Defamation

Herskovits PLLC Proves Form U5 Defamation and is Awarded Attorneys’ Fees for Our Client

November 24, 2020 | Herskovits, PLLC

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On November 19, 2020, FINRA published a noteworthy arbitration award for a Herskovits PLLC client in FINRA Arbitration No. 20-01054. This case has garnered significant attention in the press due to the fact that Wells Fargo was ordered to pay our client’s attorneys’ fees. Stories about the case have been reported in AdvisorHub, InvestmentNews and ThinkAdvisor.

On February 18, 2020, Wells Fargo terminated the FA and inserted the following allegation on the Form U5:

“WF Bank, N.A., registered banker was discharged by the bank after a bank investigation reviewed complaints received by AMIG from two bank customers alleging the customers were enrolled in renter’s insurance policies for which the banker received referral sales credit without the customers’ authorization. The registered banker denied the customers’ allegations. The activity was not related to the securities business of WFCS.”

CALIFORNIA ENDS ABSOLUTE IMMUNITY FOR FORM U5 DEFAMATION CLAIMS

May 2, 2020 | Herskovits, PLLC

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On April 21, 2020, California’s Court of Appeal, Fourth Appellate District created a significant carve-out to the absolute immunity standard previously applicable to Form U5 defamation claims in California. The full opinion in Tilkey v. Allstate Insurance Co., Super. Ct. No. 37-2016-00015545-CU-OE-CTL (2020) is available here. This case significantly changes the landscape for Form U5 defamation claim unless California’s highest court intervenes. As a result of Allstate’s defamation, the trial court awarded Tilkey $2,663,137 in compensatory damages and $15,978,822 in punitive damages.

Background

Before jumping in to the facts of the case, some background on Form U5 defamation claims might be helpful. Broker-dealers are required to file a Form U5 whenever an employee’s registration is terminated. The Form U5 requires the firm to provide a narrative explanation of the termination if the employee was discharged or permitted to resign. When it comes to the narrative explanation, professionals in the financial services industry frequently complain that employers “play games” by providing extraneous and gratuitous remarks or, worse yet, offering an entirely false explanation for the termination. The consequences flowing from negative Form U5 disclosure information are severe. In addition to reputational harm, FINRA will start a costly investigation and potential employers will shy away from a prospective employee with negative information on CRD.

UBS IS SLAMMED FOR FORM U5 DEFAMATION: QUALIFIED IMMUNITY PREVAILS

December 13, 2019 | Herskovits, PLLC

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On December 11, 2019, a Chicago-based FINRA arbitration panel body-slammed UBS in a Form U5 defamation case (FINRA Case No. 18-02179 – Munizzi vs. UBS Financial Services Inc.). UBS will need to cough up compensatory damages of $3,149,656, punitive damages of $7.5 million, and almost $500,000 in attorneys’ fees. The bean counters in Zurich can’t be happy. This case should serve as a warning to brokerage firms who play games with Form U5 disclosures.

The issues surrounding Form U5 disclosures are well known. Firms are required to state a reason for an individual’s termination as either “discharged,” “other,’ permitted to resign,” “deceased,” or voluntary.” If the reason for termination is designated as discharged, permitted to resign or other, the firm is required to provide a written explanation. This is where things get funky, particularly where the individual contests the explanation offered-up by the firm.

Lawyers tend to squabble over whether a firm can be successfully sued for defamatory statements on a registration termination form (Form U5). Brokerage firm’s argue that FINRA requires them to provide timely, complete and accurate information on Form U5 concerning the individual’s termination. Firm’s will often cite to FINRA Regulatory Notice 10-39 [a copy can be viewed here] to support this proposition. Thus, many firms will claim to enjoy “absolute immunity” for statements made on a Form U5 and rely upon Rosenberg v. Metlife, 8 N.Y.3d 359 (2007) (where New York’s highest court ruled that defamatory statements on a Form U5 are subject to an absolute privilege). However, as set forth in the tables below, New York’s position on Form U5 immunity is clearly the minority view, since most states that have considered this issue provide brokerage firm’s with only qualified immunity (meaning, immunity for statements made in “good faith”):

MAJORITY POSITION: QUALIFIED IMMUNITY
State	Case
Arizona	Wietecha v. Ameritas Life Ins. Corp., No. CIV 05-0324-PHX-SMM, 2006 WL 2772838 (D. Ariz. Sep. 27, 2006)
Connecticut	Dickinson v. Merrill Lynch, 431 F. Supp. 2d 247 (D. Conn. 2006)
Florida	Smith-Johnson v. Thrivent, No. 803CV2551T30EAJ, 2005 WL 1705471 (M.D. Fla. July 20, 2005)
Illinois	Bavarati v. Josephthal, Lyon & Ross, 28 F.3d 704 (7^th Cir. 1994)
Michigan	Andrews v. Prudential, 160 F. 3d 304 (6^th Cir. 1998)
Oklahoma	Prudential Sec. Inc. v. Dalton, 929 F. Supp. 1411 (1996)
Tennessee	Glennon v. Dean Witter, 83 F.3d 132 (6^th Cir. 1996)
Texas	In re Wakefield, 293 B.R. 372 (N.D. Tex. 2003)

In addition, a number of states have enacted Section 507 of the Uniform Securities Act, which specifically provides for qualified immunity (the firm can be liable for defamation if the firm knew or should have known that the statement was false, or acted in reckless disregard of the statement’s truth or falsity.

MAJORITY POSITION: QUALIFIED IMMUNITY
State	Statute
Hawaii	HAW. REV. STAT. ANN. § 485A-507 (2006)
Idaho	IDAHO CODE ANN. § 30-14-507 (2004)
Kansas	KAN. STAT. ANN. § 17-21a507 (2005)
Maine	ME. REV. STAT. ANN. 32, § 16507 (2005)
Minnesota	MINN. STAT. ANN. § 80A.74 (2007)
Missouri	MO. REV. STAT. § 409.5-507 (2003)
Oklahoma	OKLA. STAT. ANN. 71, § 1-507 (2004)
South Carolina	S.C. CODE ANN. § 35-1-507 (2006)
South Dakota	S.D. CODIFIED LAWS § 47-31B-507 (2002)
U.S. Virgin Islands	V.I. CODE ANN. 9, § 657 (2004)
Vermont	VT. STAT. ANN. 9, § 5507 (2006)

In addition, the regulatory community has historically supported the proposition of qualified immunity instead of absolute immunity. In 1997, FINRA (then NASD) even proposed a rule specifically provided only qualified immunity for Form U5 disclosure [click here to read the Notice to Members]. Additionally, in 1996, then SEC Commissioner, Isaac C. Hunt, Jr., forcefully advocated for qualified immunity [click here to read his remarks].

Herskovits PLLC has a nationwide practice representing individuals in the securities industry in employment and compensation disputes, including Form U5 defamation cases and Form U5 reformation cases. Feel free to view our practice area page or call us at 212-897-5410.