Brokerage firms won a round Thursday in an ongoing battle over what they can and can’t say about departing brokers on their U5 records. In Rosenberg vs. MetLife, the New York Court of Appeals ruled that MetLife had "absolute" privilege over the information it inserted into former employee Chaskie Rosenberg’s "Form U-5" when he left the firm. Essentially, the decision means that reps cannot sue brokerage firms for allegedly defamatory comments made on U-5 termination forms.
Maurice Heller, Rosenberg's lawyer, says, "We are disappointed with the outcome. We considering our options but the legal remedies are limited at this point." An appeal to the New York Court of Appeals decision would have to be made in the U.S. Supreme Court.
“The Second Circuit dealt a severe blow today to the rights of anyone employed by a firm under the regulation of the NASD,” wrote Jacob H. Zamansky, a leading plaintiff's securities arbitration lawyer, about the case in his legal blog. “To better protect employees working in the securities industry, the NASD should revisit a 1998 rule enacting a "qualified" privilege allowing some recourse for those who have been defamed. I wrote this to NASD Chairman and CEO urging her to immediately reconsider the rule.”
Some brokers and lawyers claim that firms use the U5 forms to scapegoat brokers for firm-wide problems, or tar departing brokers so that they won’t be able to take clients with them.
In Rosenberg vs. MetLife, former MetLife broker Chaskie Rosenberg filed suit against MetLife in federal court charging the insurance company with claims of defamation. (See this story for more.) Rosenberg was fired in April 2003 for allegedly violating “company policies and procedures involving speculative insurance sales and possible accessory to money laundering violations.”
In December, the Securities Industry and Financial Markets Association (SIFMA) filed an amicus curiae saying statements on U-5 forms should be “absolutely privileged” against defamation claims because it “better enables the form to achieve its purposes of exposing and deterring unlawful and otherwise unauthorized conduct by registered reps, and providing the investing public with information to make informed choices concerning their selection and use of investment advisors.”
One Smith Barney rep says the decision doesn’t concern him too much. “About ten years ago, it was standard practice by firms to leave a mark on your record if you were about to jump ship. But I don’t think they do that as much anymore, so it doesn’t bother me too much,” he says.
But another advisor is less sanguine about it: “The decision gives broker/dealers this freedom to write what they want without any consequences. It’s not good for anyone except the big firms,” he says.