Form U-5: Unequal Justice in State, U.S. Courts : Investment News

A fundamental principle of our legal system is that courts must apply uniformly the same standards in deciding cases. Unfortunately, reality often misses the mark, as many stockbrokers who pursue legal remediation to counter a past employer’s false and defamatory Form U-5 filing (the standard securities employment termination form) and the consequential “blackballing” from the industry soon learn. The truth is that our state and federal courts, in fact, apply very different legal standards in deciding such claims.

Washington-based NASD requires broker-dealers to file a Form U-5 each time an employee is terminated, regardless of cause. In theory, the form is designed to protect a new employer and its customers from hiring a person who has exhibited a disregard for industry regulations or sullying the professional reputation of an ex-employee who now simply poses a competitive threat. Those who wish to harm a former employee, or try to prevent the employee from re-establishing his business or client book at another firm, have been known to use the weapon of filing a “negative” or disparaging Form U-5 with NASD, knowing that most brokerage firms are loath to hire a broker with a tainted U-5.

‘Absolute’ Privilege Upheld

In a recent case decided by a New York state appeals court, Cicconi v. McGinn Smith & Co. Inc., the court in a 3-2 split decision dismissed a stockbroker’s case against his employer for defamation on Form U-5 on the grounds that the brokerage firm had an “absolute” privilege or immunity from suit for statements made on Form U-5.

In that case, broker Kethe Cicconi sued his previous employer for defamation over a statement made on his U-5 that he had been terminated for “performance based” reasons. In 2001, he came to work for Albany-based McGinn Smith when it acquired a firm with 12 retail stockbrokers that he had founded. As part of the deal, Mr. Cicconi was given a five-year contract to work as McGinn’s director of retail sales. Mr. Cicconi claimed that the grounds given for his termination not only were false but intentionally used to harm his reputation in the securities industry and to bootstrap what he termed McGinn’s false claim that it had “cause” to terminate his employment.

The court reasoned that it was necessary to give McGinn broad immunity, because the firm had a regulatory obligation to report the circumstances of the termination and that such reporting was part of a “quasijudicial” process to which immunity attaches.

The court concluded that such immunity avoids the possibility that a brokerage firm will hesitate to frankly articulate the exact grounds for an employee’s termination, which ultimately would be detrimental to investors.

Had the case been filed literally across the street in federal court, it is likely that a different result would have occurred. In Acciardo v. Millennium Securities Corp., the U.S. District Court in Manhattan took the opposite approach, holding that a brokerage firm had only a “qualified” rather than absolute immunity and that that privilege could be vitiated upon a showing that the firm acted with actual “malice” to harm the employee.

In that case, Raymond Acciardo, formerly New York-based Millennium’s director of compliance, sued the firm claiming that he was fired when he refused to “look the other way” or participate in regulatory frauds proposed by his employer. He claimed that his employer wrongfully terminated his contract and punished him by making a false and defamatory statement on his U-5 saying that he was terminated for “failure to perform duties” pursuant to NASD supervisory rules and that he was “under internal investigation” at the time of his termination. Mr. Acciardo claimed that the false U-5 filing prevented him from finding comparable future employment and ruined his reputation.

Arbitration Ruling Confirmed

The federal court confirmed an NASD arbitration panel’s earlier ruling that awarded him compensatory and punitive damages, and ordered changes to his Form U-5, finding that the firm acted with “malice” in its U-5 filing.

Perhaps adding even further confusion about the state of the law, in Rosenberg v. MetLife Inc. of New York, a primarily religious discrimination case filed in court (as opposed to NASD arbitration), the U.S. District Court for the Southern District of New York last year agreed to follow the state court rule rather than the Acciardo v. Millennium Securities holding in dismissing a U-5 claim.

Unless New York’s highest state court reconciles the “qualified” versus “absolute” immunity issue, it is likely that Form U-5 defamation cases will be decided in different ways by state and federal courts. It is unconscionable that a stockbroker’s legal rights on a crucial employment issue depend solely upon the court in which his case is pending.

So where does NASD stand on the qualified versus absolute privilege issue?

In 1998, NASD filed with the Securities and Exchange Commission a proposed rule change that would provide NASD members with a “qualified” immunity in arbitration proceedings for statements made on Form U-5. The proposed rule languished at the SEC for several years and finally was withdrawn last October.

Given that the federal and state courts are split hopelessly on the issue, the SEC and NASD need to move quickly to enact the qualified immunity rule. In so doing, they would afford protection to the reputation of honest individuals employed in the securities industry – and restore balance to the scales of justice.

Jacob H. Zamansky is the principal of Zamansky LLC, a securities arbitration firm in New York. He represented the victorious employee in Acciardo v. Millennium Securities.