the time the original and amended complaints were filed, “Baird conveniently ‘discovered’ and now contends that defendants were actually technically officers of Baird, despite never having informed them of this while defendants were employed there. …
“Baird’s original allegations on the subject were consistent with the truth, which is that none of them were Baird officers at the time of their departure. Defendants had no reason to suspect that Baird would change its story after they pointed out in their motion that they did not qualify as fiduciaries under Wisconsin law.”

However, the defendants did hold rather exalted titles. Bowman and Vrabel were each styled as Senior Vice President and Senior Portfolio Manager for BIM. Bosworth was a Managing Director and Portfolio Manager.
So, when is a Senior Vice President not an officer? When the company in question is a large financial institution.
As the defense memorandum points out in a footnote, “ Baird is a registered broker-dealer and investment advisory firm regulated by the Securities and Exchange Commission, NASD, various exchanges and state securities laws. In none of its filings were defendants listed as ‘officers’ of Baird at the time of their departure. … Baird (like most large financial institutions) has literally hundreds of ‘vice presidents’ who are not actually legal officers of the company. It is a sales and status title only. This is supported by Baird’s form ADV, which as of March 30, 2006, identified its true officers as well as all of its directors. None of the defendants were included in the listing.”
According to a Reply Memorandum dated August 4th, as the officer issue continued to be debated, and Baird's motion for a Temporary Restraining Order and Preliminary Injunction was denied, Baird first made "the incredible assertion that 1,086 of its 2,230 employees (48.6%) are corporate officers and fiduciaries. ... As discovery continues in this case, it will be interesting to see how many of these 'officers' have any idea that Baird has apparently elected them to this capacity or whether Baird has ever had a meeting of its 'officers'." [Emphasis original -- Ed.]
In fact, the list of actual officers and directors of Baird fron the ADV includes the names of only twelve men -- and one woman.

They are Paul Edward Purcell, Glen Fredrick Hackmann, Leonard Marion Rush, Jeffry Frank Freiburger, Russell Paul Schwei, Patrick Steven Lawton, William Walter Mahler, Michael John Schroeder, , Robert John Venable, Paul John Carbone, Todd Steven Nichol, Steven Gregory Booth and Mary Ellen Stanek.

{Editor's Note: I have been unable to link to the ADV files of the SEC with success. But if you click at this link
you should get rather close.}

SUIT ALLEGES BAIRD CEO OF COVER UP OF UNLICENSED FUND MANAGERS

[[UPDATE: November 10th, 2006 --

The item below, originally posted on August 22nd, 2006, was the original story about the Robert W. Baird & Co. Inc. v. Red Granite Advisors, LLC. dispute. The www.milwaukeeworld.com account buzzed across the internet, bringing many new visitors to the site. The article came to the attention of Suzanne Craig, a staff writer for the Wall Street Journal, who posted this account today on page C1. I will post an item about that article elsewhere on this site today. -- Michael Horne]]

PURCELL’S PONDERINGS:

Suit alleges Baird CEO ordered a cover-up when subordinates questioned superiors’ lack of securities licenses.

By Michael Horne

“In reality it would have been much better to discuss this before you start papering the file for the regulators because things like that get into the files with regulators. And they rotate backwards with great precision and then some of those words in there, if they ended up in the front page of “The Wall Street Journal” or the “New York Times,” you wouldn’t feel good, and I guarantee I wouldn’t feel good and you would be very sorry that you had ever said them, I believe, because it wouldn’t be good for your business. In any event a much better way to get our attention, which was to talk to me.”

[-- Paul Purcell, CEO of Robert W. Baird & Co., in a telephone message on February 27^th, 2002, to Baird employee, Joel D. Vrabel expressing his wish that regulatory lapses at the Milwaukee-based investment firm not be put down in writing. – Ed.]

Between April 28^th, and May 1^st 2006, David W. Bowman and Joel D. Vrabel, both senior portfolio managers for Baird Investment Management, along with Robinson Bosworth III and eight other employees, terminated their employment with Baird to form Red Granite Advisors LLC, a competing investment advisory firm. Baird sued the three claiming they had taken confidential client information, and sought to enjoin them from “engaging in unfair competition by using Baird’s ‘track record’ in soliciting clients. In addition, Baird sought damages from Red Granite.

The Red Granite defendants fought back with vigor, and Baird may very well regret ever having commenced an action against them.

In court documents, the Red Granite defendants claim that Baird management, including CEO Purcell, retaliated against them for submitting the written regulatory memorandum mentioned by Purcell in the paranoid voice mail quoted above.

The memorandum questioned “a lack of proper licensure for certain Baird employees.”

“After learning that several of Baird’s new employees did not have the required licenses, defendants became concerned about the effect this could have on their own client relationships, as a joint-marketing campaign with these non-licensed individuals was being contemplated at that time. After carefully considering the matter over several months time, and first raising it with the managing director of BIM, defendants decided to draft and deliver a written memorandum detailing their understanding of the situation and requesting that Baird management take the appropriate remedial action. … Believing they had done the right thing, defendants were shocked by the hostile response their memorandum elicited from Baird management.”

The person in particular whose lack of licensure most concerned the defendants is not mentioned by name in court documents, but there is a mention of “the challenge that defendants made to Purcell and Baird management [in the memorandum] in 2002 about illegal unlicensed persons working with a fund manager who was not licensed when she came over to Baird, and was required to be licensed to sell securities and run a mutual fund.” [Note the pronoun, “she.” Milwaukeeworld is attempting to verify the identity of that individual, and will report back tomorrow.]

[Update: Tuesday, August 22^nd 2006. I will wait to reveal the identity until such time as court documents are filed naming the individual.—Ed.]

[Update: Friday, September 15th 2006. The individual has since been identified in the Milwaukee Journal Sentinel as Mary Ellen Stanek. See recent www.milwaukeeworld.com postings for more.-- Ed.]

That members of their department lacked proper licenses was a shocking matter to Bowman and Vrabel, as were their “significant concerns about the inconsistent and often cavalier approach Baird took with respect to compliance and oversight of its most favored employees.”

According to a Bowman affidavit, “in mid-July 2001, Joel D. Vrabel and I heard that personnel at the Baird Advisors unit of Baird had not obtained their securities licenses, and that the managers of that unit had been signing various client contracts and managing mutual funds without proper licensure. Mr. Vrabel and I reported what we had learned to J. Bary Morgan, the Managing Director of BIM.

“In October 2001, Mr. Vrabel and I received word that representatives from Baird Advisors wanted to market products to some of our client contacts. We were also asked to relinquish our fixed-income management business to Baird Advisors. In light of our concerns regarding the licensing situation with Baird Advisors, however, we declined. …”

Finally, according to Bowman, “Our concern about the licensing situation with Baird Advisors and the apparent inaction on the part of Baird management grew to such a high level that Mr. Vrabel, Mr. Robinson Bosworth III, and I sent a memorandum to Baird Chief Executive Officer Paul Purcell. … Because we believed that reporting our concerns to management was an appropriate step, we were shocked by the responses we received from Mr. Purcell on my voicemail and Mr. Vrabel’s voicemail.”

Purcell’s voicemail to Bowman, like that on the same day, February 27^th, 2002, to his colleague Vrabel, seemed panicked: “I think you just didn’t understand that by, by sending me that kind of a memo you created a record, a serious record, I might add, that I and the firm need to officially respond through our general counsel here, ‘cause it is viewed as that serious. And it’s gonna create a whole series of rebuttals and the like, none of which are good for any of us, including you and Joel and Boz, by the way, in my opinion, and I think you just didn’t understand the seriousness of the process you were really initiating, creating, rather than pick up the phone and calling me and saying, yeah, you know about this, you created a record here that, uh, we need to deal with. And the truth is, we are dealing with it.”

Vrabel received yet another voicemail from Purcell on February 27^th, 2002. In it, Purcell made an unusual request:

“Joel, it’s Paul here, I’m sorry I’m so long-winded. My suggestion is that you retract the memo if you feel that you can do that because I do think that, uh, my guess is that you really don’t have any idea of the potential legal problems you’ve created for the firm and for yourself and all of us.”

According to Bowman’s affidavit, “Following Mr. Purcell’s messages of February 25 and 27, 2002, Mr. Vrabel and I were further chastised for putting our concerns in writing to Mr. Purcell. We were informed that we were not “team players.” We were also informed that the situation was being handled and that we should retract the memorandum. Because we were concerned that our continued refusal to retract the memorandum would result in adverse employment actions against us, Mr. Vrabel and I agreed to retract the memorandum on the understanding the memorandum would be maintained in a folder detailing management’s response.”

“Despite the fact that Mr. Vrabel and I complied with management’s request to retract our February 22, 2002 memorandum, our treatment by Baird and BIM management deteriorated from that point forward. Through numerous actions, including but not limited to criticizing us behind our backs, continually referring to us as “non-team players,” disregarding our input on new department hires … our positions at BIM were marginalized to the point that management declined our requests to enter into another compensation agreement. Our compensation agreement, entered on January 26, 2001, was allowed to expire on January 26, 2006. During our discussions regarding a possible new compensation agreement, Mr. Morgan informed us of a new compensation scheme that would result in significant reductions in compensation for Mr. Vrabel and me. Through Baird’s actions since our February 22, 2002 memorandum, including Baird’s refusal to enter into another compensation agreement with us, Mr.Vrabel and I felt we were being forced out of our posiions at BIM.”

In effect, they were “constructively terminated,” according to a defendants’ memorandum in the case, because the defendants “acted to protect their client relationships and to save the company from potentially severe regulatory consequences… . Baird CEO Purcell ordered a cover-up and minimized the problem, branding defendants as not being team players. … Baird’s scheme was to terminate defendants in a way to obtain the benefits of their business, but not suffer the sting of their wrongful termination claim, by holding off and allowing the contract to lapse; making the atmosphere so poisonous that both the investment philosophy of defendants in stock selection and portfolio management would be compromised; and thereby constructively terminate them. … The long campaign to force defendants out, originally motivated by retaliation for reporting Baird’s illegal activity in 2002 constitutes a wrongful termination that is actionable in Wisconsin, on violation of public policy grounds.”

Baird’s suit against the defendants may indeed come back to sting Baird itself.

As Purcell feared in one of his voicemails to the defendants, “I think frankly having that kind of high intensity verbiage letter, and when you go back and read that, I think there’s some things in there I don’t think any of us, especially you guys, would like to see on the front page of any newspaper. And that’s the kind of thing you have created. You created a real track for any regulator who has 100 per cent hindsight and will take some of those words and twist them very, very, um, in a very bad way in my opinion. So it’s created a record that’s not good.”