In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in August 2009, Claimant Investment Professionals, Inc. ("IPI") sought not less than $1 million in damages and alleged that its former employee Joshua Freeman:
In the Matter of the Arbitration Between Investment Professionals, Inc., Claimant, vs. Joshua Canaan Freeman, Sr., Respondent (FINRA Arbitration 09-04752, February 25, 2011).
Respondent Freeman generally denied the allegations and asserted affirmative defenses including defamation, breach of contract, failure to pay severance and accrued compensation, and violations of electronic privacy. Also, Respondent Freeman alleged that Claimant IPI made false and misleading statements on his Uniform Termination Notice For Securities Industry Registration ("Form U5″). Respondent alleged that Claimant failed to pay him wages earned, severance, and accrued compensation. Respondent sought not less than $130,900 in damages. Claimant IPI generally denied Freeman's allegtions and asserted responsive affirmative defenses.
In September 2010,the parties settled the case and asked the FINRA Arbitration Panel to enter an Award.
The first thing that caught my attention when reading this FINRA Arbitration Decision was the stipulation below:
IPI stipulates and acknowledges that it defamed Joshua Canaan Freeman, Sr. on the U-5 that IPI submitted to the FINRA CRD dated September 20, 2009, and in the Amended U-5 that IPI submitted to the FINRA CRD dated January 15, 2010.
In accordance with the parties' settlement, the FINRA Panel denied all claims with prejudice. Additionally, Claimant IPI and Respondent Freeman requested that the FINRA Panel recommend the expungement of Respondent Freeman's Form U5, which stated in relevant part (Uppercase in original):
BEGINNING ON JANUARY 23, 2009, INTERNAL REVIEW OF MR. FREEMAN'S ACTIVITIES WAS BASED UPON HIS SUSPECTED CONTINUED INVOLVEMENT WITH FORMER MANAGERS NO LONGER WITH THE FIRM, EACH SUBJECT TO AN ARBITRATION BROUGHT BY IPI. BY MIDSUMMER 2009 IPI COMPLIANCE LEARNED OF FURTHER ACTIONS ON MR. FREEMAN'S PART IN A SEPARATE REGULATORY CONTEXT WHICH ULTIMATELY WARRANTED HIS DISMISSAL.
The FINRA Panel retained on Freeman's Form U5 the Reason for Termination: "Discharged," but based upon the stipulated "defamation," recommended the following expungement and replacement language for the above:
Upon further investigation, IPI has learned that the facts and circumstances did not support the claims and allegations IPI previously made on Freeman's U-5 regarding his termination. IPI has withdrawn its previous claims and allegations against Freeman regarding his termination and has reached a settlement with him.
Accordingly, the FINRA Panel recommended that the "Yes" answers to the following Questions be expunged and changed to "No":
SIDE BAR: I've been practicing law for nearly three decades and, I gotta tell you, I'm not sure that I've ever seen a stipulation to defamation in a FINRA arbitration settlement - certainly not one that got spread on the record. Such an admission, if it were ever to be made, would usually occur orally as part of the sheepish smile, half-hearted handshake, and shrug that would accompany the handing over of a settlement payment from the offending party to the victim. The fact that such an admission appears in a formal FINRA Arbitration Decision and covers material statements on both the original and amended Form U5 (which are regulatory documents) is, to be frank, astounding.
It will be interesting to see whether FINRA subsequently brings a regulatory action against its member firm IPI for defaming a registered person on Forms U4 and U5. A key issue for IPI may be whether its stipulation of defamation constitutes an admission that it willfully entered materially false information on Freeman's Forms U4/U5. Such an admission could result in any responsible individuals being deemed statutorily disqualified. It may well be IPI's position that the defamation was inadvertent and based upon good faith at the time of the filing of the regulatory forms. Moreover, the member firm may assert that with the passage of time it realized that its earlier allegations were erroneous and promptly corrected the record. To that extent, FINRA may not have any regulatory case.
As has been documented over the years on the RRBDlaw.com website, willfully failing to disclose material facts on Forms U4/U5 often leads to the impostion of a Bar by FINRA in accordance with the definition of statutory disqualification. See these Statutory Disqualification cases for guidance: