YOU CAN BARELY MAKE OUT THE FACE of Chaskie Rosenberg in the photocopy of a newspaper advertisement in his court file. In the late 1990s, Metropolitan Life Insurance Co. placed the ad in Hamodia, an Orthodox Jewish weekly whose U.S. office is based in Brooklyn. The ad is an artifact of MetLife's short-lived, ill-fated plan to market insurance to the Hasidic community; it features passport-sized portraits of Rosenberg and 22 other brokers from MetLife's All-Boro agency in Flatbush, Brooklyn. Rosenberg is pictured with the long locks and beard worn by many Hasidic Jewish men, and several other salesman pictured are wearing the black hats of the Hasidim custom, sharing the page — in an unusual juxtaposition — with Snoopy, MetLife's cartoon character mascot.
The old MetLife ad is among the hundreds of documents and exhibits now before the judges of the New York Court of Appeals in Albany, the last stop in Rosenberg's nearly four-year battle against MetLife, which fired him in April 2003. At issue is the description MetLife put on Rosenberg's U5: It says that an “internal review disclosed” that Rosenberg “appeared to have violated company policies and procedures involving speculative insurance practices and possible accessory to money laundering.”
In this appeal, Rosenberg is hoping to win the right to go back to the trial court to pursue his claim for defamation damages against MetLife. He contends that he did not sell speculative insurance policies or launder money. Further, he says his old firm knows it. But Rosenberg's case was thrown out of a U.S. District Court because the judge ruled that in New York, a broker/dealer has “absolute privilege” over the U5; in effect, the b/d can't be sued for posting even false statements on a U5. Rosenberg appealed and, last August, the federal appeals court in Manhattan agreed with his contention that the case law in New York on absolute privilege is not so clear-cut. It sent the question to the state appeals court in Albany, calling it an “important” question because the absolute privilege qualification leaves “former employees without a remedy in tort for even the most egregious and abusive statements made by former employers.”
Public filings and the court record show that Rosenberg was no big fish. In 2001, his best year at MetLife, Rosenberg grossed a mere $145,234 in commissions — a modest book by any standard. Still, “My reputation is worth more to me than anything except my faith and my family,” he said in a statement filed with the trial court in September 2004.
The case has ramifications beyond the outcome for both Rosenberg and MetLife. Indeed, the outcome could affect the entire financial-services industry. Many brokers claim the “absolute privilege” law in New York allows securities firms to, in effect, blackball them with impunity. (Some firms won't look at a rep with a complaint or smudge on his U4 or U5.) The Rosenberg appeal seeks to put the New York law in line with most other courts, giving the firms just a “qualified privilege,” which would dissolve once a broker showed the statements were made with malice, thus clearing the way for a defamation claim and damages. (New York law is important, since so many firms are headquartered there.)
The appeals court heard arguments in Rosenberg's case in mid-February and, if they rule for him, he will emerge an unlikely hero for registered reps who say they have been threatened with a bad U5 filing when leaving one firm for another. War stories abound. The classic is the departing corner-office rep who is dragged through the mud by a bitter branch manager in an effort to retain the rep's biggest clients. The “tagging” of a U5 is the ultimate act of revenge on a departing advisor. (Expunging a U5 is a costly, time-consuming trip through the arbitration process, where the vast majority of these “defamation” cases are heard.)
Religious Custom v. The Patriot Act
Rosenberg's case is unique and essentially pits a socio-religious custom against the rules of the secular company that employed him — indeed against post-9/11 law enforcement. Rosenberg got into trouble for issuing life insurance policies that were paid for by third parties with no family relationship to the insured. This is usually a sign of the illegal practice of “speculative insurance” (an attempt to profit on someone else's imminent death). It is also considered a red flag for money laundering.
But Rosenberg says he is no criminal, much less a broker laundering money for terrorists. (He now works for New York Life Securities, a unit of New York Life.) In fact, Rosenberg argues in his appeal that the third-party funding he got for a life insurance policy was actually an act of charity. (Rosenberg, through his lawyer, declined to be interviewed or photographed for this article.) And, in fact, he contends that MetLife fired him simply because he is Jewish. MetLife claims Rosenberg was fired because he repeatedly accepted checks from third parties to pay premiums for his insurance clients, raising “numerous widely-accepted red flags for money-laundering activities.”
Rosenberg counters that, even after the USA Patriot Act, Met Life's official policies allowed for checks drawn on the accounts of another party, and that the policy didn't change until seven months after he was fired.
Rosenberg's odyssey began in August 1997, when MetLife recruited him as a financial-services representative in the All-Boro agency as part of its effort to market products to the Hasidic community. Rosenberg is a member of the Bobover Hasidic sect.
One religious tenet of the Bobover is g'milus chessed, or the obligation to care for those in the community who are less fortunate. The Bobover carry out this obligation through the Gamach, a free-loan society that issues money to community members who are short on cash to pay bills, such as life insurance premiums. Members of the community pay into the Gamach and withdraw from it when in need.
In May 1999, MetLife launched a compliance audit of the All-Boro agency. MetLife claims the audit revealed significant concerns about speculative insurance and other problems, including a pattern of selling insurance to “individuals who apparently could not afford it,” who then assigned the policy to a charity or religious organization. The problems persisted and, the following May, MetLife took what it calls the “drastic” step of abolishing the All-Boro agency. Several people resigned, including the agency's manager. Rosenberg and the others were transferred. “I do not deny, to my shame,” that “some bad apples existed,” Rosenberg said in his court statement. But the company's hostility led him to conclude, “MetLife believes all Hasidic Jews are crooked.” MetLife denies this.
In 2002, MetLife audited the 12 former All-Boro brokers, all of whom are Hasidic Jews, again. This time, the investigation was expanded to include agents who had allowed “questionable third-party premium payments from charitable organizations.” These were payments made by the Gamach. Investigators found nine policies issued by Rosenberg with this problem and questioned him about them. In bold black typeface, MetLife's legal brief asserts: “Rosenberg admits that he knowingly included false information in the questionnaire responses he provided to MetLife's auditors.”
But the evidence itself is more nuanced. Rosenberg issued a $300,000 life insurance policy to Pinchas Goldman, who listed his wife, Chanie, as a beneficiary. Abraham Sieger made a $1,551.67 payment on that policy, about half of the first annual premium, according to the MetLife audit. Goldman is Rosenberg's brother-in-law and a Torah scholar; Sieger was Goldman's student. Goldman was 29 years old and in fine health; speculative insurance policies are usually issued when someone is near death, so the payment by Sieger “raised no red flags with me,” according to Rosenberg's statement to the trial court.
In January 2003, with the audit heating up, Rosenberg's manager, Jimmy Fay, asked him to fill out a questionnaire. On it, Rosenberg said Sieger was a family member of Pinchas Goldman. To back up its claim that Rosenberg lied, MetLife points to an excerpt from Rosenberg's deposition, when MetLife's lawyer grilled him about his answers on the questionnaire. “So you signed this document knowing that the information contained in it was false?” Rosenberg answered: “Mr. Fay told me that this is not going anywhere, and he says a close friend is like a family member and let's just write family member.”
While his defamation claims were dismissed, Rosenberg's claim that MetLife audited him and then fired him in violation of the federal discrimination laws went to trial, which revealed some explosive emails. One email, entitled “Issues re Orthodox Sales Practices,” says, “We must put in place measures that anticipate future transgressions from the group.” The email also comments, “Some have suggested we should have closed our borders…Obviously this is not possible in our multicultural society.” In February 2003, one senior MetLife manager, Richard Leist, set forth his theory about what was happening among the Hasidim, describing it as a “tight community” with “many members engaged in cash businesses and these members have the intent of under-reporting revenue to minimize taxes.” He says the free loan societies had a “purposeful lack of accounting between receipts and disbursements” and that “cash is cleaned this way.”
The Leist memo apparently did not sway the jurors, but it prompted U.S. District Judge Jed Rakoff to make an extraordinary comment from the bench, after thanking the jurors for their service. He called it “something MetLife ought to be ashamed of…I think a person of the Jewish faith seeing that memo would be inclined to regard it as blatantly anti-Semitic.” But Leist had nothing to do with the decision to fire Rosenberg, MetLife points out. “Apart from the overwhelming evidence of Rosenberg's misconduct, it is noteworthy that many of the MetLife decision-makers in this matter were Jewish,” according to its legal brief.
The Last Stand?
The New York Court of Appeals is Rosenberg's last hope. At the Feb. 13 argument, several of the judges seemed skeptical of MetLife's claim that an absolute privilege should apply. Judge Susan Phillips Reed posed the most basic question to MetLife's lawyer, Steven Obus: “Why isn't a qualified privilege sufficient to balance the interests of the employee and the investing public and everyone involved?” Time and again, Obus said the absolute privilege was needed to protect the process. “It doesn't foster disclosure nearly to the extent as absolute privilege,” he said. “What's the remedy for the employee? What if it is malicious?” asked Judge Carmen Beauchamp Ciparick. “We make a judgment that it's more important to protect the process,” Obus responded.
The brokerage industry's largest lobbying group, the Securities Industry and Financial Markets Association, made the same point in an amicus brief supporting MetLife, contending that an absolute privilege “fosters thoroughness and candor on the U5.” The SIFMA's lawyer did not return two phone calls seeking comment.
Rosenberg's lawyer, Maurice Heller, told the judges that he'd like to be asking for more than just a qualified privilege. His client will still have to go back to court, prove MetLife made the statements with malice and offer evidence on damages. And, ironically enough, if the judges side with MetLife, the appeal could boomerang: Lawyers who represent individual brokers in expungement cases say arbitrators already apply the qualified privilege. If Rosenberg loses, his case could hurt advisors in those arbitrations. Not that qualified privilege is as bad for the industry as its lobbyists claim. The NASD proposed a rule in 1997 that would have created a nationwide “qualified immunity” standard for U5 forms, but the SEC never acted on it. And many arbitration panels have awarded brokers damages for defamation, sometimes for seven-figure sums. In December 2005, a New York Stock Exchange arbitration panel awarded $12.5 million in defamation damages to three former Merrill Lynch brokers who were fired in the wake of the mutual fund market-timing scandal.
Adam Safer, a New York lawyer who represents brokerage firms in these cases, says the absolute privilege is needed to put the brakes on overly sympathetic arbitrators who have awarded damages in expungement cases that didn't warrant it. “If an arbitrator feels sympathy for the employee who had bad info written about them, even if the mistake on the U5 was caused by negligence or was made reasonably — but nevertheless incorrect — he might feel sympathy for the guy harmed and might give damages.” An absolute privilege would put a stop to that, he says.
Two amicus briefs support Rosenberg's appeal, one from the National Association of Employment Lawyers and another from Jeffrey Liddle, a New York lawyer who represents individual brokers. “It's hard enough to win a case with the qualified privilege,” he says. “The message of absolute immunity is that you are entitled to do whatever you want to do — no matter what it is — that the rest of us can't.”
So, Rosenberg appears to be a religious, even honest, member of his community. Yet, if you are a compliance officer, you might be forgiven for regarding Gamach as a compliance nightmare — particularly under the USA Patriot Act. So, even assuming MetLife had cause to dismiss him, how far should it go in issuing statements of “apparent” misconduct? Bear in mind that the U4 and the U5 exist to protect the investing public at large. A bad sentence on a U5 can ruin a person's reputation and, therefore, jeopardize his entire career. On this score, Rosenberg's appeal offers a litmus test that every b/d should be watching.
For now, Rosenberg waits. An internal email, disclosed at the trial, demonstrates that the MetLife brass was well aware that its statements about the fired reps would tar them for the rest of their careers: “Keep in mind that while it is possible that some broker/dealer may hire these individuals, the language on the U5 stays with them forever.”