Trouble in the Workplace, Part 2
Guest Blogger: Katherine Vessenes, JD, CFP® - President, Vestment Advisors
In my December 12 post, I outlined three of the five most common claims and issues that are currently being brought against broker dealers by unhappy registered reps. The first three included class actions for unpaid overtime; claims for illegal charges for sales assistants, trading errors, marketing costs and technology fees; and promissory notes. Let's take a look at the final two.
4. Wrongful termination
Eccleston says he has seen a number of wrongful termination cases that have come up after the rep has left the firm. Usually the rep doesn’t know they have a right to bring an action for wrongful termination and they are not inclined to sue until they get the note advising them the firm is going to sue them for the balance of the promissory note.
“This is usually the last straw,” Eccleston stated. “This just sends the rep over the end and they will file a wrongful termination as a counterclaim.”
5. U-5 defamation
The U-5 is a termination form that the NASD requires members to fill out whenever a registered employee leaves the firm, explaining the reasons for the termination. Certain comments on this document can effectively end a rep’s career in the industry since most firms will not hire any registered person who has been terminated at another firm if the termination was precipitated by egregious conduct.
Sometimes the reps will sue to reform the statements on a U-5. The statements must be both defamatory and false in order for the rep to have a chance at winning. In addition, they usually have to prove the broker dealer filed the statements knowingly and maliciously. Some categories of defamation are so heinous, that damages are presumed, according to Eccleston. One area is job performance.
Attorney Richard Levan of Levan and Friedman in Philadelphia, noted that this area is in a state of flux. The question becomes whether the broker dealer has an absolute or qualified privilege regarding the statements on the U-5.
If b/ds have an absolute privilege, the broker dealer can state whatever they want on the form and be immune from a rep’s lawsuits, even if the statements are deliberately false and defamatory. If a b/d has a qualified privilege, the reps can sue only if they can prove the statements are false, defamatory and the employer made statements with malice.
Reps faced with a state law that holds a broker dealer has an absolute privilege can be in a difficult position, because they have been falsely defamed and are then without a means to get the language on the U-5 ammended to reflect the truth. The end result is that they are usually out of work, since no one will hire them.
Levan is intrigued by a New York case in the Second Circuit of the US Court of Appeals, Rosenberg v. MetLife Inc. Rosenberg was terminated by New York Life who filed a U-5, which stated in part: “. . . Rosenberg appeared to violate company policies and procedures involving speculative insurance sales and possible accessory to money laundering violations.” Rosenberg says the real reason he was fired is because he is a Hasidic Jew.
The district court dismissed Rosenberg’s claim holding that Met Life had an absolute privilege to say whatever they wanted on the U-5, even if it was false and defamed Rosenberg.
“What is quite unusual about this case,” said Levan “is that on appeal the Second Circuit sent the case directly to New York’s highest court to get an opinion on the issue.”
Levan thinks this case, because it is from New York, our financial center, will have a bearing on similar cases in the future.
Another case that Levan believes is hopeful for brokers is Galarneau v. Merrill Lynch decided in July of this year. In that case Debora Galarneau, a 15-year Merrill broker, sued Merrill for filing a false and defamatory U-5. A Portland Maine jury agreed with her and awarded her $3 million in damages. Merrill has stated they will appeal.
According to Levan this is a difficult case to prove because the plaintiff must prove that the form was incorrect and the firm knew it was incorrect and proceeded to file it anyway. In essence they had to prove that Merrill was knowingly blackballing Galarneau from the industry.
Although Galarneau may have won the battle, it is unclear whether she will win the war. She is still facing an appeal and as of August has still not found another job in the industry. She fears that the U-5 may have permanently damaged her reputation in the industry.
Lessons for broker dealers: Although it can be tempting to ruin a rep’s career and livelihood, take the high ground and only print true statements on a U-5 and make sure you can defend them if you are sued.
Lessons for reps: if you are unwillingly terminated from your broker/dealer, consult with an attorney. They can frequently negotiate language on the U-5 that will not damage your career.
In conclusion, it is anticipated that the number of employment related claims between brokers and their firms will continue to increase. This is one area where it pays to get good legal advice from a law firm that specializes in these issues. Many of the problems listed here could have been avoided if the parties had used a qualified legal expert from the beginning. Whether you are a broker dealer or a rep, get the best help you can and you will increase your chances for success.
The author wishes to express her appreciation to all the people interviewed in this article, including compliance consultant Paul Bruce of Waterside who provided background information. They may be reached at:
Paul Bruce: paul.bruce@watersidellc.com
James Eccleston: JEccleston@snsf-law.com
Richard Levan: rlevan@levanfriedman.com
Katherine Vessenes, JD, CFP® is the country’s best known authority on the legal and ethical issues facing financial advisors. As president of Vestment Advisors, she helps broker dealers and financial advisors build safer, more profitable businesses. You can reach her at 952-401-1045 or Katherine@vestmentadvisors.com. This article first appeared in Broker/Dealer magazine.
