Alex. Brown still hurting after the raid

First Boston's grab a blow to its bottom line and to its reputation

The day the stars left

Court papers tell of hardball recruiting, vanishing documents

Investment banking

July 11, 1999|By Robert Little | Robert Little,SUN STAFF

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.

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