The Privilege Defense to U-5 Defamation Claims

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. 

SEC Takes a Closer Look at Real Estate Investment Trusts

A Real Estate Investment Trust (“REIT”) is generally a company that owns income producing real estate.  To qualify as a REIT, a company must have the majority of its assets and income connected to real estate investments and must annually distribute at least 90 percent of its taxable income to shareholders in the form of dividends.  To review additional qualifications of a REIT, See SEC - REIT Information. 

REITs have really come under intensifying scrutiny by securities regulators since many non-traded REITs have been forced to cut their estimated value and have ceased making distributions.  Furthermore, many of these REITs have attracted retirees as investors by promising steady and dependable distributions.  For example, the SEC has recently taken interest in the activities of Inland American Real Estate Trust to determine if it committed violations relating to management fees, the timing and amount of distributions paid to investors, determination of property impairments and transactions with affiliates.  The investigation was announced by Inland last week in its quarterly report.  Executives from Inland have stated that they intend to fully cooperate with any investigation and that they do not believe it has committed any violations. 

Inland holds around $11.2 billion in property, including retail hotels, offices, industrial buildings and apartment complexes.  It is the largest REIT in an industry of around 90 non-traded REITs.

FINRA has recently proposed new guidelines on adviser disclosure of REITs.  See FINRA Regulatory Notice.   Furthermore, the SEC has been pressing non-traded REITs to provide better disclosure on their share valuations because these valuations can vary due to some REITs relying on outside appraisals and others relying on their own management.  For instance, FINRA sued David Lerner Associates Inc., last year, alleging that the Apple REIT seller “unreasonably valued their shares at a constant price of $11, notwithstanding market fluctuations, performance declines and increased leverage.”  The case is still pending. 

In June, 2011, another REIT, Retail Properties of America Inc., estimated its value at $6.95 per share.  However, in its initial public offering last month, the shares were listed at $3.20 per share. 

REITs, however, may be appropriate for the savvy and experienced investor, particularly since many REITs have been investing in the global market.  Several U.S. REITs that have invested abroad believe the future is promising.  For instance, New York and Toronto based Brookfield Office Properties entered into its first London deal on a development site known as 100 Bishopgate.  Many of these investments are good for the patient investor because income is usually not realized until further down the road. 

If you have suffered losses as a result of purchasing non-traded REITs, contact us to discuss your legal rights.

FINRA Bars Pinnacle Partner Financial Corp. and its President Over Allegedly Fraudulent Sales

On April 25, Financial Industry Regulatory Authority (“FINRA”) expelled broker-dealer Pinnacle Partners Financial Corp. and its president, Brian Alfaro, from membership after they failed to respond to allegations that they made fraudulent sales involving oil and gas private placements and unregistered securities in violation of Section 10(b) of the Securities Exchange Act of 1934.  In addition to expulsion, Pinnacle and Alfaro also were ordered to offer rescission to investors who were sold fraudulent offerings, and to refund all sales commissions to those who do not request rescission. See FINRA Order

 

According to FINRA, from August 2008 to March 2011, Alfaro and Pinnacle operated a “boiler room” from which approximately 11 brokers placed thousands of cold calls per week attempting to persuade investments in oil and gas drilling joint ventures that Alfaro owned or controlled.  FINRA claims the operation raised more than $10 million from more than 100 investors.  Alfaro allegedly misrepresented or omitted material facts regarding the offerings they sold to investors. 

FINRA also alleges that from around January 2009 through March 2011, Alfaro used customer funds: “(1) to meet obligations for previous offerings; (2) cover Alfaro’s personal expenses; and (3) make cash payments to Alfaro personally.”  See FINRA Order
 
The disciplinary proceedings began on November 23, 2010.  Alfaro and Pinnacle subsequently entered in Temporary Cease and Desist Consent Orders (“TCDO”).  Approximately two months after entering into the TCDO, Alfaro and Pinnacle allegedly violated the orders and were suspended from FINRA on March 8, 2011.  The hearing was scheduled for February 27, 2012 but Alfaro informed his counsel that he would not be attending the hearing and planned on defaulting.  As a result, Pinnacle and Alfaro were expelled from FINRA.