Getting fired is bad enough. Having an ex-employer bad-mouth you on a publicly available document compounds the injury. Two recent Finra arbitration rulings could diminish that ugly scenario's occurrence in the future.
In one case reported early in March, a Finra arbitration panel ordered Charles Schwab & Co. to pay nearly $1.8 million (including $1.5 million in punitive damages) and expunge a comment it had made on the U-5 termination form of Timothy Leahy, a former operations supervisor at a Schwab office in Orlando, Fla. The panel wrote that Schwab "falsely stated human resources violations as the reason for termination" and then "included those false violations" on Leahy's Form U-5, according to Dow Jones.
A separate Finra award made last June and upheld by a U.S. District Court judge on March 2 required Hilliard Lyons to pay former Cincinnati-area branch manager Carlos Reisen Jr. $516,000 in damages and $115,000 in attorney's fees. The Finra panel in that case also expunged the firm's defamatory statement on Reisen's U-5. Hilliard Lyons told Investment News it plans to appeal the district court decision.
Right to Damages Varies By State
The Form U-5 is meant to protect investors by disclosing why a former employee left a firm. But its public nature magnifies the career damage a professional may suffer if information isn't accurate. The form follows you wherever you go, potentially jeopardizing your reputation, ability to land a new job, and maintain clients.
Defamation suits are governed by separate laws in each state, notes Allan Bloom, an attorney at Paul Hastings. New York law gives registered firms "absolute privilege" - unconditional immunity from liability, without having to defend what they wrote about an ex-employee. The Hilliard case took place in Ohio, whose law gives employers only a qualified privilege. That means a firm can be held liable if it is found to have acted maliciously in its depiction of the ex-employee on the U-5.
Bloom says professionals who fear termination should be proactive about the information in their U-5. Discuss it with your employer employer long before you leave, in tandem with severance and unused vacation days, he says.
How a Departing Employee Should Proceed
If you are terminated and did nothing wrong, the truth can be your ally. Finra regulations require employers to post accurate information on a U-5 and provide penalties for false information. The form must detail the circumstances surrounding the dismissal. Questions about an employee's conduct, such as whether you are under internal review, or if a complaint was issued against you, must be addressed, says Deborah Tuchman, a regulatory attorney at Skadden Arps.
Well before a defamation case begins, she says, you can work with an attorney and request a review and comment on your Form U-5. Employees can use the form to tell their side of the story and dispute the firm's claims.
If you 're terminated as part of a group of people due to circumstances such as a merger, "you want it to be noted that the termination wasn't performance related," Tuchman says. "A U-5 that says downsizing is better than one that isn't clear about the reasons that you were terminated."
An employee's main weapon if defamed is to enter arbitration before Finra. Employees can challenge statements in their U-5 as false and derogatory. Further, they can seek to show it was filed with malicious intent. (For New York-based employees, the possibility of winning damages for defamation was all but eliminated when that state's highest court ruled in 2007 in Rosenberg v.MetLife et al that employers' statements on a U-5 are absolutely privileged. However, Finra still has power to order an employer to expunge defamatory statements.)
The two recent arbitration awards reinforce both sides' interest in keeping U-5 information accurate. By demonstrating the teeth in Finra's rules for registered firms in such cases, the decisions give employers a strong incentive to engage in a meaningful dialogue with a professional on the way out the door.