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Fighting the U5

New York's highest court will soon decide whether a brokerage employee can contest the language an employer uses in the Form U5

In 1998, Raymond Acciardo was employed as a compliance officer at New York-based Millennium Securities. When the firm sought to commit what Acciardo thought looked like regulatory fraud, he wouldn't look the other way and his reward was termination. In the required Form U5 that followed, Millennium Securities claimed he was fired for “failure to perform duties” and that he was “under internal investigation for fraud and misappropriation.” This statement effectively blackballed him from the securities industry forever.

Acciardo came to me and together we were able to show in arbitration that Millennium Securities acted with malice when filling out Acciardo's Form U5, a document that is submitted to the National Association of Securities Dealer's (NASD) Central Registration Depository (CRD) system any time an employee departs from a securities firm. He was able not only to clear his name but also to recover a significant punitive-damage award.

The same cannot be said of Kethe Cicconi, who was terminated by an Albany, N.Y.-based securities firm named McGinn Smith & Co. On Cicconi's Form U5, his former employer stated that the reason for termination was “performance based.” In New York State Court, Cicconi claimed the employer lacked good cause for termination and that the U5 language was false and malicious. But the court ruled that employers have an absolute privilege over U5 disclosures and the case was dismissed.

Obviously, there is a wide discrepancy between Acciardo's and Cicconi's cases. But in January of next year this discrepancy will be made crystal clear, and the stakes could not be higher. The New York Court of Appeals, the state's highest court, will hear Rosenberg v. MetLife, Inc. It is primarily a discrimination case, but the court will focus on reconciling whether securities firms have “qualified” or “absolute” privilege over U5 statements, an issue upon which New York courts have rendered often-conflicting decisions. A qualified-privilege ruling would allow a securities industry employee who has been defamed on his or her U5 to pursue legal action, while an absolute-privilege ruling would mean an employee would not. The court's decision clearly affects the lives and reputations of every securities industry employee.

No other profession or industry allows employers to make public accusations detrimental to an employee without due process. In the case of the U5, it is argued that absolute privilege is an investor-protection mechanism and encourages employers to be forthcoming about a past employee's unscrupulous behavior towards clients. Courts have also mistakenly decided that the Form U5 deserves full immunity because, they say, it is part of “judicial or quasi-judicial process,” akin to testimony given in court. Even a whistleblower's confidential discussions with a district attorney or police officer get only qualified immunity.

Rest assured these arguments do not hold much water. The CRD, which catalogs U5 information, is an “employment clearinghouse” and totally separate from the NASD's regulatory department, where “quasi-judicial” activities take place. Further, the regulatory department is not required to look at a U5 prior to launching an investigation or inquiry, thus not all U5s trigger a quasi-judicial proceeding. The investor advocacy argument is also irrelevant. It's common to see U5s with statements such as “wrongful taking of firm property” and “performance based,” things which do not typically prompt an NASD investigation or implicate investor-protection concerns.

Vague termination language on a Form U5 is, however, an effective tool that a vindictive past employer can use to mar an employee's career for any reason. The record shows that Form U5s have been used by firms to prevent a broker from transferring a book of business to a new firm and, most shockingly, to scapegoat an employee to appease or curry favor with regulators. The latter has apparently happened repeatedly during the market-timing investigations.

The troubling reality is that the fate of the entire securities industry now resides squarely with the Court of Appeals. Fortunately the bench is full of very thoughtful and practical judges, who will hopefully see the wide-ranging impact this ruling will have.

Jacob H. Zamansky is a principal in the New York firm Zamansky & Associates, a leading plaintiff's securities arbitration firm.

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