U Sure U Know About U5?

March 4, 2008

In the Beginning

In 2003, MetLife terminated registered
representative Chaskie Rosenberg, and filed a Form U5 with NASD that disclosed
the following explanation:


Rosenberg then sued MetLife in the United
States District Court for the Southern District of New York and sought damages
for employment discrimination, fraudulent misrepresentation, breach of contract
and libel. Rosenberg alleged that MetLife terminated his employment because he
is a Hasidic Jew. With respect to his libel claim, he asserted that MetLife's
statements on the Form U-5 were defamatory and made with malicious intent. After discovery, MetLife moved for summary judgment dismissing the complaint in its entirety.

The Court denied MetLife's motion as to the discrimination claims and breach of contract cause of action, but granted the motion dismissing the fraudulent misrepresentation and libel claims. The federal court held that, under New York law, MetLife's statements on the Form U-5 were absolutely privileged. Following a trial on the remaining issues, the Court dismissed plaintiff's contract claim and the jury found MetLife not liable on the discrimination claims.  On appeal, to the United States Court of Appeals for the Second Circuit, Rosenberg argued that the district court erroneously dismissed his libel claim on the basis that Form U5 statements are absolutely privileged under New York State law. The Second Circuit concluded that plaintiff presented an unsettled issue of New York law and certified a question the New York State Court of Appeals: "Are statements made by an employer on an NASD employee termination notice ('Form U-5') subject to an absolute or a qualified privilege in a suit for defamation?"

End of the Road?

Nearly a year ago on March 29, 2007, in Rosenberg v.MetLife, et al., http://www.law.cornell.edu/nyctap/I07_0037.htm
the New York State Court of Appeals answered the certified question from the federal court with the following succinct explanation:

The Form U-5's compulsory nature and its role in the NASD'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. Analogously, close to 40 years ago in Wiener we determined that complaints involving attorneys should be accorded an absolute privilege because of "the necessity of maintaining the high standards of our bar" (Wiener, 22 NY2d at 332). The regulation of registered brokers in the securities industry is of no less importance 7. We further note that registered employees who are maliciously defamed on a Form U-5 are not wholly without remedy as they may commence an arbitration proceeding or court action to expunge any alleged defamatory language.

the certified question should be answered as follows: Statements made by an employer on a NASD employee termination notice are subject to an absolute privilege in a suit for defamation.

For my part, the New York State Court of Appeals got the issue totally wrong, and the Dissent was squarely on point when it noted:

Because the Form U-5 is not a part of any judicial process, and given the serious potential damage to an employee's reputation and business prospects, any communication associated with the Form is amply protected by a qualified rather than an absolute privilege.


Water Cooler Law

Sadly, it doesn't matter one whit what Bill Singer agrees or disagrees with.Rosenberg is now the law in New York State, and will likely be persuasive in many others.
Still,there are times when it helps to have gone to law school and gained admission to the Bar. I know what Rosenberg says and what it doesn't.The ruling says that "in a suit for defamation" employers have an "absolute privilege" concerning statements on a U5.  The ruling does not say that RRs have no recourse whatsoever -- even if you may not be able to win monetary damages, you still have some options.
Now, of course, there are far more water-cooler lawyers on Wall Street than we professionals with those pesky admission certificates on our walls.The know-it-alls who dispense supposedly sage advice while leaning on the water cooler or spilling coffee on your desk have told you with great seriousness and with total assurance that you can't do anything about a dirty U5. They tell you that you're stuck with it. Like it or lump it. Well, they're wrong.  

Maybe you should spend a few bucks and talk to a real lawyer--particularly if you are now a victim of a defamatory U5.

Recent FINRA Arbitrations

Okay, so let's consider what you've heard.  No one can sue anymore over U5s.  It's been settled law since March 2007.  You have no recourse. Oh, yeah?  Well, consider this small sampling of U5 cases since Rosenberg.


In the Matter of the Arbitration Between Jacob Niremberg (Claimant) AND NYLife Securities, Inc. (Respondent) and George R.Gordon (Respondent) (FINRA Dispute Resolution #06-02862, February 1, 2008),Niremberg alleged that he had been libeled and slandered on a Form U5, and
requested $50,000 in compensatory damages, reimbursement of his costs, and expungement of his CRD record. Respondents requested dismissal of the Statementof Claim in its entirety and that the costs be assessed against Claimant. 

Although the Panel dismissed Niremberg's claims for monetary damages, it recommended that

the termination comment "discharged for failure to attend training seminars" be expunged from Claimant Jacob Niremberg's registration records and the reason for termination be replaced with "voluntary." The Panel orders this expungement from the registration records maintained by the NASD Central Registration Depository "CRD") based on the defamatory
nature of the information, albeit unintentional. 


In the Matter of the Arbitration Between Esdras Vera (Claimant) AND Citicorp Financial Services Corp. (Respondent) (FINRA Dispute Resolution #06-01760, February 27, 2008),
Vera asserted that he had been defamed on the Form U5 and that Citicorp had tortiously interferred with his prospective economic advantage.  Vera sought compensatory/punitive damages and expungement of his Form U5.

Following the granting of a Motion for a Directed Award, the Panel found that 

[C]laimant was terminated for reasons that were not upported by the facts in this case and that the alleged defamatory statements contained in the Form U5 are not actionable because they are privileged.

Although the Panel denied compensatory damages for the reason noted above, it still ordered the expungement and amendment of Section 3 of Form U5 dated April 12, 2005 filed by Respondent as follows: 


  • replace that language with: "The Firm made a business decision to terminate Mr.Vera.

In accordance with FINRA rules, Vera's Form U5 is not automatically amended and he must forward a copy of the Award to FINRA's Registration and Disclosure Department for the amendments to be incorporated into the Form U5. 


In the Matter of the Arbitration Between Edgar Rene Barron (Claimant) AND H&R Block Financial Advisors, Inc. (Respondent) (FINRA Dispute Resolution # 07-00960, February 7, 2008. Barron alleged that he was defamed on his Form U5. Claimant requested an expungement order to remove the defamatory comments from Claimant's Form U5 and the registration comments in the Central Registration Depository ("CRD").

In its Counterclaim, Respondent asserted the
cause of action of breach of contract, and cited Claimant's failure to repay monies allegedly due upon Respondent's termination of Claimant's employment for good cause, in accordance with the terms of a fully executed Signing Bonus Agreement dated May 9, 2002 (the "Agreement"). Respondent requested dismissal of the Statement of Claim in its entirety and an award to Respondent of its costs and attorneys' fees. Respondent further requested compensatory damages on its Counterclaim in the amount of $20,000.00, plus interest pursuant to the terms of the Agreement.

In quite stark language, the Panel dismissed
with prejudice Respondent's Counterclaim and stated:

The Panel finds that there was no
evidence presented to justify Claimant Edgar Rene Barron's dismissal from his employment with Respondent based on the warning letter that had been issued.
Panel recommends the expungement of the Reason for Termination in Question 3 of form U5 dated 9/17/03 of Claimant Edgar Rene Barron's registration records maintained by the Central Registration Depository "CRD"). The panel recommends that the Reason for Termination be immediately changed to
"Voluntary." The entirety of the Termination Comment,
"INVOLUNTARY-VIOLATION OF COMPANY POLICIES REGARDING DISCLOSURE AND TRADING IN OUTSIDE BROKERAGE ACCOUNTS" should be deleted. The expungement is based on the defamatory nature of the information contained in Claimant's CRD record. . . 


IIn the Matter of the Arbitration Between Lisa D. Lindley (Claimant) AND Strand, Atkinson, Williams & York, Inc.,(Respondent) (FINRA Dispute Resolution #07-01189, February 22, 2008), Lindley alleged defamation and unpaid wages involving her previous employment with Respondent, and sought expungement of her Form U5 based on the defamatory nature of the information, $300,000.00 in compensatory damages, unpaid wages along with applicable penalties, and costs, including attorney's fees.  At the hearing, Lindley withdrew her wage claim, and subsequently, the Panel ruled that

1) The Panel orders the expungement of the reason for termination language listed under Item #3 on Claimant's Form U5.
The reason for termination should be changed to Other. In addition, the Panel orders the expungement of the accompanying termination comment. The termination comment should be changed to read, "Clerical errors related to daily securities reconciliation reports." The expungement is based on the defamatory nature of the information contained in Claimant's Form U5.

2) Respondent is liable to and shall pay Claimant the sum of $50,000.00 in compensatory damages.

Hmmmm. . .okay,so even I'm not quite sure how or on what basis the panel awarded Lindley $50,000,particularly since "defamation" is now absolutely privileged, but, hey, I tend to doubt that she's on her way to the post office to mail it back. Sometimes Panels do strange things. Even more reason to take a chance every so often and refuse to settle on the cheap and take a shot at a hearing.