Appellate Court Affirms $11.5 Million in Damages and Costs in Employment Defamation Case

November 23, 2021

In a stunning FINRA intra-industry arbitration victory in 2019, a former UBS registered representative was awarded over $11.5 million for Form U5 defamation and attendant harm. Then came the appeal. Two state courts affirmed the Award. Notably, the appellate court refused to bite on UBS's bait that so-called public policy gave it broad license when it came to posting disclosures about an associated person's conduct.

2019 FINRA Arbitration Award

In a FINRA Arbitration Statement of Claim filed in June 2018 and as amended, associated person Claimant Munizzi asserted defamation per se attendant to Respondent UBS' filing of his Form U5 and the disclosures on his Central Registration Depository record ("CRD"); and, further asserted violation of the Illinois Wage Payment and Collection Act and tortious interference with prospective economic advantage. Claimant Munizzi alleged that UBS owed him severance and that the Form U5 interferes with his ability to obtain commensurate employment. At the hearing, Claimant sought an expungement/modification of the Form U5, $3,149,656 in compensatory damages, interest, $496,753.50 in attorneys' fees, $23,419.13 in costs, and 10 times the compensatory damages via punitive damages.

In the Matter of the Arbitration Between Mark Munizzi, Claimant, v. UBS Financial Services Inc., Respondent (FINRA Arbitration Award 18-02179 / December 11, 2019)

https://www.finra.org/sites/default/files/aao_documents/18-02179.pdf

Respondent UBS generally denied the allegations and asserted affirmative defenses.

2019 FINRA Award

The FINRA Arbitration Panel recommended the expungement of Claimant Munizzi's U5. Pointedly, the Panel recommended, in part, that the "Reason for Termination" be changed to "Other" and the "Termination Explanation" to "Terminated without cause."

Further, the Panel found Respondent UBS liable to and ordered the firm to pay to Claimant Munizzi $3,149,656 in compensatory damages, $112,500 in interest, $496,753.36 in attorneys' fees, $24,381.40 in costs, $375 in reimbursed FINRA filing fees; and $7,500,000 in punitive damages.

Motions to Confirm/Vacate

In December 2019, Munizzi filed a Motion to Confirm the FINRA Award in the Circuit Court/Cook County, IL. In October 2020, the Circuit Court confirmed the FINRA Award and denied the Motion to Vacate. On November 5, 2020, the Circuit Court entered judgment in Munizzi's favor for a total award of $11,170,790.86 as awarded by the arbitrators, plus additional attorney fees and costs in defending the award of $97,604.30, and $908,965.20 in interest from the date of the award.

UBS Appeals

In November 2020, UBS appealed the Circuit Court's confirmation to the Appellate Court of Illinois / First District ("AppCt") Mark Munizzi, Plaintiff/Appellee, v. UBS Financial Services, Inc., Defendant/Appellant (Opinion, Appellate Court of , 2021 IL App (1st) 201237 / November 19, 2021)

https://brokeandbroker.com/PDF/MunizziAppCtILOp211119.pdf

Content and Context -- What Actually Happened

The Illinois Appellate Court provides us with content and context woefully lacking in the FINRA Award:

¶ 6 Mr. Munizzi, a registered broker/salesperson and investment adviser representative, was hired by UBS in 2003. In 2016, Mr. Munizzi became the Chicago-area market supervisory officer, and his duties included overseeing the securities brokerage managers-who supervise financial advisors and accounts-in UBS's Chicago branch offices. According to Mr. Munizzi, he received exemplary annual assessments throughout his time at UBS and, in his 36 years working in the securities industry, he never failed a regulatory or internal audit or received a write-up or warning of any kind.

¶ 7 On February 5, 2018, two UBS accounts suffered extraordinary losses. One was an employee account and the other was an account held by the mother of an employee. According to Mr. Munizzi's testimony at the arbitration hearing, these two accounts held specific options that can be profitable when "stock market volatility is relatively low" but will likely result in losses when stock prices fluctuate.

¶ 8 As also explained by Mr. Munizzi at the arbitration hearing, under regulatory and UBS requirements, customers who hold these risky types of options are subject to "margin" requirements, meaning those customers must maintain a certain level of assets in their accounts "based on the value of the margin position." If the options lose value, a margin call may be issued for additional collateral. If a customer does not respond to that margin call within five days-by, for example, depositing cash or eligible securities-the firm will sell investments in the customer's account to "meet the call." If the loss on the options exceeds the proceeds from the sale of investments in the account, UBS is liable for the resulting "unsecured debit," subject to potential collection from the customer.

¶ 9 The stock market was volatile on Friday, February 2, 2018, and at the end of that day, one of these accounts had "large unrealized losses in excess of $700,000" and the other had a "margin call" "that exceeded $800,000." The following Monday, February 5, 2018, the stock market dropped 1000 points, and by market close, the unsecured losses in both of these accounts had increased to more than $3 million. After an investigation into these losses, UBS terminated Mr. Munizzi on April 19, 2018.

¶ 10 As required by Illinois law and the FINRA rules, UBS filed a form U5 -- the "Uniform Termination Notice for Securities Industry Registration" -- disclosing the termination. On the form U5, UBS indicated that the "Reason for Termination" was that Mr. Munizzi was "discharged after firm review determined that (1) he failed to adequately supervise employees in association with the risks of an uncovered options strategy in employee and employee related accounts and (2) gave varied responses during the review."

¶ 11 Mr. Munizzi filed his complaint before the FINRA arbitration committee, alleging claims of defamation per se, a violation of the Illinois Wage Payment and Collection Act (Wage Act) (820 ILCS 115/1 et seq. (West 2018)), and tortious interference with prospective economic advantage against UBS. In his complaint, Mr. Munizzi alleged that "[w]hen registered employees are terminated, a summary of the U5 appears on FINRA's widely publicized BrokerCheck database," and that "[s]tatements about the termination of Registered Persons which indicate that an employee was incompetent or dishonest can severely impair their ability to obtain employment in the financial services industry." Mr. Munizzi alleged he had been "permanently injured by UBS's false and inaccurate reasons for termination" and that UBS had injured Mr. Munizzi "knowingly and with reckless disregard for [his] wellbeing and future ability to find employment." Mr. Munizzi sought, as relief, expungement and modification of the form U5, compensatory and punitive damages, attorney fees, and interest.

at Pages 2 - 4 of the AppCt Opinion

UBS' "Public Policy Arguments

In its appeal, UBS argues that a vacatur or modification of the FINRA Award is necessary because it:

violates a "well-defined and dominant" public policy favoring the disclosure of information regarding negligent or dishonest conduct of securities professionals. UBS also argues that the award should be vacated because the circuit court erroneously concluded that it was bound by the arbitrators' findings. Finally, UBS argues in the alternative that this court should vacate the punitive damages award because it was excessive and contrary to public policy and the law regarding defamation. . . .

at Page 8 of the AppCt Opinion

In rejecting UBS' "public policy" argument, in part, the Appellate Court notes that:

even if the public policy exception did apply, the award in this case does not violate any "well-defined and dominant" public policy. UBS argues that the award should be overturned or modified because it violates an explicit Illinois public policy "favoring protection of the investing public through the disclosure of information concerning negligent or dishonest securities professionals." UBS states that the "[f]orm U5's effectiveness *** depends on employers making full and frank disclosures" and that FINRA's bylaws make clear that "[c]andid and accurate disclosure of a regulatory or disciplinary problem *** is critical" See Nat'l Ass'n of Securities Dealers, Notice to Members 97-77 (Nov. 1997), https://www.finra.org/sites/default/files/NoticeDocument/p004412.pdf [https://perma.cc/3 HHS-ST93].

¶ 37 The arbitration panel recommended the expungement of the reason for termination and termination explanation on the form U5 "based on the defamatory nature of the information." In doing so, it cited Republic Tobacco Co. v. North Atlantic Trading Co., 381 F.3d 717, 726 (7th Cir. 2004), which states that to succeed on a defamation claim under Illinois law, the plaintiff must show "that the defendant *** made a false statement concerning him" (internal quotation marks omitted) that was then published and caused damage to the plaintiff. Thus, the arbitration award reflects that the arbitration panel found that UBS made false statements about Mr. Munizzi. Therefore, the disclosures on the form U5 were neither "frank" nor "accurate." There is no public policy favoring false or defamatory disclosures by employers.

at Pages 11 - 12 of the AppCt Opinion

Incomplete Record Provided

In dismissing UBS assertion that the FINRA arbitrators' factual findings were not supported by the record, the Court found that said argument was forfeited because the firm had failed to supply a complete record of the arbitration hearing:

[I]nstead, UBS provided this court with portions of documents and excerpts of testimony. Thus, this court has no basis for comparing the arbitrators' factual conclusions with the evidence presented, and the circuit court correctly recognized that the arbitrators' factual findings are therefore binding.

at Page 13 of the AppCt Opinion

Punitive Damages

As to UBS' argument that the arbitrators' award of punitive damages contravened public policy, the Appellate Court stated, in part, that:

¶ 44 Again, this court is bound by the arbitrators' finding that UBS's disclosure was defamatory. Thus, this court cannot accept UBS's premise that it disclosed information that was "fully supported by facts." This is particularly true where, as here, we have not been provided with a full record. We therefore reject the argument that this award would disincentivize securities firms from providing complete and accurate information on similar disclosures. Moreover, for all the reasons outlined above, we are not convinced UBS's public policy argument plays any role in this case.

at pages 12 - 14 of the AppCt Opinion

Bill Singer's Comment

Oh my!!! What an oh-so blunt and yet very concise (and much overdue) rendering of the compelling issue in this case: