Cosgrove Law previously blogged on the topic of U-5 defamation. We noted that 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. If the reasons disclosed on the U-5 were false, exaggerated or misleading, the firm can be subject to a claim for defamation.
One defense frequently raised by defendant broker-dealers is that the statements made on the form U-5 are subject to an "absolute privilege." This means that a broker-dealer cannot be held liable for defamation for anything it puts on the U-5, even if it knows the statements were false or misleading. If that defense is unavailable, a broker-dealer will argue that the statements are subject to a "qualified privilege." A qualified privilege is usually revoked by proof of malice or by a showing of reckless disregard as to the truth of the statements. Frequently, the falsity of the statements could arguably show the malice required to revoke whatever privilege the U–5 might enjoy.
Unfortunately for the broker-dealers raising the absolute privilege defense, it is rarely available. State law, not federal law, determines whether an absolute privilege applies. So far, only the state of New York has adopted the absolute privilege standard. Rosenberg v. MetLife, Inc., 866 N.E.2d 439, 445 (N.Y. 2007) (finding that statements made by employer on form U-5 are subject to absolute privilege
in suit for defamation).
In fact, many states have explicitly rejected the absolute privilege defense or have found that only the qualified privilege applies. See
Dawson v. New York Life Ins. Co., 135 F.3d 1158, 1163-64
(7th Cir. 1998) (holding that reports of customer complaints on Form
U-5 are not protected by absolute privilege under Illinois law);
Glennon v. Dean Witter Reynolds, Inc., 83 F.3d 132, 136-37 (6th Cir.1996) (holding that statements on Form U-5 are not entitled to absolute privilege under Tennessee law); Moreland v. Perkins, Smart & Boyd
240 P.3d 601, 609 (Kan.App. 2010) (rejecting absolute privilege and holding that the statements in the Form U–5 were entitled to a
qualified privilege at most, both under case law and under Kansas statutory law); Dickinson v. Merrill Lynch, Pierce, Fenner & Smith, Inc.
431 F.Supp.2d 247, 261-62 (D.Conn. 2006) (finding that statements made on form U-5
were not subject to absolute
privilege from defamation liability under Connecticut law, but were instead subject to qualified privilege); Boxdorfer v. Thrivent Financial for Lutherans, No.
1:09-cv-0109-DFH-JMS, 2009 WL 2448459, *4 (S.D.Ind. Aug. 10, 2009)
(noting that statements on the Form U-5 are entitled to a qualified privilege under
Indiana law); Wietecha v. Ameritas Life Ins. Corp., No. CIV 05-0324-PHX-SMM,
2006 WL 2772838, *11 (D.Ariz. Sept. 27, 2006) (finding that Arizona law comports with the application
of a qualified privilege to statements published in the U-4 and U-5 Forms).
If you are 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.