Threats, Defamation, Dirty U5, EFL, LOA, VA, And Expungement

February 7, 2014

Hardball. Sometimes that's what happens when an employee decides to leave and an employer ain't none too happy about it. The game often includes a number of brush back and knock down pitches, which frequently sets off a bench clearing brawl. In today's BrokeAndBroker Blog, we have one such sporting event involving a lot of nastiness and one former employee's reputation hanging in the balance.

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in May of 2012, Claimant Robertson asserted defamation, tortious interference with prospective relations, and intentional infliction of emotional distress in connection with the purportedly inaccurate disclosures on his Uniform Termination Notice for Securities Industry Registration concerning his departure from Respondent Raymond James Financial Services, Inc.  In the Matter of the FINRA Arbitration Between James Patrick Robertson, Claimant, vs. Raymond James Financial Services, Inc., James Alan Fulp, John Wascom Houston, Jamie Linden Kosharek, and Leslie Amanda Reese, Respondent (FINRA Arbitration 12-01755, January 30, 2014).

Claimant Robertson sought $7,712,378.00 in compensatory damages plus punitive damages, interest, $70,000 in attorneys' fees, and $25,000 in costs. At the close of the arbitration hearing, Claimant sought an award of $2,500,000 plus costs, fees, and an expungement of his Form U5. At the hearing, Claimant did not pursue his claim for tortious interference or intentional infliction of emotional distress.

Respondents generally denied the allegations and asserted affirmative defenses.

In The Beginning

In 2000, Claimant Robertson was recruited to work at Woodforest Financial Services, Inc. ("Woodforest"), through which firm he was registered with the Financial Institution Division of Raymond James Financial Services, Inc. Claimant was hired to build from scratch a bank-brokerage operation. Apparently things well fairly well because within about six years, Claimant had over $60 Million in assets under his management. 

The Exemption

During the recruiting phase, Claimant had negotiated an agreement with the RJFS Branch Manager  ("Branch Manager") that allowed him to continue to service annuity accounts from his prior broker-dealer New England Financial ("NEF").  As part of the deal, Claimant submitted a list of his NEF clients, who were supposed to have been exempted from the non-compete provisions of his new employment agreement.

A Failed NEF Client Transfer

Around April 2006, one of the exempted NEF clients contacted Claimant Robertson for help in moving $10,000 from a non-RJFS mutual fund into an existing NEF Variable Annuity, which had previously been sold by Claimant to the client. Claimant did not obtain the RJFS Branch Manager's prior approval or authorization for the transfer, which he thought was in accordance with compliant with industry rules and regulations and permitted under the terms of his employment contract. Accordingly, Claimant prepared the necessary transfer forms for the client's execution and then sent the paperwork to NEF; however, that firm returned the paperwork and did not transfer the funds.


In May 2006 a client, came to Claimant Robertson's office seeking to transfer money from his Individual Retirement Account to his checking account. The client was given a pre-printed Letter Of Authorization ("LOA") for completion and execution; however, the client only executed the document and asked that Claimant and/or his assistant fill-in the blanks. Unfortunately, the assistant had arrived about three hours late from her Woodlands office jobsite and although Claimant had asked her to complete the forms, she failed to do so because she needed to leave in order to deal with family matters. Intending to finish the paperwork the next day but without Claimant's knowledge, the assistant to sent to herself at the Woodlands office the LOA documentation via inter-office courier. On the next business day, before she completed the forms, one of the Woodlands office Branch Managers found the blank executed LOA and confiscated it. The LOA was never used or placed into the client's permanent file for future use.

Another Offer

In May 2006, Claimant Robertson was approached by a search firm, and by early June, he was prepared to accept a substantial offer. Unfortunately for Claimant, the RJFS Branch Manager found out about the job offer and thereafter,  at the direction of the firm's legal department, the manager retained a lawyer to draft a severance agreement. 

The Hostilities Begin

On June 5, 2006, Co-Branch Managers came to Claimant Robertson's office and accused him of "selling away" and placing a blank executed LOA in a client's file. Further, Claimant was told that a severance agreement and resignation letter had been prepared for his execution, and that if he 

  • signed the agreement;
  • left all of his clients with Woodforest/RJFS; and
  • agreed not to compete in Harris and Montgomery counties, 
then his employee forgivable loan ("EFL") would be reduced, and he could leave with a clean Form U5. On the other hand, if Claimant did not go along with the firm's demands, he was warned that 

  • his Form U5 would be tainted;
  • he would be completely unemployable; and
  • the firm would demand immediate repayment of the $89,000 EFL, which would result in a lien against Claimant's home and the likely ruin of his credit.

Notwithstanding such demands, Claimant Robertson refused to execute the agreement and on June 8, 2005, submitted a letter of resignation, which was not accepted by Woodforest or RJFS - in fact, later that same day, Woodforest sent him a termination letter and the Branch Manager recommended that the RJFS Form U5 be filed with the disclosure that Claimant had been terminated for "SELLING AWAY, BLANK SIGNED LOA." 

On June 9, 2005, RJFS filed a Form U5, which disclosed under the Reason for Termination: "POTENTIAL SELLING AWAY, BLANK SIGNED LOA." The inclusion of the word "potential" was apparently prompted by in-house consideration that the subject transaction was never consummated. 

The Aftermath

As set forth in the FINRA Arbitration Decision, Claimant Robertson contended that:

As a result of the language placed on the U5, Robertson's personal and professional reputation as well as his economic interests were severely damaged. When Robertson was terminated, Woodforest, RJFS, the RJFS Branch Managers, and others working at their branches retained substantially all of Robertson's book of business, about $60 Million under management, and cast off Robertson with a tainted U5 and little income. Earned commissions were retained and applied against the EFL, and Robertson was advised that the non-compete provisions of his employment agreement prevented him from contacting his Woodforest/RJFS clients. The firm with whom he was negotiating terminated negotiations, in whole or in part, because of the U5 language. Additionally, Woodforest filed a lawsuit against Robertson to collect all unpaid sums on the EFL. (Robertson filed a counterclaim, and this litigation was settled in November 2007, with Robertson incurring legal fees of over $100,000.00. (RJFS was not a party to this case.) The Settlement Agreement represented that in September 2007 the Branch Manager had forwarded to RJFS Robertson's request that RJFS amend the U5 with specific language being suggested. In January 2008 Robertson's attorney again asked RJFS to amend the U5 to "accurately and completely" disclose the reason for Robertson's termination and to disclose the "entire truth." RJFS refused to amend the U5.) A significant period of time passed before Robertson could find other employment and establish a business; he had to essentially start from scratch to build a new book of business. The defamatory language on his U5 caused, and is continuing to cause on a daily basis, severe damage to Robertson's ability to earn a living and to otherwise advance his professional career.

The FINRA Arbitration Decision explained that:

The testimony in this case established that the term "selling away" has very serious implications in the securities industry, and the placement of "selling away" on a U5 can have devastating effects on the career of any registered representative such as Robertson. "Selling Away" could include securities fraud, theft, Ponzi schemes, and other scams to illegally obtain money from innocent victims.

RJFS inserted the language "POTENTIAL SELLING AWAY" on Robertson's U5. Both experts and other witnesses at the hearing testified that there is not a violation under FINRA or RJFS rules called "potential" selling away. This language is ambiguous and has no established meaning in the securities industry. Without further explanation a person reading Robertson's U5 could reasonably conclude, by implication, that he wantonly violated FINRA rules or was guilty of attempted fraud or some other illegal activity. Respondents' expert testified that best practices require that a U5 must be accurate and complete. True but incomplete statements can fulfill the falsity requirement for defamation, especially where the statement falsely imputes criminal conduct. The Texas Supreme Court opined in Turner v. KTRK Television, Inc., et al, 38 S.W.Sd 103 (Tex. 2000): "Because a publication's meaning depends on its effect on an ordinary person's perception, courts have held that under Texas law a publication can convey a false and defamatory meaning by omitting or juxtaposing facts, even though all of the story's individual statements considered in isolation were literally true or non-defamatory." (The same law and argument applies to the insertion of "BLANK SIGNED LOA" without further explanation.) The Panel holds that the incomplete, misleading, ambiguous language inserted on Robertson's U5 was defamatory and caused substantial damages to Robertson.

Respondents have pled various defenses including qualified immunity. At the time the defamatory language was inserted into Robertson's U5, RJFS knew and appreciated that this could fatally damage Robertson's career. This was still true in January 2008 when RJFS failed and refused to amend Robertson's U5 to "accurately and completely" disclose the reason for Robertson's termination and to disclose the "entire truth." The Panel holds that the placement of the defamatory language on the U5 and RJFS's continuing refusal to amend the U5 was both negligent and reckless. Thus, the qualified immunity defense is inapplicable. FINRA Dispute Resolution

Respondents also asserted a statute of limitations defense. The defamatory language on the U5 caused Robertson serious personal and financial problems. After spending over $100,000.00 defending the Woodforest litigation, Robertson was not in a position to timely incur more substantial legal expense to litigate with RJFS. The Panel holds that it would be inequitable to bar Robertson's cause of action. RJFS has been unjustly enriched as a result of the termination of Robertson. Moreover, this FINRA arbitration is a forum of equity, and the Panel has committed to serve justice. State statutes of limitations should not be applicable here to prevent this Panel from rendering a fair and just decision. Robertson timely filed his claim within the FINRA six year eligibility period. But even if a statute of limitations could be applied here, the Panel believes that equitable tolling should be applicable. Alternatively, it can be argued that every day that the defamatory language remains unamended on the U5, a new cause of action may accrue. Robertson has continued to suffer substantial damages since May 2011, one year before this claim was filed.

Paying The Price

For the reasons noted above, the FINRA Arbitration Panel found Respondent Raymond James liable and ordered it to pay to Claimant Robertson:

  • $272,250.00 in compensatory damages;
  • 10% per annum interest from 30 days after service of the Award until paid in full; and
  • $600 in reimbursed FINRA filing Fees.

Further, the Panel recommended the expungement of the Termination Explanation from Claimant's June 12, 2006, Form U5 and to be further reflected on his Central Registration Depository file. The Panel recommended replacement with the following language:

"Potential selling away, blank signed LOA. 1.) Employment contract gave FA approval to service former Var. Ann. client who asked FA to help move $10k to existing VA held by FA's former employer. FA/client completed forms to sell non-RJFS MF shares and move funds. FA reasonably believed supervisory signoff unnecessary. Transaction never completed. 2.) Client signed blank LOA to open new account. Forms given to ass't to complete process but LOA taken from ass't next business day by OSJ before process completed."

The Panel dismissed with prejudice Claimant's claims against Respondents Fulp, Houston, Kosharek, and Reese denied and dismissed with prejudice.

Bill Singer's Comment

Regular readers of the BrokeAndBroker Blog know that I'm a tough one to please when it comes to the quality and content of many FINRA arbitration decisions.  Too often, what we are provided with is a fact pattern more short-shrift than substance. Further, even when we are able to make some sense out of the substance of the dispute, too many FINRA arbitration panels fail to provide us with any meaningful rationale for their decision.

In stunning contrast to the hide-and-seek nature of many FINRA arbitration decisions, Robertson is as close to perfect as I could desire -- if not, ultimately, perfect. We are given enough detail to understand what happened and how it may have prompted the bad blood between the parties. Thereafter, the Panel offers a thoughtful and compelling analysis replete with a substantive rationale. 

My compliments to the three FINRA arbitrators for a superb effort!