Will the Curse of the Dirty U5 Be Lifted? Judges Seem Skeptical of ‘Absolute Privilege’

ALBANY—On Tuesday, the New York State Court of Appeals heard the appeal of Chaskie Rosenberg, a registered rep who was fired in 2003 by Metropolitan Life Insurance. The court’s decision could have a major impact on New York laws about what brokerage firms can and cannot put on the U5 forms they file with the NASD when an employee leaves a firm. Initial questions from the judges suggest they may side with reps, some of whom have been fighting back against what they say are false allegations of misconduct on these U5 forms.

ALBANY—On Tuesday, the New York State Court of Appeals heard the appeal of Chaskie Rosenberg, a registered rep who was fired in 2003 by Metropolitan Life Insurance. The court’s decision could have a major impact on New York laws about what brokerage firms can and cannot put on the U5 forms they file with the NASD when an employee leaves a firm. Initial questions from the judges suggest they may side with reps, some of whom have been fighting back against what they say are false allegations of misconduct on these U5 forms.

Indeed, these days, when a rep switches broker/dealers, his big fear is that his old firm will “tag” him—that is, besmirch him by putting an allegation of misconduct on his U5. Until now, brokerage firms have claimed that the law in New York is clear and ironclad: The statements they make on a U5 form are “absolutely privileged”—rendering b/ds immune from damages, no matter how false or defamatory those allegations might be. Many brokers claim this allows the industry to blackball them with impunity.

Rosenberg, for example, says he was fired for being a Hasidic Jew; Metropolitan Life put on his U5 that an internal review uncovered that he “appeared to have violated company policies and procedures regarding speculative insurance-sales practices and possible accessory to money-laundering violations.”

Wednesday’s court proceedings suggest the judges in the Rosenberg case favor giving firms a lesser “qualified privilege,” which would dissolve once a broker showed the statements were made with malice. This is the way it works in most other states, and would clear the way for defamation suits from brokers against the firms.

The judges’ final decision will turn in part on whether the judges find that the filing of the U5 form amounts to the launching of a quasi-judicial proceeding. If so, absolute privilege would probably be maintained. Met Life, supported by a friend-of-the-court brief from the securities industry’s largest lobbying group, asserts that the filing of a U5 sets off investigations that lead to enforcement proceedings by the NASD and, therefore, has that protection. But several of the six judges who heard the arguments did not appear to be convinced.

Judge Robert Smith brought up a 1994 decision by Judge Richard Posner, a renowned federal appeals court judge, who called the U5 forms “the means by which the NASD administers an employment clearing house.” Met Life’s lawyer, Steven Obus of New York’s Proskauer Rose, cited California cases on his side, and said Posner had “mistakenly” decided the 1994 case.

Judge Susan Phillips Reed posed the most basic question to Obus: “Why isn’t a qualified privilege sufficient to balance the interests of the employee and the investing public and everyone involved?” Time and again, Obus responded that qualified privilege doesn’t “protect the process.”

“It doesn’t foster disclosure nearly to the extent as absolute privilege,” Obus said. “What’s the remedy for the employee? What if it is malicious?” asked Judge Carmen Beauchamp Ciparick. “We make a judgment that it’s more important to protect the process,” Obus responded.

Several times, Judge Eugene Pigotti Jr. questioned why statements to the NASD, which is private and run by its members, should be cloaked with absolute immunity. He posed this hypothetical: Suppose there’s a two-person firm in Buffalo. One employee has an affair with the other’s spouse and puts unfounded allegations on his U5. Should that get absolute immunity? “I’m having a difficult time getting that far for this type of entity” Pigotti said, calling the forms “ministerial filings.”

Maurice Heller, the lawyer for Rosenberg, told the judges he had a list of cases “longer than both my arms” from other jurisdictions that use a qualified privilege, which allows employees to sue. “But you’d have to agree that we are the most important jurisdiction?” Judge Reed interjected. “That’s correct; that’s why we’re here.”

Most of the brokerage industry operates from Manhattan, where firms have benefited from a 1991 court decision. But one of the judges who issued that ruling said in a 2006 decision that the case was “wrongly decided” and has resulted in “distorted and false filings for tactical, competitive business reasons.” Responding to the recent case, Obus conceded a point. “Is there any public interest in having false information in the record? Of course there is not,” he said, repeating his mantra on the reason for the absolute privilege: “We are going to protect the process.” He pointed out that Rosenberg, who sued Met Life claiming that the company audited him and fired him because he is a Hasidic Jew, said terrible things about the company and was absolutely protected. But this was a nonstarter with the judges: Statements made in lawsuits have always had that immunity.

Throughout the 40-minute session, the judges questioned both sides about expungement, the remedy offered for correcting information on U5 forms. Many brokers complain that this arbitration proceeding is too expensive to undertake. Meanwhile, the false information sits on the form. “Once the bell has been rung, it’s difficult to unring it,” he said. “This industry has a very powerful grapevine.” Heller asserted that the “vast majority” of U5 forms are never investigated by the NASD, but he had no hard numbers when pressed by Judge Smith.

Chief Judge Judith Kaye left the bench when the Rosenberg arguments began, recusing herself from consideration of his appeal. An appeals court spokesman said the court does not disclose the reasons for a judge’s decision not to hear a case.

The judges took the case under advisement, and the opposing lawyer headed back to Manhattan as the winter’s first snowstorm blew through Albany.

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