NASD Form U-5 Notice of Termination Statements Are ‘Absolutely Privileged,’ Says A Divided New York Court of Appeals

A Federal Appeals Court in New York reversed prior decisions and decided that statements in a NASD Notice of Termination Form U-5 are subject to absolute privilege from defamation actions. The Securities Industry and Financial Markets Association claim the ruling is a victory for investors and that firms will now be encouraged, rather than discouraged, from offering investors full disclosure regarding a broker that has participated in any wrongful actions. Yet, observers believe it is the brokerage industry itself that won a victory.

In Judge Victoria A. Graffeo’s opinion, the court discussed that Chaskie Rosenberg was hired as a financial services representative in 1997 for defendant Metropolitan Life Insurance Company’s All-Boro agency. Based in Brooklyn, the agency served members of the local Hasidic Jewish community. Most of its employees were also Hasidic Jews.

MetLife performed an agency audit in 1999 because the agency accepted third-party checks to pay for life insurance policy premiums. Following another audit, MetLife shut the agency down and moved employees to a different office. Rosenberg was let go after a third audit by MetLife. ‘

In its termination notice statement, MetLife said it seemed that Rosenberg violated policies related to speculative insurance sales and that he may have been an accessory to money laundering violations. MetLife also said that Rosenberg had been investigated internally for violating regulations that were related to investments.

Rosenberg filed a lawsuit alleging breach of contract, employment discrimination, libel, and other causes of action. He says that MetLife ignored what was considered a Hasidic lending practice-that a customer’s check could be drawn on an account that was not in his or her name and that it would not have to be considered a third-party payment.

A jury ruled against Rosenberg and the court dismissed the remaining allegations. Regarding Rosenberg’s libel claim, it says that statements made by MetLife in Form U-5 were absolutely privileged. Rosenberg filed an appeal, and the U.S. Court of Appeals for the Second Circuit requested the high court weigh in on the issue of privilege.

The state high court ruled in favor of MetLife, noting that although absolute privilege is usually reserved for communications by individuals engaged in a public function, it can also apply to “preliminary or investigative stages of the process, particularly where compelling public interests are at stake.”

The court said that the NASD is the biggest securities self-regulation organization subject to SEC oversight and that it has the authority to enforce the 1934 Securities Exchange Act requirements, in addition to being the main regulator for the brokerage industry. The court noted that investigating and adjudicating suspected SEC and NASD violations is one of NASD’s primary roles and that it is entitled to question individuals, examine documents, engage in disciplinary proceedings, and impose sanctions and fines.

The court said that Form U-5 plays an important role in NASD’s self-regulating process and must be filed by an employer within 30 days after an employee is terminated. Form U-5 is the first notice to NASD that a securities industry participant may have engaged in possible misconduct, which can then allow NASD to initiate a disciplinary action. Form U-5 also lets member firms investigate the backgrounds of employee candidates. The court therefore concluded that the interest of the public is served by the filing of Form U-5 and that statements made by an employer on the form are subject to “absolute privilege” in a defamation claim.

William S. Shepherd is an attorney who has represented stockbrokers in claims that brokerage firms have defamed them who claims this is a remarkable decision. “This is a very competitive business and firms often retaliate against brokers when they leave. Some firms even tell brokers ‘we will bloody your U-5’ as a threat to keep them from taking their clients to another firm. What this decision says is that brokerage firms can lie about brokers who leave a firm – simply defame them – and be immune from lawsuits. How can this be? It’s the golden rule: He who has the gold makes the rule!. Perhaps stockbrokers and others should start to consider whether the ‘new breed’ of judges is protecting their rights.”

Please contact Shepherd Smith and Edwards if you have sustained a financial loss as an investor because of the inappropriate actions of a member of the brokerage industry. Your first consultation with Shepherd Smith and Edwards is free.