3Cir Considers Absolute Privilege For Alleged Form U5 Defamation

April 4, 2022

On Wall Street, there are rules and regulations requiring that a former employer truthfully disclose certain aspects of the firing of a former employee. That disclosure regimen is supposed to ensure that investor protection concerns are addressed by alerting the regulators to any troublesome aspect of the former employee's conduct that prompted the termination. Some think it is a healthy approach to encourage former employers to send up flares and ring alarms, even if it turns out that some of the initial concerns weren't warranted. Others think it's a terrible idea that weaponizes the termination process in a manner designed to hamstring former employees and hobble their abilities to retain their customers or subsequently compete with their former employer. In a recent federal lawsuit, a lot of the pros and cons of Wall Street's termination protocol are on full display. 

Fidelity Sued For Discrimination and Defamation

In December 2016, former Fidelity Brokerage Services Financial Consultant Thomas Preston filed a Complaint in the United States District Court for the Western District of Pennsylvania ("WDPA") alleging age discrimination and defamation for statements Fidelity made on the Uniform Termination Notice for Securities Industry Registrations ("Form U5"). Thomas E. Preston, Plaintiff, v. Fidelity Brokerage Services, Defendant (Opinion, United States District Court for the Western District of Pennsylvania ("WDPA"), 16-CV-01799 / February 19, 2020)

Absolute Privilege for Form U5 Statements

In defending against Preston's allegations concerning the allegedly defamatory nature of its statements on his Form U5, Fidelity raised the Absolute Privilege Defense:

[F]idelity thus submits the Court of Appeals of New York's decision in Rosenberg v. MetLife, Inc., 866 N.E.2d 439 (2007) to support its argument that an absolute privilege should apply. The Rosenberg Court held, "Statements made by an employer on a [FINRA] employee termination notice are subject to an absolute privilege in a suit for defamation." Rosenberg, 866 N.E.2d at 445. In reaching this conclusion, the Rosenberg Court noted that FINRA's investigation of misconduct received through a Form U5 "ultimately inure[s] to the benefit of the general investing public, which faces the potential for substantial harm if exposed to unethical brokers." Id. at 444. The Court explained that the "Form U-5's compulsory nature and its role in [FINRA's] quasi-judicial process, together with the protection of public interests, lead us to conclude that statements made by an employer on the form should be subject to an absolute privilege." Id. Fidelity argues that the Rosenberg Court's reason should be adopted by this Court.

Mr. Preston argues that application of an absolute privilege to responses on FINRA Form U5 in defamation cases is an extreme minority view. Mr. Preston argues that the Pennsylvania Constitution protects an individual's right to reputation, and that pursuant to defamation case law in Pennsylvania, Pennsylvania would not apply absolute privilege to FINRA U5 disclosures. He further argues that Pennsylvania case law supports the majority view of affording conditional privilege for FINRA U5 disclosures.

at Page 20 of the WDPA Opinion

Preston filed a Motion for Partial Summary Judgment as to Fidelity's assertion of the Absolute Privilege Defense; and Fidelity filed a Motion for Summary Judgment as to all claims. WDPA granted Fidelity's Motion for Summary Judgment.

3Cir Appeal

Preston appealed WDPA's decision to the United States Court of Appeals for the Third Circuit ("3Cir") with regard to the denial of his defamation claim only. Thomas E. Preston, Appellant, v. Fidelity Brokerage Services (Opinion, 3Cir, 20-1612,16-CV-01799 / March 30, 2020)

The Temporary Lockout Policy

As 3Cir summarized the background to the lawsuit as follows [Ed: footnote omitted]:

[A]s an FC, Preston was subject to Fidelity's Temporary Lockout Policy ("TLO") set forth in Fidelity's "PI Investor Center, 2016 Rules of Engagement Rules of Relationship Policy Document." The TLO policy provides that an FC, under certain enumerated circumstances, may "lock out" a customer in Fidelity's database and receive exclusive financial renumeration for that customer. To properly exercise the TLO policy, an FC must have an "investment-related conversation [ ]" or "[v]alue-add conversation" with the customer or the prospect. App. 4-5. The policy also requires the FC to record and describe the conversation in the Seibel system, Fidelity's computer-based system kept as part of the company's books and records. 

In February 2016, a Fidelity employee made an anonymous complaint with the company accusing unnamed FCs in Pittsburgh of "abusing the TLO system by locking out customers without actually [having] the requisite customer interaction." App. 732. This prompted Fidelity's Director of Employee Relations and its in-house counsel to launch an investigation into the claim, which was led by two Fidelity internal investigators, Matthew Pliskin and Eric Bronner. During the investigation, Pliskin and Bronner flagged seven of Preston's TLOs as concerning because the "length of the customer telephone calls appeared to be too brief" to properly qualify as a requisite value-added conversation. App. 7; App. 997. One TLO in particular involved a documented conversation with "Customer A." Preston placed three calls to Customer A: two recorded voice messages and one six-second call. In documenting his interaction with Customer A in the Siebel note, Preston stated the following: "Called to introduce myself to him as [a] local point of contact for him. Sending my contact information. Will use if needed. Confirmed that TOA [transfer of assets] is in progress towards completion, saw note that fee adjustment was made." App. 8.

Appellees argue that this call and Preston's subsequent Siebel note raised two concerns: (1) it was not plausible that Preston covered all of the topics documented in his Siebel note in six seconds, and (2) even if Preston's call with Customer A did occur as he documented it, the call would not qualify as a value-added conversation that could support a TLO. Appellee Br. at 5. When Fidelity's investigators interviewed Preston about his interactions with Customer A, Preston explained that the Siebel note reflected a conversation that occurred when Customer A returned his call. However, both parties agree that this alleged phone call is not reflected in Fidelity's phone logs. Immediately following their interview with Preston, Pliskin and Bronner briefed Preston's supervisor and representatives from Fidelity's legal, employee relations, and compliance teams. During the briefing, Pliskin and Bronner reported that Preston admitted that he did not have a conversation with Customer A and falsified his books and records. Preston denies making any such admission. Following the investigation, Fidelity concluded that Preston "falsified books and records to manipulate the compensation plan" and terminated Preston on April 14, 2016. Appellee Br. at 7. 

On May 11, 2016, pursuant to its obligations, Fidelity submitted a Uniform Termination Notice for Securities Industry Registrations ("Form U5") to FINRA explaining the reasons for Preston's termination. In response to the question "is this a full termination?", Fidelity selected "Yes" and explained that it "determined employee violated department procedures by recording a detailed customer interaction for purposes of performance credit without actually having had the requisite degree of interaction with the customer." App. 738; App. 1000. Preston alleges that these statements on the Form U5 are defamatory.

at Pages 3 - 4 of the 3Cir Opinion 

WDPA Used the Lesser "Conditional" Privilege Standard (Only Required Proof of Negligence)

As we pick up the thread of the appeal, we come across a somewhat common issue involving Form U5: Are the statements posted on the form by an employer FINRA member firm entitled to an absolute or a conditional privilege when it comes to allegations of defamation? As 3Cir notes in Footnote 5:

Only four states in the United States have provided absolute privilege to form U5 defamation: California, Colorado, Massachusetts, and New York. Preston also argues that Pennsylvania law does not afford Fidelity absolute privilege for three reasons: (1) Pennsylvania provides greater protection to its defamed citizens than many other states in the country because the State's Constitution protects reputation as a fundamental right of mankind;(2) Pennsylvania does not follow the single-publication rule in cases of database defamation; and (3) Pennsylvania recognizes the theory of defamation by implication.

WDPA concluded that Fidelity was not negligent in completing the Form U5 and that Preston had failed to establish a genuine issue of material fact -- and that finding was predicated upon the lower Court's use of the Plaintiff-friendly "conditional" privilege, which requires only a showing of "negligence." As more fully explained in the 3Cir Opinion:

[T]he Court found that from the time that Fidelity received the anonymous complaint to the time it filed the Form U5, it "adhered to a course of action that was reasonable and methodical." App. 24. Three individuals, including Fidelity's in-house counsel, reviewed the initial anonymous complaint, which prompted a thorough investigation. The investigation commenced with a review of all of Fidelity's FCs in Pittsburgh, and multiple questionable TLOs led Preston to become the investigation's focus. After investigators interviewed Preston and reported their findings to his manager and Fidelity's in-house counsel, Fidelity determined that Preston falsely reported conversations to exercise the TLO policy and receive monetary compensation, a determination which the District Court noted was "sound and reasonable." App. 25. Fidelity then terminated Preston. 

Preston made a six-second call to Customer A and noted it in the Siebel when he applied the TLO, though he admits that said call did not relate to the TLO. Instead, he claims that the information in the Siebel referred to an incoming call from Customer A, a call which both parties concede is not reflected in the relevant call logs. In fact, there is no evidence that this incoming call ever occurred. Preston further argues that the TLO was appropriate, though he provides no evidence to support this. As the District Court noted, the undisputed evidence shows that Mr. Preston "violated department procedures by recording a detailed customer interaction for purposes of performance credit without actually having had the requisite degree of interaction with the customer," exactly as Fidelity stated on the Form U5. App. 738; App. 1000.

at Pages 9 - 10 of the 3Cir Opinion 

In reviewing WDPA's findings, 3Cir agreed that Fidelity had undertaken its conduct with care and had not engaged in any negligence. The rationale was as simple as it was compelling to the appellate court; namely: "Fidelity received a complaint, investigated it, determined wrongdoing by Preston, terminated Preston, and prepared and submitted the Form U5 with accurate statements, as required."  Accordingly, 3Cir affirmed WDPA's granting of Fidelity's Motion for Summary Judgment and its denial of Preston's Partial Motion for Summary Judgment.

Bill Singer's Comment

Compliments to WDPA and 3Cir for setting out the facts and legal issues with clarity and cutting through the thicket to render lucid Opinions.

Should there be a "privilege" to defame a former employee in furtherance of investor protection? One can argue the nuance of an absolute versus a conditional privilege but, in the end, it's often a debate between the rights of investors versus the rights of stockbrokers. As matters stand today on Wall Street and in our society, investor concerns will always be afforded more weight than those of industry employees. I'm not taking sides but am merely restating the obvious. In Preston, according to the district and circuit courts, the employee's cited conduct painted a troubling picture that the courts found justified the employer's Form U5 disclosures; and, in the end, Fidelity was found to have acted in a non-defamatory manner.