United States: New York Court of Appeals Holds That Form U-5s Are Protected By An Absolute Privilege

March 29, 2007 – In a decision of great importance to employers in the financial services industry, the New York Court of Appeals held today that statements made by employers on a Uniform Termination Notice for Securities Industry Registration ("Form U-5") are subject to an absolute privilege in a suit for defamation brought by the terminated employee. Rosenberg v. MetLife, Inc., No. 23 (N.Y. Mar. 29, 2007). New York employers in the financial services industry, who are required to accurately disclose the reasons for terminating an employee on the Form U-5, need no longer fear the costly defamation litigation which often times accompanies the filing of the Form U-5. Proskauer Rose LLP represented MetLife in obtaining this noteworthy decision.

The plaintiff in this case, Chaskie Rosenberg, a former MetLife insurance salesman, was registered with the NASD and was terminated by MetLife based on MetLife’s determination that he had violated firm policies relating to speculative insurance and its concern that he was a possible accessory to money laundering violations. Rosenberg commenced an action in the United States District Court for the Southern District of New York alleging, among other things, defamation based on the statements MetLife placed on Mr. Rosenberg’s Form U-5 when it terminated him and that MetLife indicated on the Form U-5 that Rosenberg had been under internal review for violating investor-related rules. In his complaint, Rosenberg also asserted a claim for religious discrimination, which claim was subsequently rejected in a jury trial.

MetLife moved for summary judgment on the defamation claim before the Honorable Jed S. Rakoff, U.S.D.J. Judge Rakoff granted MetLife’s motion for summary judgment on the defamation claim, holding that MetLife enjoyed an absolute privilege for statements made on the Form U-5. Mr. Rosenberg appealed this ruling to the United States Court of Appeals for the Second Circuit, which, given the importance of this issue and the lack of any controlling authority in New York, certified the question to the New York Court of Appeals.

On February 13, 2007, the New York Court of Appeals heard oral arguments on the Form U-5 issue. MetLife argued that statements on a Form U-5 are made in the context of a quasi-judicial proceeding and therefore subject to an absolute privilege. Moreover, the application of an absolute privilege ensures full and accurate disclosure, thus serving the significant public interest of protecting investors from potentially unscrupulous brokers.

In a 4-2 decision, New York’s highest court ruled that the investing public’s interest in ensuring accurate reporting of the reasons for the termination of registered representatives justifies the need for the application of an absolute versus qualified privilege. The New York Court of Appeals began by examining the investigatory conduct of the NASD and concluding that it was, in fact, a quasi-judicial process.

The Court noted that the Form U-5 was "a preliminary or first-step in the NASD’s quasi judicial process" since the Form U-5 notifies the NASD of potential misconduct by a registered representative. Id. at *11. After receiving such notice, the NASD is able to "investigate, sanction and deter misconduct by its registered representatives." Id. The Court also specifically referred to the NASD’s authority during the investigation, which includes the ability to inspect and copy any books, records or accounts related to the investigation, and to require individuals to testify under oath. Id. at *10.

The Court continued by describing the public interest implicated by the filing of a Form U-5 as "significant." Id. at *11. Noting that the Form U-5 can lead to the NASD taking action, including investigations, disciplinary proceedings and sanctions, against registered representatives who engage in misconduct, the Court determined that the NASD’s capability to undertake such actions aids the general investing public. The Court further analogized the proceedings before the NASD to those that occur in the context of an attorney grievance proceeding, which it had previously held to be subject to an absolute privilege. Weiner v. Weintraub, 22 N.Y.2d 330 (1968). The Court reasoned that the NASD’s duties in regulating registered representatives were no less important than the bar association’s responsibilities in regulating attorneys.

The Court indeed appreciated that the general investing public "faces the potential for substantial harm if exposed to unethical brokers." Rosenberg, No. 23 at *11. Thus, in order to provide full and complete protection to the public, the Court recognized that "[a]ccurate and forthright responses on the Form U-5 are critical," which can only be obtained by an absolute privilege. Id. The Court balanced the public interest against fairness to the terminated employee by leaving open the possibility that former employees may still be allowed to bring an action, in court or arbitration, to have the Form U-5 language expunged if the statement on the Form U-5 was made with malice. Id. at *12.

The Proskauer team representing MetLife on this matter included Steven E. Obus, Steven Yarusinsky, Steven H. Holinstat and Patrick J. Lamparello.

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