Last April, Rep. Edward Markey (D-Mass.) wrote to SEC Chairman Arthur Levitt asking for a list of cases in which brokerage firms were successfully sued for disclosing truthful information on U-5 forms.
In a May response, Levitt admitted that the SEC "is not aware of any such cases."
The SEC gave Markey no arbitration data but promised to forward his request to the NASD and NYSE "and ask that they respond directly to you."
Although an NASDR task force is known to be working on the issue, a Markey staffer says as of early September, the SROs have yet to respond.
The SEC also is known to be looking at several studies of U-5 cases. In response to a Freedom of Information Act request by this magazine, the SEC confirmed that it has the following studies on U-5 defamation claims: An October 1995 report on a study performed by the Maplewood, N.J.-based Securities Arbitration Commentator newsletter (SAC); a 1995 presentation by an attorney at Orrick Herrington & Sutcliffe; and a 1995 law review article by Anne Wright, associate general counsel at the NASD.
The SAC report and study concluded that the "statistics are not persuasive" that firms are getting hit with many defamation claims arising from U-5 filings (see "OddLots," Feb. '96, Page 25). The study found 57 cases heard between May '89 and early 1995 that had "definite U-5 allegations," along with other claims. The newsletter added that the number of these awards since 1989 "remains relatively steady." The study found no million-dollar NYSE awards, and only three million-dollar or higher NASD awards. Excluding the seven-figure cases, the average NASD award was less than $70,000, SAC said.
The Orrick Herrington study, presented to a Securities Industry Association (SIA) meeting by the late Stuart Bompey, a partner at the firm, was based on case data from SAC and showed only three distinct U-5 defamation cases (where no other claims were alleged). According to Bompey's report, employee/claimants won two of these pure defamation cases-$248,000 in one dispute (Watkins v. Edward D. Jones, 1989), and $625,000 plus $1.25 million punitive damages in another case (Ulrich v. Eaton Vance et. al., 1995).
Although he provided no evidence of a trend, Bompey claimed the number of U-5 defamation suits has "risen dramatically" in recent years.
(Orrick Herrington is an outside law firm retained by many large broker/dealers and the SIA. Bompey and Orrick Herrington filed a friend-of-the-court brief for the SIA in support of Eaton Vance when the fund distributor appealed the Ulrich award. A Florida district court of appeal upheld the award earlier this year, based in part on the fact that Eaton Vance attempted to negotiate U-5 language in an effort to gain concessions from Ulrich, a former wholesaler, regarding a severance package. In a footnote to his study, Bompey confirmed that he "exclusively" represents employers.)
Meanwhile, the Wright study found 55 defamation-related cases since 1989, an amount that represented a "small fraction" of intraindustry disputes, which themselves are a "tiny percentage" of all arbitrations. Wright found only seven "pure" U-5 defamation claims, and concluded that "available statistics do not suggest that [U-5 defamation] claims are routinely raised or that large damage awards are the norm. ..."
Most recently, in a just-concluded study of NASD arbitration cases decided between September 1996 and July 1997, RR magazine has uncovered 11 pure U-5 defamation cases out of a total 40 cases where reps alleged various wrongdoings, including a U-5 problem and/or where a panel ordered an amended U-5. Brokers or registered employees won monetary damages in only four of the 11 disputes-a total of $616,000. In six of the cases, arbitration panels ordered that the rep's U-5 be amended or expunged (see the tables below).
All the studies acknowledged that pinpointing damages from U-5 defamation claims is not possible due to the limited information available about arbitration cases.
RR magazine requested U-5 defamation data that the NASDR and the NYSE may have provided to the NASDR-run task force studying the issue. An NASDR spokesperson declined to provide any information. The NYSE did not respond to requests for NYSE cases. RR was able to obtain the NASD case information independently.
In his April letter, Markey also noted that in a 1994 hearing on rogue brokers, he'd also asked the SIA to provide him with the list of cases involving truthful U-5s. According to his aide, Markey is still waiting for that information.
(For an expanded version of this story, including descriptions of the cases studied by both Bompey and RR, see http://www.rrmag.com, and go to the "RR News-Oddlots" section.)
It appears to have sprung from the rogue broker sweeps. Since late 1993 or early 1994, the Securities Industry Association, which represents broker/dealers, has been pushing for legal immunity for what firms report on Form U-5s. For awhile, the industry was lobbying for absolute immunity, which would have protected dealers from outright malicious statements.
The SEC officially endorsed limited or "qualified" immunity in the May 1994 Large Firm (rogue broker) report. An excerpt follows:
In addition to the Staff's general concern regarding the need for timely filing of Forms U-4 and U-5 with respect to registered personnel, there are additional issues presented in the case of the Uniform Notice of Termination, Form U-5. These issues relate to the circumstances under which a registered representative leaves a particular firm.
Form U-5 requires a firm to disclose whether a termination is voluntary or not, and whether or not the salesman is the subject of customer complaints or an investigation. Registered representatives have complained they have been libeled by statements made on Form U-5 regarding the characterization of their termination. Furthermore these complaints, as well as other disclosures made on the form, have been the subject of litigation and/or arbitration and substantial awards have been made in some cases. Regulators have raised concerns that the fear of litigation has led firms to be less candid in their filings and has reduced the value of the Form U-5 as a "red flag" in sales practice cases.
Improved disclosure by firms on Form U-5 could substantially assist regulators in policing for serious sales practice violations. Although some states afford some form of immunity from liability for defamation in these circumstances, the Staff believes that concerns of firms and supervisory personnel regarding civil liability for statements made in regulatory filings required by the Commission or SROs warrant further examination. Such concerns may inhibit full and adequate disclosure of the facts and circumstances surrounding the reasons for termination of registered representatives. The Staff, however, is also cognizant that false statements by firms about registered representatives in filings can be professionally damaging and a source of possible abuse. Accordingly, the Staff intends to recommend rule-making by the Commission, or if necessary, legislative changes, to implement uniform policies governing the liability and immunity of broker-dealers and their associated persons with respect to state law defamation actions in connection with statements made in regulatory filings required by the Commission or SROs.
