Federal Reserve Seeks to Bar Bankers for Misappropriation

A greater awareness of the need to guard against misappropriation of trade secrets and the need for effective remedies has become a rather hot topic of late. With the passage of the Federal Defend Trade Secrets Act, Congress federalized the fight against trade secret misappropriation with the effect that there will eventually be a consistent application of trade secret law across the United States. Regulatory bodies are also ramping up their efforts to stem misappropriation. For example, the DOJ has formed the Intellectual Property Task Force.

Domestically, a recent and rather dramatic enforcement action by the Federal Reserve illustrates a growing government involvement in the prevention of trade secret misappropriation. In a first of its kind decision, the Board of Governors of the Federal Reserve, has taken the position that the misappropriation of trade secrets constitute an “unsafe or unsound banking practice” by bank executives and can result in their being banned from the industry. The facts of the case suggest why.

In 2014, Frank E. Smith and Mark Kiolbasa were employed by Central Bank & Trust in Wyoming. They hatched a plan to acquire and take management positions at Farmer’s State Bank and to misappropriate Central’s loan portfolio, confidential internal financial information and proprietary forms to facilitate their future success. Kiolbasa even told Farmer’s that he had “obtained consent from several Central borrowers to transfer their loans to Farmers” once he and Smith became Farmer’s employees.

Kiolbasa began his employment at Farmers in September 2014 as a loan officer. Before he left Central, however, he took with him several of Central’s proprietary forms and other information. Thereafter, many of the Central loans he had managed moved to Farmers. Smith, who remained behind at Farmer’s until May of 2015, facilitated the transfer of the loans and periodically forwarded proprietary information to Smith. This included loan balances, customer information profile forms, bank liquidity and customer information. Later, Smith and Kiolbasa purchased significant portions stock in Farmer’s parent company. And in May 2015, Smith became Farmer’s President and CEO.

In September 2016, Central sued Farmers, Smith, and Kiolbasa, among others, for theft of trade secrets, conversion, and breach of fiduciary duty. After a two-week trial in April 2018, judgment, not surprisingly, was entered for Central, which was awarded over two million dollars in damages. An enforcement action by the Federal Reserve, via a “Notice to Prohibit” followed and the matter is currently pending. In that case, the Fed seeks to bar the two bankers from participating in the future “affairs of any insured depository institution, holding company thereof, foreign bank or like institution…” on the basis that they engaged in unsafe or unsound banking practices and breached their fiduciary duties to both banks.

The Federal Reserve’s enforcement action (Docket No. 18-036-E-1) may signify a new crackdown on the misappropriation of trade secrets in the banking industry and a recognition that a more severe remedy, above and beyond the payment of money damages and a cease and desist injunction, is needed.

This blog post is not offered as, and should not be relied on as, legal advice. You should consult an attorney for advice in specific situations.