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Damages in Form U5 Defamation Cases

When a brokerage firm terminates a financial adviser, disclosure rules require the firm to file a Form U.5. This form typically includes, among other disclosures, the nature of the termination and the reasons behind it. And while termination of a broker may simply be the result of layoffs or other neutral reasons, Form U5s may also delineate firings for cause.

Because this form is seen by possible future employers (and even the public, in some instances), false or misleading information included on it can be extremely damaging to an innocent broker’s livelihood. Therefore, processes exist to have the record modified or expunged.

When Modification or Expungement isn’t Enough

Unfortunately, by the time the record is either amended or removed, the damage may have already been done. Brokers and other financial professionals in this position, then, may seek monetary damages from the defamatory firm, to compensate them for the harm inflicted on their reputations.

Monetary awards in Form U5 defamation arbitration cases are not common. However, they can be significant. As reported by Forbes, in 2011, one defamed broker received $285,000 in compensatory damages, $282,822.13 in attorneys’ fees, and $575,000 in punitive damages. In another case, compensatory damages totaled $100,000 and punitive damages were quadruple that.

Courts Differ on Form U5 “Immunity”

However, in some instances, the bar to claimants’ recoveries is not limited to proving that they have been harmed by defamatory statements in their Form U5s. There are a number of courts throughout the country that—when U5 arbitration awards are challenged—refuse to enforce them. They take the position that the filers of these forms are “immune” from paying damages.

Some courts, like the United States Court of Appeals for the Seventh Circuit, have held that brokerages have only a “qualified immunity” against defamation lawsuits. In other words, defendants/respondents can be liable to pay damages, but only in certain circumstances. In Dawson v. New York Life Ins. Co., the Seventh Circuit noted the tensions at play when a brokerage files a Form U5:

On the one hand, securities firms (because of both FINRA rules and possible lawsuits by subsequent employers) are under pressure to report customer complaints against their brokers. On the other hand, securities firms (because of the possibility of defamation suits and possible punitive damages) are under pressure not to report these complaints. Thus, the Seventh Circuit held that brokerages are immune from defamation suits—to a point. They can be sued for reckless behavior, but not for negligence.

Other courts, like the New York Court of Appeals (the highest court in that state), have held statements made in Form U5s to be protected by “absolute” immunity. The court in New York, for example, held that “compelling public policy” justified complete protection for employers filing the forms. And, while employees could still seek expungements, they could not receive damages.

If you were victim of defamation on your Form U5, please contact attorney Gregory Tendrich, P.A. to discuss your legal options today.

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