Advisor Hub: U5 Defamation Wins Stack Up, But Tables Have Not Turned to Brokers’ Advantage, Lawyers Say

U-5 defamation has been an issue for brokers since I began practicing law, and not much has changed to address the issue - except for U-5 filings to become absolutely privileged in New York.

I have had some successes negotiating U-5 language before the U-5 is filed, to stop a firm from causing further damage to the registered representative, but many of these issues arise after the broker has left the time, and there is no ability to discuss the language with the firm.

FINRA needs to do something about this. Perhaps a process for review of U-5s before they are filed and made public, giving the broker the opportunity to object and to have someone review the filing and the facts before the filing before it becomes part of the broker's permanent record.

AdvisorHub has an excellent article on the issue - Defamation Wins Stack Up, But Tables Have Not Turned to Brokers’ Advantage, Lawyers Say

UBS Keeps Losing its Attempt to Vacate $11-Mln Finra Award

Back in December 2019 award UBS lost an arbitration case brought by Mark Munizzi, a former UBS regional compliance officer in Chicago, whom the wirehouse fired in 2018. His claim was based on his allegations UBS defamed him with the language it put on his U5 form filed with the Central Registration Depository.

The arbitration panel awarded Mr. Munizzi 11 million dollars, and UBS has been appealing the decision ever since.

AdvisorHub tracks the appeals, and UBS' defeats here - https://www.advisorhub.com/ubss-appeal-to-vacate-11-mln-finra-award-faces-uphill-battle-lawyers/

-------------

Mark J. Astarita, Esq. is a 30-year securities arbitration veteran, having represented parties in over 600 FINRA arbitrations in 20 cities. To discuss your securities law claim, call Mark at 212-509-6544.

UBS Smacked For Unnecessary Defamation of Terminated Employee - $11 Million

Punitive damage awards in arbitration are rare. I was able to obtain one against a major brokerage firm years ago for a disabled investor, but they don't happen often. However, last year a FINRA arbitration panel ordered UBS to pay $7.5 million in punitive damages to a compliance officer who claimed he was defamed when the firm terminated him. The arbitration panel also award him $3.1 million in compensatory damages, almost $497,000 in attorneys’ fees. It also required UBS to pay all but $800 of the $30,000 of hearing and prehearing session fees,

UBS moved to vacate the award, and the court denied that request, leaving the 11 million dollar award in place. AdvisorHub is reporting that UBS has appealed that decision, but if UBS loses that appeal, it will have 30 days to pay the award, or FINRA will suspend its broker-dealer license.

Defamation Claims

Defamation claims in the securities industry are difficult, and depending on the state where the employee worked, nearly impossible. Think about New York, where the highest court ruled that firms have absolute immunity in their U-5 filings - absolute, not simply conditional. Absolute, as in you can't sue them for a defamatory filing.

While that is not 100% true, and knowledgeable attorneys have filed successful claims in New York for false U5 filings, the point is - it is not easy.

And that is true in most jurisdictions. Forms U4 and U5 are government required filings, and one of the requirements of Form U-5 is to state the reason that a broker's employment was terminated. Most times there is no issue, as the broker resigned. The situation gets dicey when the broker is fired since the firm is between a rock and a hard place - its obligation to be truthful to the regulators, and being sure not to defame the broker.

The Arbitration Award

Most firms meet those obligations without controversy, but in this case, something clearly went wrong. FINRA arbitrators are not required to give a reason for their award, but a careful reading of the award tells its own story:

• $3,149,656 in compensatory damages, the EXACT amount the Claimant asked for.
• $112,500 in interest on the compensatory damages, the EXACT amount the Claimant asked for;
• $7,500,000 in punitive damages
• $496,753.36 in attorneys fees pursuant to the state wage payment act,
• Plus assessing the $30,000 of the $30,800 in hearing costs to UBS and ordering the expungement of the "Yes" answers on Form U5.

The Award doesn't provide any details of the claim, but UBS' motion to vacate the award provides some insight. The termination reason on Form U-5 stated terminated “after firm review determined that (1) he failed to adequately supervise employees in association with the risks of an uncovered options strategy in employee and employee related accounts and (2) gave varied responses during the review.”

I was not involved in the case, nor do I know anything about the case other than what is in the public filings. But I have represented dozens of brokers and compliance professionals in employment disputes. For some reason, firms have this desire to add an allegation that the employee lied to the firm as a reason for termination. In their court papers, UBS did exactly that, labeling the employee's conduct as an attempt to conceal the truth and that he presented a "shifting" story during the internal investigation.

Even in UBS' court papers the evidence of "varied responses" could reasonably be viewed as a failure to recall specific details of events that happened during the course of a day weeks later and even a month later, when interviewed by the firm. The documents do not state this, but my best guess is that the employee was called into a meeting, without notice, not told what the purpose of the meeting was, was not permitted to have an attorney present and was pressed for answers to very specific questions without his notes or files.

When he is later able to review his files he remembers facts that he did not recall during the interview,  and so advises the interviewer. UBS called this concealment and a shifting story, and having been involved in similar cases, I imagine that UBS did all it could do to establish that the employee attempted to conceal the truth.

Keep in mind that the employee is a supervisor. He did not place the trades, he is was accused on not supervising the trades and of not advising the customers of the risks involved. That is, at worst, negligence, and a grounds for termination. Not good grounds, but enough to support a termination for cause.

But UBS, and other firms, are not satisfied with that, they want to make sure the termination sticks, so they add allegations that the employee attempted to conceal his negligent conduct.

Problem is, that makes him unhireable anywhere else. The negligence is bad enough.

And apparently the arbitrators saw the conduct for what it was, and it cost UBS 11 million dollars.

Trouble Ahead - FINRA Focus on Outside Business Activities. Are Yours Fully Disclosed?

By now, most registered representatives are aware that FINRA has been actively investigating the backgrounds of registered persons for undisclosed judgments and liens. There have been questions as to how they are conducting those investigations, and a few folks have suggested to me that FINRA is running credit checks on brokers.

That would be of questionable legality, but there is no evidence that it is happening. What has happened is FINRA was very successful at sanctioning registered representatives who did not fully disclose such items. Some reps were charged with willfully failing to disclose, which is a small trap laid by FINRA. You see, while FINRA will take a settlement with a fine for a willful failure to disclose, many state regulators will use a willful failure as a reason to bar the broker!

Fortunately, for the reps that I represented, there were no suspensions or bars and no findings of willful violations. I managed to convince FINRA in some cases that there was no failure to disclose, and in all cases that any such failure was not willful.


Having fought that battle, the next one is starting. FINRA has no identified outside business activities and private securities transactions as the next regulatory concern. FINRA has stated that it has found that some individuals failed to notify their firms of proposed OBAs or PSTs, including situations where a new hire or current registered or associated person failed to notify their prospective or current firm in writing of an existing OBA or PST. 

FINRA acknowledges that in some cases, individuals did not understand what constitutes an OBA or PST, or did not satisfy important provisions of the rules (e.g., the requirement for written rather than verbal notice). In other cases, individuals failed to provide the information with sufficient detail for a firm to make an adequate determination as to whether to allow a proposed OBA or PST to proceed.

This is important not only to avoid an issue with FINRA, but with the firms. Most large firms will jump at the opportunity to terminate a broker and seize his assets under management for failing to disclose an outside business activity, and certainly for failing to disclose a private securities transaction.

Outside business activities are covered by FINRA Rule 3270 and must be disclosed on Form U-4 in item 13

3270. Outside Business Activities of Registered Persons

No registered person may be an employee, independent contractor, sole proprietor, officer, director or partner of another person, or be compensated, or have the reasonable expectation of compensation, from any other person as a result of any business activity outside the scope of the relationship with his or her member firm, unless he or she has provided prior written notice to the member, in such form as specified by the member. Passive investments and activities subject to the requirements of Rule 3280 shall be exempted from this requirement.

Form U-4 Item 13.

Are you currently engaged in any other business either as a proprietor, partner, officer, director, employee, trustee, agent or otherwise? (Please exclude non investment-related activity that is exclusively charitable, civic, religious or fraternal and is recognized as tax exempt.) If YES, please provide the following details: the name of the other business, whether the business is investment-related, the address of the other business, the nature of the other business, your position, title, or relationship with the other business, the start date of your relationship, the approximate number of hours/month you devote to the other business, the number of hours you devote to the other business during securities trading hours, and briefly describe your duties relating to the other business.

There is a bit of a mis-match between the rule and the dislosure, as the rule limits the activity to those which involve compensation, or the expectation of compensation, and the disclosure item is not so limited - it purports to require a yes answer for any position with any other business.

Take a look at your own disclosures. Have you disclosed all of your outside business activities to your employer and on Form U-4? Have you obtained written approval of the activity from your employer? Verbal approval from your manager is not enough - you need it in writing.

Have a question about an outside business activity? Received an 8210 request about your U-4 disclosures? Give me a call at 212-509-6544, let's see if you have a problem, and if so, how we can fix it.

Next up: Private Securities Transactions

Senator Pushes FINRA to Hurry Reviews of Fired Wells Fargo Brokers

Wells Fargo & Co. is facing increasing scrutiny from lawmakers over the potentially wrongful dismissals of financial advisers and other employees who pushed back on questionable practices during the bank's multiyear cross-selling scandal.

The latest salvo comes from Sen. Bob Casey (D., Pa.), who, in a letter Wednesday to the Financial Industry Regulatory Agency, the brokerage industry's self-regulatory body, asked for an expedited review process to determine whether any Wells Fargo employees were unfairly dismissed as retribution for speaking out or not cooperating with aggressive cross-selling tactics, according to the letter reviewed by The Wall Street Journal.

FINRA in response to an earlier inquiry from lawmakers, said that of the 5,300 employees fired during a five-year period, more than 600 from Wells Fargo's wealth-management division had received termination filings known as Form U5s. These forms chronicle the reasons for the dismissals of brokerage employees, and negative justifications can hinder an adviser from gaining employment elsewhere in the industry."

Senator Pushes Finra to Hurry Reviews of Fired Wells Fargo Brokers


---
The attorneys of Sallah Astarita & Cox have decades of experience in representation of brokers in expungements and other  U4 and U5 issues. Call them at 212-509-6544 or send an email. for more information on correcting your CRD record

Problems When Failing to Report Customer Complaints

FINRA rules require firms, and brokers, to report certain customer complaints on the broker's Form U-4 within 30 days of receipt of the complaint. FINRA's requirements for complaint reporting are extremely broad, and quite frankly, unfair. While FINRA's reporting requirements need to be changed, they also need to be followed.

The details of the requirement have changed over the years, but today, if a broker's customer files a sales practice complaint, in writing, or an arbitration or lawsuit, and alleges damages of  $5,000 or more or alleges forgery, theft, misappropriation or conversion of funds or securities, the complaint must be reported on Form U-4 for at least two years. The disclosure questions have become convoluted over the years as FINRA expands the universe of reportable complaints, but are detailed in Item 14 on Form U-4.

This is true even if the broker is not named on the complaint. Because customer attorneys decided it was clever not to name individual brokers in FINRA arbitrations, in the hopes of causing a rift between broker and firm, FINRA decided that if the firm can identify the broker (and it almost always can do so), the complaint or arbitration is reportable on the brokers U-4 - even though he was not sued.

Failing to file a required amendment can result in fines of up to $25,000 and a 30 day suspension - for the broker as well as the firm. It is FINRA"s position that each registered individual has the responsibility to keep his U-4 current and accurate, regardless of what his firm does or says. Brokers are still responsible for accurate filings, even if the firm gives them incorrect information regarding a disclosure.

Firms are also responsible, although sometimes the sanction is not as significant as it might be. Take the recent fine against Merrill Lynch. According to FINRA, Merrill took a year to report allegations that one of its financial advisers was siphoning money from client accounts. Finra fined Merrill $175,000 for this falure. The problem is that because the allegations went unreported, the broker was hired at another firm, and allegedly continued his thefts at the new firm.

If this failure to report had been at a small firm, the fine would have been more significant to the firm than this fine was to Merrill. And you can be sure that an individual, either the President, the CCO or the registration manager would have been named.

Not so when you are dealing with a large firm.

For more information, go to Finra Fines Merrill Lynch Over Delay in Reporting Allegations Against Adviser - NASDAQ.com

---
The attorneys at Sallah Astarita & Cox include seasoned securities regulatory attorneys, with decades of experience in SEC and FINRA regulatory and compliance regulations. For more information call 212-509-6544 or send an email.