In a decision of great importance to employers in the financial services industry, the New York Court of Appeals recently held that statements made by a brokerage firm on a Uniform Termination Notice for Securities Industry Regulation form ("Form U-5") are subject to absolute immunity in a suit for defamation brought by a former employee. Rosenberg v. MetLife, Inc., et al., No. 23 (N.Y. Mar. 29, 2007). The practical result of this decision is that if an employee brings a defamation suit against a former employer for statements made on a Form U-5, the employer will not be liable.
The Form U-5
The National Association of Securities Dealers ("NASD") requires member firms who employ registered representatives to accurately disclose the reasons for terminating a member on a Form U-5. The Form U-5 serves a number of purposes. First, it protects prospective employers and public investors by providing a mechanism allowing them to research the background of an employee or advisor whom they may hire. Second, it alerts the NASD to persons suspected of misconduct so that it may institute appropriate disciplinary proceedings.
For years, member firms have faced uncertainty as to whether statements made on a Form U-5 could be used against them in litigation because New York courts have been split as to the type of privilege to be applied to brokerage firms defending these kinds of defamation actions. Some courts in New York gave firms an absolute privilege regarding these statements, essentially giving the firms immunity from any lawsuit premised on allegedly defamatory remarks disclosed on the form. Other New York courts gave firms only a qualified privilege, which allows a defamation claim to proceed if the employee can show that the statements were made with malice.
MetLife, Inc. terminated Chaskie Rosenberg's employment when it determined that he had engaged in activities which suggested the sale of speculative insurance policies and possible money laundering. The Form U-5 completed by MetLife indicated that these were the grounds for terminating Rosenberg's employment. The Form U-5 also indicated that Rosenberg had been under an internal review for violating investor-related rules.
After his termination, Rosenberg brought an action against MetLife in the United States District Court for the Southern District of New York alleging, among other things, that statements made on MetLife's Form U-5 were defamatory and made with malicious intent. The district court held that under New York law, MetLife's statements on the Form U-5 were absolutely privileged and dismissed the defamation claim. Rosenberg appealed the ruling to the United State Court of Appeals for the Second Circuit, arguing that the statements should have been given a qualified, rather than an absolute, privilege. The Second Circuit found that there was a lack of controlling authority on this issue, and in light of the importance of this issue, asked the New York Court of Appeals to determine whether statements made by an employer on a Form U-5 were subject to an absolute or qualified privilege in a suit for defamation.
The New York Court of Appeals ruled that an absolute privilege applied to such statements because it fostered accurate and forthright responses by employers, which are critical to maintaining the high standards of registered brokers in the securities industry. Specifically, the court noted that the Form U-5 is often the first indication the NASD receives regarding possible misconduct by members of the securities industry, and investigations of misconduct reported on the form allow the NASD to "investigate, sanction and deter misconduct by its registered representatives." As such, the form "was a preliminary or first step in the NASD's quasi-judicial process." The court further noted that the NASD's actions ultimately inure to the benefit of the general public, which faces the potential for substantial harm if exposed to unethical brokers.
Implications for Brokerage Firms
The Court of Appeals' decision in Rosenberg represents a victory for securities industry employers who were previously faced with a choice between honesty and liability when completing the Form U-5. The decision allows New York brokerage firms to make accurate and complete disclosure of the circumstances surrounding the termination of a member without fearing liability for defamation.
Brokerage firms should be aware, however, that they are not entirely removed from legal action relating to allegedly defamatory statements made on a Form U-5. Specifically, the Rosenberg court recognized that a former employee still has the right to commence an arbitration proceeding or court action to expunge any allegedly defamatory language included in a Form U-5. For this reason, member firms should be honest and accurate when completing a Form U-5, but limit statements to the actual reasons for terminating an employee. Further, the Rosenberg decision only establishes absolute immunity as the standard in New York. Therefore, employers need to mindful that there is a continuing risk of defamation suits in those jurisdictions that have adopted a lesser privilege.