Inside the Litigation Lion

The Form U-5: Why New York Got It Wrong

As the dust settles from the 2007 decision of Rosenberg v. Metlife Inc., it has become evident that employers in the securities industry, in the state of New York, now wield significant power over their employees thanks to a document known as the Form U-5. Mandated by FINRA, any employer who is a member of NASD is required to submit the Form U-5 upon the termination of a registered employee, stating the reason or reasons for the termination. While this seems in theory like a reasonable procedure, in reality, thanks primarily to the opinion of the Second Circuit Court of Appeals, the Form U-5 has evolved into an offensive weapon for employers, tipping the scales heavily against registered NASD employees.

In Rosenberg, the plaintiff Rosenberg brought a libel suit against his former employer Metlife, alleging that the justification for his termination as recorded on the Form U-5 was fabricated, and he was in fact terminated because of his religion. The Second Circuit, however, decided that the statements made by an employer on a Form U-5 are considered to be absolutely privileged under New York law, which “shields the speaker or writer from liability for an otherwise defamatory statement, regardless of the speaker or writer’s motive in making the statement” (emphasis added). By reaching this decision, and subsequently making New York the only state to grant absolute privilege, the court either blatantly ignored or was completely oblivious to the detrimental impact that this decision would have on the terminated individuals.

The problem lies not with the Form U-5 itself. Rather it is personified by the growing trend since Rosenberg of securities institutions using the Form U-5 as a sword to gain the upper hand over their employees. Because any type of termination requires the filing of a Form U-5, these institutions can essentially coerce employees to resign, forcing them to choose the lesser of two evils to avoid having a “dirty” or “dinged” Form U-5 follow them throughout their career. To make matters worse for the employees, it is very rare that FINRA thoroughly investigates claims of wrongful or fabricated Form U-5s.  Consequently there have been, and will continue to be, a significant number of cases in which former employers deny making falsified statements on Form U-5s, and proceed to walk away unscathed.

Additionally, since the Form U-5s is the first document that each prospective future employer in the securities industry reviews (it is usually the first thing they look before making a hire), these individuals have their fate in the hands of their former employers. Consequently, many qualified, licensed securities professionals are finding themselves barred from attaining employment in the securities industry, as potential employers are increasingly unwilling to look past one of these “dirty” or “dinged” Form U-5s.  Further, there is a minimal standard of specificity required of employers when drafting a Form U-5. For example, in Rosenberg, the court found perfectly acceptable the defendant-employer’s reasoning of “possible accessory to money laundering violations” as justification for terminating the plaintiff, without requiring any degree of elaboration or further justification on the part of the employer.

As Jacob Zamansky wrote for this publicationprior to the Court of Appeals hearing of Rosenberg, “No other profession or industry allows employers to make public accusations detrimental to an employee without due process…the troubling reality is that the fate of the entire securities industry now resides squarely with the Court.” Now, as we sit on the other side of the ruling, it is evident that the worst fears of the industry have come true; that these employers are given freedom of the pen when it comes to the Form U-5s, be their writings truthful or fabricated, while the former employees are relegated to standing by, keeping their fingers crossed that their ex-employer’s words do not cause them to be blackballed from the securities industry.

The Second Circuit’s granting of absolute privilege to the statements made by an employer on a Form U-5 is an absolutely detrimental blow to the securities industry. By allowing employers to not only terminate qualified professionals, but also brand them for life with “dirty” Form U-5s, it has subjected the industry to a significant step backward. Only by holding employers accountable for their end of the Form U-5 will the industry be operating as smoothly and justly as it should.

Richard Roth is the founder and president of The Roth Law Firm, PLLC, a boutique litigation firm that concentrates in litigating securities arbitrations and SEC/FINRA enforcement actions.

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Richard Roth

Richard Roth is the founder and president of The Roth Law Firm, PLLC, a boutique litigation firm that concentrates in litigating securities arbitrations and SEC/FINRA enforcement actions. He...
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