Bloomberg News

Wedbush Lawsuit Says Ex-Employees Took Secrets to Liquidnet

October 20, 2011

(Updates with with Liquidnet comment in fifth paragraph.)

Oct. 20 (Bloomberg) -- Wedbush Securities Inc. sued two former employees and trading platform Liquidnet Holdings Inc., accusing them of taking customer lists, documents and disclosures from the firm.

The suit accuses New York-based Liquidnet, used by institutional investors to buy and sell large blocks of shares, and the ex-employees, Louis Kerner and Michael Silverstein, of working together to take proprietary information from Wedbush in order to start the same business at Liquidnet.

Liquidnet said on Oct. 17 that it hired Kerner to run a new group focused on private companies, and that he would be joined by Silverstein. Wedbush filed the lawsuit today in New York State Supreme Court in Manhattan.

“Kerner, Silverstein and Liquidnet engaged, and continue to engage, in the premeditated taking and misappropriation of certain of Wedbush’s most valuable trade secret and confidential and proprietary information,” Wedbush said in the complaint.

Liquidnet received the lawsuit and is reviewing it closely, Melissa Kanter, a spokeswoman for the company, said in an e- mail. She declined to comment further on the complaint.

Kerner began working for Los Angeles-based Wedbush in its New York office in April 2010 and had been managing director of its Private Shares Group since March, while Silverstein began working in Wedbush’s Los Angeles office in February and had been reporting to Kerner and others since April, Wedbush said in the complaint.

Joining Competitor

Kerner called a Wedbush managing director on Oct. 16 and told him that he and Silverstein would be joining a competitor the next day, Wedbush said in the complaint. The managing director, Cyrus Pirasteh, reminded Kerner of his confidentiality obligations, and Kerner replied that the Private Shares Group’s clients belonged to him and that Wedbush could speak to his lawyers if the firm had “a problem with that,” according to the complaint.

The complaint accuses the defendants of forwarding entire customer data sets to personal e-mail accounts and changing passwords to keep Wedbush out of its own databases. Kerner and Silverstein are also accused of personally soliciting at least two other Wedbush employees to leave the firm and not returning company property including laptop computers.

“Kerner, Silverstein and Liquidnet began blatantly soliciting Wedbush’s customers and potential customers using the trade secret customer data of Wedbush -- a fact Wedbush only learned when its own affiliates and clients began forwarding these solicitations to Wedbush,” the firm said in the complaint.

Customer Data

Some of the clients identified in the customer data have engaged in trading relationships exclusive to Wedbush, according to the complaint, including one client holding about 9 million Facebook Inc. shares who has been selling them through the firm at a 2 percent to 3 percent commission, representing about $8 million in potential revenue.

Wedbush is seeking unspecified compensatory damages. The firm also asked for injunctions preventing the defendants from using, disclosing or transmitting any records, documents or information related to its clients, business, marketing strategies, technical information or operations.

It also seeks to stop the defendants from using customer data to compete with Wedbush, soliciting similar services to current or former Wedbush clients and retaining any customer data.

The case is Wedbush Securities Inc. v. Liquidnet Inc., 652875/2011, New York State Supreme Court (Manhattan).

--With assistance from Ari Levy in San Francisco. Editors: Mary Romano, Stephen Farr

To contact the reporter on this story: Chris Dolmetsch in New York at cdolmetsch@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.


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