Collaborator Misappropriation

The Federal Reserve is prepared to ratchet up the penalty for bankers caught misappropriating their employer’s trade secrets. Although bankers were already subject to civil liability under state laws governing trade secrets and breach of contract, the Federal Reserve now appears willing to subject guilty bankers to an outright ban from working with any institution specified in 12 U.S.C. § 1818(e)(7)(a), pursuant to section 8(e) of the Federal Deposit Insurance Act.

Two Wyoming bankers are seemingly harbingers of this newfound willingness by the Federal Reserve to ban bankers caught misappropriating an employer’s trade secrets. The two culprits misappropriated Central Bank & Trust’s (“Central”) proprietary business information in connection with their plan to acquire employment and an ownership interest in Farmers State Bank (“Farmers”). The bankers’ malpractice included dissuading Central from pursuing an opportunity they conspired to exploit once at Farmers, moving loans from Central to Farmers, and the sharing of other proprietary (non-customer) information with Farmers’ employees. Although a Wyoming state judge ruled against the bankers last April, they retained their new jobs; this apparently irked the Board of Governors. In seeking to ban the bankers, the Federal Reserve alleged unsafe or unsound banking practices, as well as breaches of fiduciary duty. If banned, the duo will likely struggle to make good on their court-ordered $2.2 million civil judgment.

Whether the Federal Reserve is instituting a policy change regarding enforcement of trade secrets law or is merely punishing an instance of exceptionally brazen illicit behavior is still unclear. That said, aggrieved banks certainly have another arrow in their quiver when confronting unscrupulous ex-employees. Regardless, any employee should proceed with extreme care when handling an employer’s confidential and proprietary business information.

The case is In the Matter of Frank E. Smith and Mark A. Kiolbasa, Docket No. 18-036-E-I, before the Board of Governors of the Federal Reserve System.