Mcfarland v. Schneider

• Court: Massachusetts Superior Court
• Writing for the Court: Judge (with first initial, no space for Sullivan, Dorsey, and Walsh): MCHUGH
• Citation: Mcfarland v. Schneider, 1998 MBAR 366, CA 967097 (Mass. Super. Feb 17, 1998)
• Decision Date: 17 February 1998
• Docket Number: CA 967097
• Parties: Duncan M. McFarland et al. v. Arnold C. Schneider, III

1998-MBAR-366

Duncan M. McFarland et al. v. Arnold C. Schneider, III

No. CA 967097

Superior Court of Massachusetts

February 17, 1998

Mass L. Rptr. Cite: 11 Mass. L. Rptr. 704

Venue Superior Court, Middlesex, SS

Judge (with first initial, no space for Sullivan, Dorsey, and Walsh): MCHUGH

I. BACKGROUND

This is an action in which four of the partners of Wellington Management Company seek on behalf of themselves and their partners injunctive relief and damages against a former partner who left the firm to start his own business.1 Pursuant to Mass.R.Civ.P. 42(b), the claim for injunctive relief was severed before trial from the claim for damages.2 The injunction claim then proceeded to trial, without a jury. Without objection, direct examination generally proceeded by way of affidavits and cross examination proceeded in the customary fashion. Following completion of the courtroom phase, the parties submitted deposition transcripts3 and requests for findings of fact and conclusions of law. Based on the testimony presented during the course of the trial the exhibits there introduced, the deposition testimony admitted after the trial, and the reasonable inferences I have drawn from all of those sources, I find and conclude as follows:

II. FINDINGS OF FACT

A. PARTIES

Plaintiffs Duncan M. McFarland ("McFarland"), Robert W. Doran ("Doran"), John R. Ryan ("Ryan") and Paul D. Kaplan ("Kaplan") are partners of Wellington Management Company, LLP ("Wellington" or the "Partnership"), a limited liability partnership registered under the laws of the Commonwealth of Massachusetts.

Messrs McFarland, Doran and Ryan are the Managing Partners (the "Managing Partners") of Wellington. At all times relevant to this action, Mr. Kaplan was a member of Wellington's Executive Committee. When this lawsuit was filed, Wellington had 51 partners (collectively the "Partners" and individually a "Partner").

Defendant Arnold C. Schneider, III ("Mr. Schneider") is a former Partner of Wellington. He was removed from the Partnership on December 4, 1996 pursuant to the vote of the Wellington Partners the preceding day. Mr. Schneider is a citizen of the Commonwealth of Pennsylvania. He is a Chartered Financial Analyst, a former president of the Financial Analysts of Philadelphia and is currently on that group's Board of Directors. Mr. Schneider now operates his own investment management company, Schneider Capital Management, L.P. ("SCM").

B. WELLINGTON MANAGEMENT COMPANY

1. General

Founded in 1928, Wellington provides investment advisory and management services for several hundred clients located in the United States and in more than 20 foreign countries. Currently, the firm manages over $133 billion of its clients' assets. Those clients are primarily institutional investors (such as retirement plans or endowments) and mutual funds.

Wellington is organized as a Massachusetts limited liability partnership and currently has 54 Partners, all of whom are actively engaged in Wellington's business. In addition to the Partners, Wellington employs approximately 600 employees, consisting of about 160 investment professionals, 120 non-investment professionals and a support staff of 320. Included among the investment professionals are 24 equity portfolio managers with an average of 25 years of experience and an average of 19 years with Wellington. There are also 16 fixed income portfolio managers representing an average of 16 years of experience and 9 years with Wellington. Wellington is headquartered in Boston but also has offices in Valley Forge, Atlanta, and San Francisco.4

Wellington's business has grown steadily over the years since it was formed. Most of its contracts are terminable by either side on thirty days notice to the other. Although Wellington loses, and expects to lose, some clients each year for a variety of reasons, it also gains, and expects to gain, new clients annually as well. Despite those annual ebbs and flows, Wellington's overall number of clients and the overall amount of money it manages have shown consistent increases.

When a client contracts with Wellington for investment services, a portfolio manager typically is assigned to the client's account. The portfolio manager typically is assigned to the client's account by Wellington's Chief Executive Officer ("CEO") based on recommendations from line managers. In assigning portfolio managers, the CEO attempts to match a manager's skills and style with client needs and objectives rather than to reward origination of business. Almost invariably, however, the client is consulted about the identity of the prospective portfolio manager before a final decision is made. Moreover, the client typically has the right to reject a manager proposed by Wellington either as a consequence of an express term of the management contract between the client and Wellington or as a practical consequence of Wellington's desire to maintain good client relations. Once assigned to an account, the portfolio manager is the Wellington employee primarily charged with making investment decisions regarding the client's funds in the account for which he or she is responsible.5

Wellington charges its clients an annual fee for the services it provides. Typically, that fee is determined by a percentage of assets under Wellington's management on a specific date or dates. All of the revenues derived by Wellington from all of its activities belong to the Partners as a whole. Those revenues are divided between and among the Wellington Partners and employees pursuant to various criteria, all of which are designed to provide incentives for performance at high levels.

Wellington Partners, like Mr. Schneider, are compensated by means of a draw, participation in the firm's year-end profits and incentives tailored to the individual Partner. Wellington typically uses benchmarks to determine incentive-based distribution to those of its Partners who manage portfolios. The incentive compensation those managers receive therefore depends, in large part, on how the funds they are handling during a given period perform in relation to performance of the funds included in the benchmark. Mr. Schneider's benchmarks always were the S&P 500 or the Russell 1000 Value, indices that tracked performance of securities issued by the some of the largest companies in the United States.

Although the portfolio manager is ultimately responsible for investment decisions regarding the accounts he or she is managing, one person working alone typically cannot acquire and digest all of the vast amount of information typically necessary for sound investment decisions. Wellington, therefore, provides support to all of its portfolio managers in many different ways. Three of those ways are of primary importance. First of all, Wellington typically assigns teams of analysts to work for individual portfolio managers. Those teams often are critical to the manager's success for, over time at least, they come to know his or her investment "style," the kinds of information he or she needs in order to make sound decisions and the kinds of data he or she regards as important. Accordingly, while an individual manager's insights, judgment and experience are critical to his or her overall success, those qualities require the support of an experienced and competent team of analysts in order to reach their full potential.

Second, in addition to the team of analysts assigned to each manager, Wellington maintains a large central research group with analysts devoted to following particular industries and companies within those industries. All portfolio managers have access to services and reports the central research group generates.

Finally, every morning, all of Wellington's investment professionals gather for a morning meeting during which investment information is discussed and analyzed. The Valley Forge office participates in that morning meeting by conference call and is on-line with three monitors used to display investment information to all in attendance at the meeting at whatever site. During the meeting or at some other time during the morning, Wellington distributes to all managers listings of all transactions made by all Wellington portfolio managers the previous day.

Wellington's overall management was designed in a manner the designers thought was likely to allow investment professionals to concentrate on their investment-related responsibilities with an almost single-minded intensity. Specific Wellington employees other than the portfolio managers are responsible for such things as marketing and business development, client service, regulatory affairs, administration, finance, investment services, portfolio management and other areas. Each of those individuals is responsible for seeing that his or her specific functions are performed throughout the organization.

In keeping with its desire to allow investment professionals to focus on investments and investing, Wellington does not rely on its portfolio managers to originate new business and does not directly compensate them for business they do originate. Instead, Wellington has developed marketing teams dedicated to that task. Similarly, Wellington's clients generally receive administrative services from specific service managers who are part of dedicated client service groups within the firm, not from the client's portfolio manager.

2. The Partnership Agreement and Structure

The Wellington Partnership was formed in 1979 when Wellington, at the time a public company with approximately 2,000 shareholders, became privately owned. Wellington's Articles of Partnership (the "Partnership Agreement") were originally adopted on August 31, 1979 and have been amended several times since then. The most recent ...