A federal judge in New York ruled in February that firms do not have absolute legal immunity from defamation for statements made on U-5s.
The brokerage industry has argued that it enjoys absolute immunity for U-5s in New York based on a 1991 New York state court case. The ruling in Herzfeld & Stern v. Beck says absolute immunity applied to U-5s and subsequent letters sent to NYSE investigators.
Under a doctrine of absolute immunity, a party cannot be sued. Such protection typically applies to statements made in judicial proceedings or legislative bodies. But extending the concept to U-5 wording has been hotly contested because it prevents brokers from suing over malicious statements.
The Feb. 15 decision by U.S. district judge Deborah Batts could quiet the debate. Absolute immunity for U-5s, Batts decided, is not a "governing legal principle" in New York.
Batts made the determination in upholding an arbitration award won by Raymond Acciardo, a former director of compliance at Millennium Securities in New York. Acciardo claimed he was fired in October 1998 for refusing to condone illegal practices and then defamed on his U-5.
Acciardo sued. In April 1999, an arbitration panel awarded him 40,000 dollars, an additional 100,000 dollars in punitive damages and a reworded U-5.
When Acciardo sought to confirm the award in court, Millennium claimed it enjoyed an absolute privilege under Herzfeld. The firm asked that the award be vacated.
Judge Batts upheld the award saying, "The conflicting legal sources and controversial debate over U-5 defamation make the arbitrators' error, if any, far from obvious."
Meanwhile, the industry has resurrected the idea of absolute immunity in a draft revision of uniform state securities laws (see "Ghost of Qualified Immunity Rises," Page 36).