Even General Counsels Get Defamed

What happens when the media re-states bluntly what you tried to say cleverly? A jury might find you liable for defamation, even if your statement was made in a legal document.

This observation is one of many take-aways from the litigation victory achieved by Minnesota attorney Chet Taylor. A jury awarded Chet $600,000 for a defamatory statement his former broker-dealer made in a corrective action plan attached to a FINRA consent order. The defendant added another $250,000 after the initial verdict to end the case.

Would a broker-dealer really throw former employees, including its General Counsel, under the proverbial bus? Perhaps. In this instance, broker-dealer Feltl and Company implied in the corrective action plan with FINRA that the “replacement” of certain employees, including its General Counsel, would “enhance a culture of compliance at the firm.” The Wall Street Journal subsequently published an article about Feltl utilizing a direct summary of the rather ham-handed plan: “The firm also said it replaced its general counsel...to beef up compliance.” The jury obviously did not care that Chet was not identified by name in the corrective action plan or Journal article. But they certainly cared that Chet had voluntarily departed for private practice about 2 years before the execution of the Consent Order and plan. Food for thought.

David Cosgrove has obtained monetary awards and expungements for various members of the financial industry from broker-dealers such as U.S. Bancorp Investments, Raymond James Financial Advisers, and Questar. He has also achieved negotiated confidential resolutions on behalf of other advisers and employees.

FINRA's BrokerCheck Posting Terminations More Quickly, but Firms Still have 30 days to Report

FINRA's RegulatoryNotice 15-39 is getting a little blog time, but sadly some law firms writing about it seem to misunderstand not only the Notice itself, but also the implications of the changes that have been implemented.  

FINRA Rule 8313 governs the body’s public disclosure of the professional history, business practices, and conduct of their security industry member firms, associates, and those affiliated with the Central Registration Depository (CRD). The Notice, issued December 12, 2015, advises of the approved change to this rule that effects the timeframe in which FINRA releases information to the public through its online BrokerCheck report system.

FINRA currently requires firms to report the termination of a representative’s registration/employment with them within 30 days of the termination through the CRD system[1]. In other words, once a representative leaves or is fired from his or her job with XYZ Financial Services, XYZ has 30 days to file a Form U5 regarding that termination. Once the U5 has been processed, it becomes available for FINRA to post on BrokerCheck, and the states to provide in the CRD Snapshot. 

The Notice states that the time FINRA must wait (after processing the filing) before making the U5 available for public access has decreased by 80 percent, from 15 days to three (3).  While this is a big change, and worthy of plenty of blog time, it in no way effects the 30-day window employment firms have to make the U5 filings.  

Now to the real heart of the matter:  Fairness.  

According to FINRA, “a three-business-day waiting period is more reasonable than a 15-day period because it allows investors to more quickly access disclosure information reported on Form U5 while at the same time still providing brokers with the opportunity to comment on the reported disclosure event.” FINRA claims this was necessary for it to fulfill its mandate to, “prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest[2].”  

While FINRA's argument is for prompt disclosure to the public, they miss a key element in this process—the accuracy of the firm's Form U5 filing.  The problem is that firms sometimes have reasons to file improper or down-right false U5s[3]. (See a previous blog titled “How to Terminate,Discredit, and Interfere with a Financial Adviser: the U-5.”) 

Until FINRA member firms are held accountable for improper U5 termination language, the shorter window does little to ensure that fair and accurate information is being provided to the public, much less in a prompter fashion.  The initial 15-day window was selected to provide the representative with at least some amount of time to respond to the filed termination language before it became public.  Changing that window to three days eliminates that opportunity.  While FINRA seems to be trying to make strides to be more transparent and customer-friendly, they once again ignore that their own members are, at least initially, able to wantonly disparage brokers and reap the benefits that an improper, overly harsh, inaccurate, or unfair U5 can bring to them.  

David Cosgrove and Cosgrove Law Group, LLC have handled many U-5 defamation cases over the past several years. If you believe you are a victim of U5 defamation, please contact our firm and speak with one of our qualified attorneys.

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[1] The CRD is an online registration and licensing database that allows for the filing of required forms related to the securities industry that must be submitted for a multitude of reasons, such as “Form U5 – Uniform Termination Notice for Securities Industry Registration.” Regardless of the circumstances surrounding a representative leaving the firm to which they are registered, a U5 must be filed by the firm with the CRD within 30 days of the date of termination, as well as be provided to the representative. FINRA determines what portions of the CRD filings become publicly available on BrockCheck.

[2] Securities and Exchange Commission (2015 September 25). Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Change to Amend FINRA Rule 8312 (FINRA BrokerCheck Disclosure) to Reduce the Waiting Period for the Release of Information Reported on Form U5 (Release No. 34-75988; File No. SR-FINRA-2015-032) [electronic format]. Retrieved from https://www.sec.gov/rules/sro/finra/2015/34-75988.pdf

[3] Most U-5 disclosures, however, are free of defamatory content or tortious intent. In other words, most broker-dealers satisfy their obligation to ensure a full, fair, and accurate reporting. There are, however, far too many times where this is not the case.

How to Terminate, Discredit, and Interfere with a Financial Adviser: the U-5

I did not design the method I am about to share with you. Nor do I condone it. But I have observed its employment repeatedly during my legal representation of financial advisers. And although some of the players on the field participate unwittingly, there is always a motivating participant. So, this is how it often works:

1. A FINRA broker-dealer needs a sacrificial lamb (or two) to satisfy a regulator, or a manager or large producer has an ax to grind, or a large producer is seeking to leave with a substantial piece of the broker-dealer's overall assets, or Compliance is too lazy to ferret out a false accusation against a financial adviser.
2. The motivating participant employs Compliance to (unwittingly?) establish an alternative pre-textual basis for termination. Sometimes it is a sales or management practice that has been accepted or overlooked for years.
3. The motivating participant and Compliance employ Legal and Registration, under cover of the attorney-client privilege, to approve and issue a sufficiently disabling Form U-5 disclosure¹. Extra damage can be done by simply checking any of the “yes” boxes under U-5 question 7. This can be too-easily justified by expanding the scope of the term “industry standards” in question 7E. 7E will trigger a public disclosure and regulatory investigation.
4. Delay #1: The broker-dealer has 30 days after the termination to file the Form U-5. It can also update it at any time should updates be necessary.
5. Delay #2: State regulators will refuse to register the financial adviser until they can investigate the basis for the U-5 disclosure. They may take weeks or months to inquire of the financial adviser and broker-dealer, giving the unmotivated broker-dealer 30-60 days to respond to their request for information. Often times this lengthy response time is used by the broker-dealer to craft a letter that is misleading and refers to the financial adviser in the worst possible light. A copy is not sent to the financial adviser.
6. Delay #3: FINRA will likely demand documents and explanations as well from all of the parties.
7. During the pendancy of #'s 3, 4, and 5, the broker-dealer may aggressively enforce non-solicitation or non-compete provisions. The successor financial adviser will call the departing financial adviser's book and, among several tactics, claim that he/she does not have contact information for the departed financial adviser. He or she may also encourage the client to view any disclosures on BrokerCheck and to stay with the current broker-dealer².
8. Finally, a promissory note balance may be used to exert extra financial pressure or silence from the financial adviser.

This is the basic anatomy of a tortious scheme to interfere with a financial adviser's business relationships. If you are currently or about to be a part of this game, either as a victim or hesitant participant, I urge you to contact me³ immediately.

1Most U-5 disclosures, however, are free of defamatory content or tortious intent. In other words, most broker-dealers satisfy their obligation to ensure a full, fair, and accurate reporting.

2This is a critical footnote. One or more of the players may simply be mean-spirited or incompetent. While this person may be the motivating player, he or she is usually manipulated and used by the motivator. The ultimate financial adviser victim—typically our client—frequently has a character defect (like all of us) that is exaggerated and exploited.

3David Cosgrove has handled U-5 matters involving MetLife Securities, US Bancorp Investments, Questar, US Allianz, Edward Jones, Raymond James, Morgan Stanley, ING Financial partners, and others.    

BROKER BEWARE

Brokers and Investment Advisors facing demands for repayment of training fees, retention bonuses, or promissory notes should bite the bullet and retain legal counsel. While their new current employer may be willing to offer unofficial advice or moral support, it is rarely willing to assign its legal department to your defense. No surprise, as its legal department is probably busy sending similar demands out to its former account executives or representatives.

The truth of the matter is that, despite demand letters that inaccurately portray your indebtedness as an unassailable fundamental truth, there are frequently either legal or equitable defenses to your former employer’s demand for money. And even if you owe and should therefore remit some funds, the broker frequently owes less than the total being demanded. Few like to hire attorneys, and even less like to pay for them. But you might actually have a legal right to save yourself some hard-earned cash in the long run—even after paying for that damn lawyer.