Ripple effect feared as Fed mulls lifetime bans for two bankers

Bankers thinking about changing jobs should pay attention to an unfolding situation in Wyoming.

The Federal Reserve is considering liftetime bans for two bankers — Frank Smith and Mark Kiolbasa — who were recently ordered by a judge to pay damages to a former employer for taking trade secrets and recruiting clients to another bank. The Fed plans to hold a hearing later this year to review the matter.

Lifetime bans are rare in banking and are usually used to protect the integrity of the financial system, industry observers said.

While it's unclear whether the Fed is paying closer attention to bankers who are moving to competitors, its actions should encourage bankers and employers to make sure they are behaving legally and ethically during recruitment, legal experts said.

The potential ban "will heighten sensitivity when an individual” leaves a bank, though it shouldn't stop bankers from exploring job opportunities, said Lisa Narrell-Mead, CEO of Everett Advisory Partners. For now, bankers should simply be extra careful when changing jobs, she said.

The Fed's notice "brings the risk analysis" of career mobility "to a new level by upping the ante to include the potential for regulatory action that could jeopardize the entire future industry career of the banker,” Jeffery Smith and Nelson Cary, lawyers at Vorys, Sater, Seymour & Pease, wrote in an article for their firm's next newsletter.

The lawyers noted that bankers are usually prohibited, by law, company policy or regulation, from poaching items such as customer data and lists and loan documents, on their way out the door. It is unclear what the Fed’s ultimate justification will be for barring the bankers, or the impact it could have on the hiring process.

It’s best to leave a company with nothing other than “what is between your two ears,” said Jonathan Hightower, a lawyer at Bryan Cave Leighton Paisner. That advice has greater relevance for senior executives since they typically have access to more sensitive information, he added.

While bankers can contact old clients at a new employer using publicly available information or their own memory, the act is still frowned upon by some in the industry, said Carll Wilkinson, a managing partner at Smith & Wilkinson, an executive search firm.

Banks often protect themselves by having high-level executives and top producers sign nonsolicitation agreements that bar direct outreach to past customers for a set period of time. A customer, however, has the right to reach out to a former banker and move their business, Wilkinson said.

“The vast majority of bankers have the integrity and intelligence ... to know you don’t take proprietary customer information, and you don’t proposition your customers prior to leaving an employer,” Wilkinson added.

To be sure, the Fed's case against Smith and Kiolbasa involves unique circumstances.

The Fed asserts that the bankers obtained commitments from clients of Central Bank & Trust in Lander to move accounts while looking to buy partial stakes in Commercial Bancorp in Pine Bluffs, according to the Fed’s notice. The Fed claims that Kiolbasa took several of Central’s proprietary forms when he left, and Smith later provided Kiolbasa with confidential loan and customer data.

The bankers joined Commercial Bancorp in 2015, where they ended up own owning 27% of the company. Kiolbasa became CEO of unit Farmers State Bank, while Smith is an executive vice president.

Smith allegedly engaged in discussions with the Fed on behalf of Farmers while still employed at Central. The Fed claims Smith also tried to dissuade Central’s management team from buying another bank because he thought it would be a good deal for Farmers State to pursue.

Central filed a lawsuit against Farmers, Smith, Kiolbasa and other Farmers directors in U.S. District Court for the District of Wyoming, alleging that the bankers misappropriated trade secrets, breached their fiduciary duties and converted Central's property. Smith testified in court that he sent confidential documents to Kiolbasa at the request of a Fed examiner, a statement that the Fed maintains is false.

A judge ruled that the bankers owed Central about $2.2 million in damages.

Smith, who still works at the $25 million-asset Farmers, declined to comment. Kiolbasa, who is also at Farmers, could not be immediately reached for comment.

Farmers "very strongly disagrees with the allegations set forth" by the Fed, Wynema Engstrom, the bank's chairman, said in an emailed statement. "The action filed by the Federal Reserve is based entirely on the underlying litigation with Central Bank. ... The action will be defended vigorously."

"My feelings on it are that I would never hire them in any venue at all," said William VonHoltum, Central's chairman.

A Fed spokesman declined to comment.

This is not the first time the agency has banned individuals for using confidential data from a previous employer in their new jobs.

The Fed in 2015 permanently barred Rohit Bansal, a former Goldman Sachs investment banker, from banking after his guilty plea for misdemeanor theft of confidential information from the Fed. The agency also barred Jason Gross, a former Fed employee, because of his involvement in the Bansal matter.