On Friday, June 25, executives at Deutsche Banc Alex. Brown in Baltimore received the kind of bad news that isn't all that unusual in the turncoat trade of investment banking.
Four managing directors of their health care investment unit quit to form a Baltimore office for a competitor, Credit Suisse First Boston.
It was a blow to Alex. Brown's reputation and its bottom line. The company had just survived its second takeover in two years and was anxious for stability, and those four men had brought in as much as $75 million in annual revenue.
But it was also just the beginning.
First Boston had designs on nearly every employee of Alex. Brown's health care unit -- even the recruits still in school -- and it had prepared an elaborate strategy to lure them.
From temporary offices in Baltimore's Renaissance Hotel, using telephone lists and detailed background reports on the employees, First Boston recruiters summoned the workers for marathon interview sessions, many lasting into the early morning.
It worked. Within days, half of the unit's analysts, all of its sales assistants and a host of administrative employees -- about 35 people in all -- resigned from Alex. Brown and jumped to Credit Suisse First Boston.
Alex. Brown had been raided.
Staff raids are not uncommon in the investment banking field. Lehman Brothers recently took half a dozen acquisition specialists from Merrill Lynch, and Deutsche Bank lost a telecommunications unit to Goldman Sachs in April.
But the Alex. Brown assault was somewhat atypical, both for the way it is being viewed by industry observers and for the way its corporate victim reacted.
It was the latest in a long string of departures, large and small, for Alex. Brown, and analysts have begun to question whether the Baltimore firm's foundation is still solid.
Alex. Brown officials say the well-orchestrated move went beyond fair game, that First Boston used Alex. Brown's confidential files to pull it off.
The matter is the subject of a federal lawsuit, with Alex. Brown's corporate parent claiming that the company's trade secrets have been compromised.
Because of the lawsuit, people involved who could be reached last week would not comment. Nor would their attorneys. But documents filed in U.S. District Court in Baltimore, including affidavits from several people involved, provide a rough outline of how a corporate raid is conducted.
The affidavits claim that sensitive documents are missing from Alex. Brown's headquarters. One reports that a former employee was seen carrying five or six tote bags from the office. Several describe the pressure imposed by First Boston officials -- even by some employees' colleagues and friends.
The court papers also point out that the tactics used by First Boston are almost commonplace in the competitive realm of investment banking. A high-ranking official with Deutsche Bank AG, which acquired Bankers Trust June 4, is quoted as saying, "That's life. We've poached many teams from other banks."
First Boston officials labeled "outrageous and false" Alex. Brown's claim that its trade secrets were "misappropriated."
"Investment banking is a fluid field with significant turnover among managing directors," Russell T. Ray, former head of Alex. Brown's health care investing unit and now a top official for the new First Boston office, said in an affidavit.
"Indeed, in the health care field alone, within the past year a number of investment bankers have switched firms."
On June 25, four managing directors of Alex. Brown's health care unit -- Ray, Harris Hyman IV, Steven R. Schuh and Stuart F. Smith -- resigned. Each had signed a contract with Alex. Brown promising not to work for a competitor until after Dec. 31, 1999. Their annual salaries were $200,000, plus bonuses.
A fifth managing director, Stanley B. Blaylock, said in court documents that he, too, was courted by First Boston executives. They invited him to their offices in New York June 24, interviewed him in Baltimore throughout the weekend and reportedly increased his proposed salary to entice him to leave Alex. Brown.
"CSFB was frustrated that I had not signed an employment contract and put incredible pressure on me," Blaylock said in his affidavit.
Offer rejected
He rejected the offer from First Boston officials at 3 a.m. on Tuesday, June 29. "One or more of them said they didn't understand, and that I was 'making a big mistake.' "
One Alex. Brown director quoted in the court documents, Christina T. Morrison, said First Boston executives told her they hoped to woo as many Alex. Brown employees as possible over the weekend. She said they planned to take the new employees to New York by train for a dinner Sunday night, then return them Monday morning so that they could resign.
"The tactics used by CSFB to recruit Alex. Brown employees are startling if only for their well-orchestrated planning," reads the primary complaint.
"Alex. Brown employees have been lured to the Renaissance Hotel in Baltimore to be escorted into conference rooms and suites with makeshift tables, temporary computers and telephones, squadrons of personnel with detailed information about Alex. Brown employees and subjected to high-pressure tactics.
"This operation by CSFB was a classic, 'boiler room' operation conducted as an employee raid on Alex. Brown."
Though the plaintiff decries the employee raid, its main accusations are that the four former directors helped lure the employees away and have "misappropriated" trade secrets.
One former employee allegedly had 106 "engagement letters" -- documents identifying the firm's clients, the deals in which they are participating and how much the deals are worth -- at her home.
The firm's remaining managing directors claim that their "managing director books" -- files containing prospect lists, account information and other data -- are missing.
And one official claims that an employee was seen leaving the Alex. Brown offices the night before he resigned carrying "five or six tote bags," the contents of which were unknown.
The lawsuit claims that the former employees violated their employment contracts by disclosing company secrets. The men dispute that.
Ray, in his affidavit, called the allegations "specious." No one took books or documents from Alex. Brown, he said. And the tote bags contained family pictures and Lucite "tombstones" commemorating investment deals.
Not only have the former directors agreed not to compete with Alex. Brown or use information they learned their to benefit their new employer, but they also are prohibited from doing so by their employment agreements with First Boston, court papers say.
Credibility questioned
Ray said he left Alex. Brown because its parent corporation was acquired by Deutsche Bank, a company that has "problems with its credibility in the marketplace," and which "appeared to be chaotic."
Alex. Brown officials acknowledge that the most-recent defection was painful. The health care unit generated $80 million to $100 million in revenue last year. It had eight managing directors, but the four who left were responsible for as much as three-quarters of the workload, court papers show.
And it came at a delicate moment. Deutsche Bank had completed its acquisition of Alex. Brown's American owner, Bankers Trust Corp., three weeks earlier, and company leaders were hoping to stem the flow of defections. A year before, Deutsche Bank had lost its 120-member technology investment team to Credit Suisse First Boston.
Alex. Brown officials reportedly have restructured their health care unit but are concerned about long-term effects on the firm's client base. One employee quoted in court papers said, "My sense is that there is confusion on the part of clients and some anger at being placed in the middle."
Industry analysts also have taken notice. Michael Flanagan, an independent brokerage analyst at Philadelphia-based Financial Service Analytics, said Alex. Brown seems to be suffering from abnormal staff changes. "The organization, I get the impression, is disintegrating," he said.
Chris Rahbany, an analyst at Denver-based GSG Securities Inc., said, "If a company is going to lose talent to the degree they have, it is a fairly serious loss."
Sun staff writer Bill Atkinson contributed to this article.
Pub Date: 7/11/99