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U5 Hazard

Brokerage firms can say anything they like on a departing broker's Form U5, even if it's defamatory in nature and untrue. That's because the New York Court of Appeals ruled in Rosenberg v. MetLife Inc. that brokerage firms were entitled to an absolute privilege for the statements they place on the U5 of a departing registered representative. The idea is to protect the investing public against rogue

Brokerage firms can say anything they like on a departing broker's Form U5, even if it's defamatory in nature — and untrue. That's because the New York Court of Appeals ruled in Rosenberg v. MetLife Inc. that brokerage firms were entitled to an “absolute privilege” for the statements they place on the U5 of a departing registered representative. The idea is to protect the investing public against rogue reps. Without absolute privilege, dinged reps would file libel suits. But lawyers who represent advisors say the ruling, which only applies to the state of New York but sets an ugly precedent for other jurisdictions, is just another cudgel with which firms can intimidate reps who wish to decamp for other firms. And the Rosenberg ruling, which was handed down this past March, sounds the death knell for reps' ability to win monetary damages based on defamatory statements in cases seeking “expungement,” or marks placed on the U5. (If you plan on leaving your firm, guess you'll have to be extra nice to your branch manager.)

But at least one arbitration ruling handed down since then suggests arbitrators may be finding ways around Rosenberg. On July 26, a panel awarded Elizabeth Bing Shen $95,000 in punitive damages against Barclays Capital Inc. in addition to recommending expungement of language Barclays had placed on her U5, based on the “defamatory nature” of the information contained in it. Barclays is seeking to vacate the punitive damages award, asserting it is in “manifest disregard” of the Rosenberg decision. Courts are extremely reluctant to grant motions to vacate because they upend the fundamental premise that arbitration results are meant to be final. The motion, now pending at the New York state trial court in lower Manhattan, may present the first test of the Rosenberg case as it plays out before arbitration panels. (For more on Chaskie Rosenberg, a rep fired by MetLife who was branded as a money launderer on his U5, check out our story on the case at:


Shen, now 31 years old, was born in Hang Zhou, China, and came to the United States in 1995, graduating from New York University in 1999 with a degree in accounting and finance. After holding positions with Arthur Anderson and Deutshe Bank, she landed at Barclays in 2003 as a collateral analyst, confirming data with outside accountants in offering materials for asset-backed securities. That is, until she was fired on January 26, 2006. At that time, Shen was in the midst of her performance review for 2005.

Shen received a “C” grade, partly based on criticisms that she did not confirm information with outside accountants, leading to errors in offering materials in early December 2005. Shen rushed to submit an email to her bosses to show them that she had in fact confirmed the data, but the Barclays' human resources department conducted an investigation, and determined the email had been “doctored.” After a five-minute termination meeting during which she was denied the chance to check her emails, she was escorted out of the building. Later, Shen said she was able to establish that she had combined two emails from the accounting firm for her personal reference, and in haste, offered them as proof that she had confirmed the accuracy of the data — an error she called an “honest mistake” at the arbitration proceeding.

Shen was fired about a month before Barclays was set to award its 2005 bonuses, which would have given Shen another $90,000 in compensation. No one ever mentioned the matter of the U5.

About a month later, Shen received a copy of the U5 form Barclays had filed with the NASD in the mail, which (to her horror) stated, “gross misconduct — non-securities related” as the reason for her termination. “I was really shocked, and I didn't know what it was,” Shen testified at the July 10 arbitration hearing. Usually, in the securities business, the language of a U5 is negotiated between a rep's lawyer and counsel for the brokerage firm.

U5 forms are made available to the public to protect investors, one reason that the New York court afforded firms absolute privilege over the statements they make on these forms. (Protected from defamation, b/ds can be blunt about why they fired a rep; defense lawyers say that prior to the Rosenberg decision, their brokerage firm clients were stuck between a rock and a hard place in trying to meet their U5 disclosure obligations, knowing that plaintiffs' lawyers were waiting to threaten a libel case.) But a nasty mark on a U5 form can also damage an individual's job prospects — which is fine if the rep is a crook, but not so fine if the rep is honest, and got dinged by vindictive management. In Shen's case, it lost her a second job: In May 2006, Shen got an offer from Citigroup at a salary of $110,000 a year, but the firm withdrew the offer after a background check turned up the U5 form. “They told me that they found the U5 language too severe,” Shen testified. Citigroup told her that she would have to ask Barclays for a further explanation, and when she tried that, they told her that further phone calls to the company would “be considered harassment,” according to Shen's testimony.

Last August, Shen filed her claim with the arbitrators, seeking a whopping $5,163,000 in compensatory damages, and another $5 million in punitive damages. The statement of claim filed by her lawyers at Singer Deutsch, a Manhattan law firm that specializes in representing investors and brokers in arbitration proceedings, sought libel damages of $5 million, plus $163,000 as an estimate of the bonus she was due, and another $5 million in punitive damages based on Barclay's “malicious and egregious U5 filing.” At the time, she was unemployed, and the Rosenberg case had not yet been decided. In January, Shen got another job, and is now employed at a company called ACA Capital, a holding company that provides asset management services and credit protection products to participants in the global credit derivatives markets, structured finance capital markets and public finance capital markets. On March 29, the Rosenberg case was decided.

Barclays' defense counsel, Theodore G. Rodgers Jr., of New York's Sullivan & Cromwell, wasted no time in alerting the arbitration panel about the Rosenberg decision. On April 5, Rodgers first informed the panel of the Rosenberg ruling. He reminded them again at a pre-hearing conference on June 8, and again on June 9, when, by telephone conference, the panel heard arguments on Barclays' motion to dismiss Shen's claims. Arbitrators rarely grant such motions, and the case went forward on July 10, when the arbitrators denied Barclays' motion to dismiss. At the outset of the hearing, the chair of the panel said, “Now this is my comment. This is a court of equity, as I have always understood NASD arbitration proceedings, and even though we follow the legal principles, there is a fair amount of latitude given to both parties in order for the arbitrators to be able to render a fair and equitable decision.”

Shen was the first to testify at the three-day hearing, and her recollections were wrenching at times. “After my offer was pulled,” she said of the Citigroup job, “ I was really desperate and hysterical at the time. It was like a nightmare for me. So I called almost everybody at Barclays I could get into touch with.”

When the arbitration panel issued its award in July, the terse document had little to say to explain its award. Shen got $90,000 in compensatory damages, the amount that her bonus would have been had she stayed on at Barclays, as established by evidence at the hearing; she also got $95, 000 in punitive damages, as well as a change on her U5 from “gross misconduct — non-securities relates” to “a regrettable act of misjudgment — non-securities related.”


The panel offered no explanation for why it awarded $95,000 in punitive damages. The rules of FINRA, the new name of the regulator created by the merger of the self-regulatory bodies of the NASD and the NYSE, do not require arbitrators to explain their awards, though a proposed rule would allow investors and disgruntled brokers to request an explanation. One attorney in the case speculated that these punitive damages could relate to Shen's testimony on her lawyer's fees, which she said at the hearing amounted to $80,000 already paid, and another $15,000 due.

But the fact is, it's anyone's guess. The arbitration ruling exists in a black box that currently makes such determinations impossible. “I think they were outraged,” says John Singer, Shen's lead lawyer at the arbitration. Shen worked, often times until 2 o'clock in the morning, and was denied her 2005 bonus even though she had worked there for the entire year, he said.

Trouble is, other lawyers who represent brokers can't conceive of a basis for punitive damages for Shen. Laurence Moy, a lawyer with New York's Liddle Robinson, won a $4.2 million dollar arbitration award in 2002 against Barclays on behalf of Charles Marais, an equities derivatives salesman who was fired in 1996. In Marais' case before the arbitrators, he had argued a legal theory known as “prospective interference with prospective economic advantage.” Barclays went to court with a motion to vacate, arguing that Marais, who had waited four years to bring his claim — far beyond the one-year statute of limitations for a claim for defamation — should be denied, because in the end, it was based on the statements on his U5 form. Barclays lost the motion to vacate.

For his part, Moy, now a partner with New York's Outten & Golden, isn't optimistic about the implications of Shen's case. In the months since the Rosenberg case was decided, it has already made it very difficult for Moy to threaten defamation damages, or negotiate the language of U5 statements — an option not afforded to Shen. “Rosenberg really isn't helpful in that dynamic,” he says. “I really can't threaten a defamation claim anymore.”

The thing is, Moy can't think of any basis for Shen's award of $95,000 in punitive damages. Shen's bonus award, of $90,000, was based on claims of unjust enrichment, and Moy's reading of the law suggests there are no punitive damages on top of that. “It's pretty clear cut,” he says. But as a fellow plaintiff's lawyer, he sympathizes with Shen's cause: “Its always kind of a skeptical thing when a firm like Barclays moves to vacate an arbitration award. They are the first ones to say, ‘Sorry, no jury, you are going to arbitration.’ And then, when they get a result they don't like, they claim it's a flawed process,” Moy says. “My clients feel like they have to win twice, but all the brokerage firms have to do is win once, and I am out of the box.”

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