Recent FINRA Awards for Defamatory Statements on Form U-5’s

In the last few years, broker-dealers have seen a recent trend by its regulatory authority, FINRA, in cracking down on the high standard of accuracy and fairness that brokerage-dealers must adhere to in terminating registered representatives.

Broker-dealers that are members of the FINRA are required to file a Form U-5 when terminating their relationship with a registered representative.  Broker-dealers must also describe the specific reason(s) that the rep was discharged or permitted to resign.  Publishing the reasons or causes for a rep’s discharge or resignation can be troubling if the reasons disclosed on the U-5 were false, exaggerated or misleading. 

A black mark on one’s U-5 can make it extremely difficult, and in some cases, impossible, to find another job in the industry.  Therefore, the potential damages against the broker-dealer for defamatory statements on one’s U-5 can be exponential, especially if the false statements were intentionally or recklessly published.  In addition to compensatory and punitive damages, the statements on the U-5 can be ordered to be expunged and amended to reflect the truth.

In July 2011, a Philadelphia FINRA Panel awarded Gregory Kipple, a former broker of Wells Fargo, $6.83 million for wrongful termination and defamation ($4.3 million for lost earnings; $1 million for defamation; $1 million in punitive damages for violation of New Jersey’s Conscientious Employee Protection Act; and $530,000 in cost and attorney’s fees).  Wells Fargo was also ordered to update Kipple’s U-5 to reflect that he was “terminated without cause.”  Kipple was fired in August of 2009 for his “failure to follow the firm’s policies related to ‘know your customers.’”  However, Kipple had no direct involvement or interaction with the specific customer that the statement was in reference to. 

The District Court upheld another FINRA award against Wells Fargo in July 2011 for submitting defamatory statements on a discharged employee’s form U-5.  The claimant, Kenneth Schafer alleged that infractions reported on his U-5 were misleading and pretextual because he was discharged for health reasons.  Schafer was awarded $75,000 in compensatory damages. 

In June of 2011, a FINRA Arbitration Panel awarded a Claimant with a substantial punitive damage award.  In Olsen v. World Equity Group, Olsen alleged defamation, breach of contract, and tortious interference.  Claimant Olson alleged that Respondent WEG had breached its employment contract with him, wrongfully terminated him, and maliciously defamed him on his Form U5.  Olson was awarded $285,000 in compensatory damages, $575,000 in punitive damages, and $282,800 in attorney’s fees.  The Panel also ordered expungement of the defamatory comment from his U-5 which stated, “Disagreement over advertising policy, rules, and advertising protocol.”  The statement was to be replaced with, “FINRA Arbitration Panel ruled discharge was wrongfully administered. FINRA Arbitration Panel questions the appearance of the stated internal review and/or its effectiveness. FINRA Arbitration Panel found no violations of investment-related statutes, regulations, rules or industry standards of conduct.” 

In Perales v. Chase Investment Services Corp., also decided in June 2011, the claimant sought damages for defamation and expungement of the statements on her U-5 which alleged that she committed fraud and wrongfully took property. Chase was ordered to pay Perales $75,000 in compensatory damages and FINRA ordered expungement of the defamatory statements and recommended replacement language. 

Charles Schwab was punished in 2010 with a substantial punitive damage award by a FINRA Panel.  In that case, Claimant Timothy Leahy, who was a registered representative with Charles Schwab, was awarded $1.8 million in total damages, of which $1.5 million was comprised of punitive damages, as well as expungement of the defamatory statement from his U-5.  Leahy’s U-5 stated that he was terminated for “failure to adhere to HR related policies.”  The Panel found that Schwab conducted an inefficient human resources investigation, stated false violations as reasons for his termination, and found that Schwab had the “specific intent” to harm the Leahy. 

In 2009, FINRA found that Questar Capital Corporation included misleading information on John Saldutte’s U-5 after terminating him as a registered rep.  Saldutte was awarded $68,000 in compensatory damages and the Panel ordered expungement of the information contained on his U-5 regarding his termination and recommended Questar replace the defamatory statement with the following language: “After conducting a deficient investigation, the firm wrongfully terminated representative based on erroneous, misleading, and unjustified conclusion that representative knowingly participated in unregistered person’s submission of business in representative’s name.”     

If you’re a registered representative and feel you have been harmed by false or misleading statements published on your Form U-5 or to third parties, Cosgrove Law, LLC has substantive experience representing reps and advisers in such matters.