(Bloomberg) -- Bankers are applying the idea of a “breakup fee,” a longtime fixture in corporate takeovers, to a very different kind of acquisition target: each other.

This story begins happily enough, with a nearly $10 million offer from Jefferies Financial Group Inc. The lucky hire was Dean Decker, a rainmaker at Credit Suisse Group AG. 

The catch: If Decker reneged before he started, a clause in his nine-page offer letter read, he’d have to pay Jefferies what amounted to a personal breakup fee. The price to walk away: $4 million. Walk away Decker did.

Seven years later, the legal fallout is still raining down. A federal appeals court in California is now poised to rule on whether the Jefferies maneuver was legal or, as Decker’s camp has contended, tantamount to ransom. During a hearing on April 12, two of the three judges on the panel appeared to express skepticism about Decker’s argument. 

How this saga ends might well shape the way financial companies and other employers – from police departments to hospitals, to the news media — recruit talent. That’s particularly so in California where Decker was employed. 

At stake, too, are the personal financial risks people might face if they accept an offer and then – shocker – try use it to squeeze more money out of their current employers. 

Wall Street banks have long used mechanisms to keep people in place, including trying to claw back pay from defectors. But Jefferies’ approach, also used by hedge funds, can lead to millions of dollars in damages for employees who back out before ever receiving a paycheck. 

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Hundreds of pages of legal documents related to the Jefferies episode filed in court provide an unusually candid view into the running war for talent on Wall Street.

Text messages from various parties, including Richard Handler, Jefferies’ chief executive officer, show the lengths to which the hard-charging New York-based firm went to lure stars.

“I want you to know how much I believe in what you and your team can do on our platform,” Handler texted Decker, a real estate and casino specialist, on Jan. 4, 2017, as Decker and several Credit Suisse colleagues wavered over their offers. Handler also said he “would really appreciate the time to talk this all through with you calmly when you can focus.” 

Decker, now 55, declined to comment for this story, as did a representative for Jefferies and its executives.  

‘Liquidated Damages’

The Jefferies provision centers on what’s known in contract law as “liquidated damages.” Such clauses specify a predetermined amount of money that must be paid if a party fails to keep their side of the bargain. One Jefferies executive testified that the clause is necessary because recruiting bankers is time consuming and expensive. (Jefferies could have had to pay more than $10 million to Decker if it backed out.)

Just how widespread are these provisions on Wall Street? It’s difficult to say. Individual employment agreements are rarely disclosed — Decker’s was as part of the case. But employment lawyers say these clauses have been proliferating in finance. 

“It’s super aggressive,” said Ross Intelisano, a founding partner of the law firm Rich, Intelisano & Katz in New York, of the trend. “I can’t imagine advising an employee to sign this.”

It wasn’t supposed to be this way at Jefferies. Back in 2016, the firm was looking to pry senior bankers away from competitors, according to testimony filed in the case. Credit Suisse — which would ultimately collapse into the arms of UBS Group AG – seemed like a target-rich environment.

Read More: Credit Suisse Moves to Block Jefferies Bid to Hire Bankers

Decker had brushed aside earlier overtures from Jefferies. Not this time. He made $1.1 million at Credit Suisse in 2015, his lowest take-home in years, according to documents entered in the court dispute. And Credit Suisse shares were sucking wind – bad news for employees whose compensation included stock.

Before long, Decker and several colleagues began talking to Jefferies about making a jump. Whether they all really intended to go is still up for debate.

One colleague messaged Decker in June 2016, asking if they should consider a move. 

Decker’s response: “Play it out.” 

“It certainly doesn’t hurt to know options,” the gaming-industry banker wrote. “I’m not going to play all the way out unless serious. I know they are willing to pay big.”

Decker ended the exchange by saying, “Need to use market data point with CS.” He subsequently testified he was referring to negotiating a raise at Credit Suisse.

Legal Action

On Monday, January 2 — a public holiday because New Year’s Day that year fell on Sunday – Decker took in the annual Rose Bowl college football game in Pasadena. Then he made his way to Jefferies’ offices near the Westwood section of Los Angeles. A team of bankers and lawyers was waiting. The offer letter Decker signed guaranteed him about $10 million in salary and bonuses for the first year with a payout of $2 million the following year. 

The breakup clause was the brainchild of Ben Lorello, then head of investment banking, the court filings show. Over a decades-long Wall Street career, Lorello had orchestrated major acquisitions, notably in health care. Many of those deals employed breakup fees. Now he was applying his M&A playbook to hiring a new banker. Attempts to reach Lorello, who left the firm in 2020, through contact information listed in public records and via Jefferies were unsuccessful. 

Decker later testified that Lorello told him the clause was non-negotiable. It was there, the Jefferies banker told him, to prevent hires from leveraging offers into fatter paychecks from their current bosses, a tactic known as a “bid-back.”

A recruiter hired by Jefferies warned his colleagues at the time that the provision might not stick.

“It’s unlikely the clause is enforceable in most states (if anywhere),” the recruiter said in an email included in court filings, “but the threat of legal action is usually enough to dissuade anyone from accepting a bid-back.”

Another Credit Suisse rainmaker, capital-markets specialist Jonathan Moneypenny, was similarly negotiating to bring his leveraged-finance unit to Jefferies.

The news reached Credit Suisse in Zurich.

“Does this mean Moneypenny is gone,” Tidjane Thiam, then CEO of the Swiss bank, asked two executives in an email that was cited in arbitration that proceeded the court case, “or is this an opportunity to embarrass them?” Thiam declined to comment for this story.

Moneypenny, now 51, wasn’t gone. He was negotiating a better deal for himself at the Swiss bank. He declined to comment for this story.

“I was really pissed,” Decker subsequently testified in the arbitration. He told an industry arbitration panel that he fully intended to join Jefferies. But when Moneypenny balked, he got cold feet, he said.  

And so, no sooner had Jefferies appeared to snag several big hires than its grand plan began to unravel. Handler tried to contain the damage. Lorello ordered a subordinate to find a way to reach Decker by that evening.

A Jefferies executive messaged the casino specialist: “All the reasons to come are still in place, and same for the reasons you wanted to leave.”

In the end, only three of the eight Credit Suisse bankers – Joseph Kieffer, John Bown and Brad Capadona – ended up moving to Jefferies.

Breakup Fees

By 5 p.m. on January 3, less than 24 hours after Decker signed his offer letter, he was negotiating with Credit Suisse for more money and a promotion. Jefferies promptly sought to collect its breakup fees (Moneypenny’s was $5 million, even more than Decker’s $4 million.)

Per standard industry practice, the disputes went to different arbitration panels. Moneypenny and two of the other bankers prevailed. Another won on liquidated damages but was ordered to pay almost $900,000 in other damages. Decker lost.

Now, the matter has gone to the courts. The outcome could have its biggest impact in California, said Zoe Salzman, an employment lawyer at the firm ECBAWM.

Jefferies’ argument is simple: Decker failed to live up to his contract and his career was “greatly enhanced” by the offer from Handler’s firm. 

“His compensation increased substantially, and he received a promotion solely because he signed the agreement with Jefferies,” Jefferies said in a court filing last November. “In fact, the only winner was Decker — both Jefferies and Credit Suisse were gamed (pun intended).”

Credit Suisse agreed to cover his legal bill — and any damages. Now, UBS will have to pick up the tab. UBS declined to comment. 

In the end, neither the Swiss bank nor Jefferies got their stars. Decker and Moneypenny have since departed for Banco Santander SA.

--With assistance from Rachel Graf.

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