Articles Posted in Employment Law

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On May 8, 2020, FINRA published an interesting AWC in which they suspended a quantitative research analyst for breaching internal policies relating to the treatment of confidential and proprietary information.  Although FINRA will aggressively pursue Reg S-P violations, in which nonpublic confidential information pertaining to a customer — such as a social security number or account number — is improperly disclosed, this AWC is somewhat unique because FINRA charged the individual with sending himself computer code seemingly unrelated to customers of the firm.

The matter at hand concerns Sune Gaulsh, FINRA Matter No. 2018058804301, an individual who was formerly employed by Barclays Capital.  According to his LinkedIn profile, Gaulsh was “part of a collaborating team within equities and research that researched and developed systematic trading strategies (volatility, global macro/CTA, L/S equity, event driven), constructed cross asset risk premia and factor portfolios, and evaluated data sets for alpha.”  Although Gaulsh voluntarily resigned from Barclays, the firm filed a Form U5 disclosing an internal investigation “to determine if the registered representative sent the firm’s proprietary business information to his personal email address.”

Underlying Conduct

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On April 21, 2020, California’s Court of Appeal, Fourth Appellate District created a significant carve-out to the absolute immunity standard previously applicable to Form U5 defamation claims in California.  The full opinion in Tilkey v. Allstate Insurance Co., Super. Ct. No. 37-2016-00015545-CU-OE-CTL (2020) is available here.  This case significantly changes the landscape for Form U5 defamation claim unless California’s highest court intervenes.  As a result of Allstate’s defamation, the trial court awarded Tilkey $2,663,137 in compensatory damages and $15,978,822 in punitive damages.

Background

Before jumping in to the facts of the case, some background on Form U5 defamation claims might be helpful.  Broker-dealers are required to file a Form U5 whenever an employee’s registration is terminated.  The Form U5 requires the firm to provide a narrative explanation of the termination if the employee was discharged or permitted to resign.  When it comes to the narrative explanation, professionals in the financial services industry frequently complain that employers “play games” by providing extraneous and gratuitous remarks or, worse yet, offering an entirely false explanation for the termination.  The consequences flowing from negative Form U5 disclosure information are severe.  In addition to reputational harm, FINRA will start a costly investigation and potential employers will shy away from a prospective employee with negative information on CRD.

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This week’s FINRA settlements report AWC’s in which FINRA hit two FAs for some misguided efforts toward good customer service.

In the Matter of Sandra Gose Stevens, FINRA Matter No. 2018058123701

Stevens was formerly registered with MML Investors Services, LLC, which terminated her in April 2018 concerning an alleged “signature irregularity.”  FINRA thereafter initiated an investigation and made the following findings in the AWC:

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Maybe it’s just me, but it feels like FINRA has ramped up its caseload for undisclosed outside business activities and unapproved private securities transactions.  This week alone, FINRA resolved two such cases in FINRA Matter No. 2018058026701, Alexander Jon James and FINRA Matter No. 2019061490801, Barry Robert Bode.  Before analyzing the cases, it’s worth re-visiting the scope of these rules:

FINRA Rule 3270 (Outside Business Activities)

The rule is designed to prevent FAs from engaging in outside business activities absent written approval from the member firm.  Generally speaking, the rule does not apply to the registered person’s personal passive investments (e.g., buying away) and activities conducted on behalf of a member firm’s affiliate (e.g., work for an affiliated investment advisory firm or insurance arm).  Examples of reportable outside business activities could include providing accounting or consulting services, working for a start-up or sitting on a board of directors, acting as a real estate broker, and serving on the board of a religious or civic organization, among other things.

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Courts call a lifetime bar “the securities industry equivalent of capital punishment.”  PAZ Sec. Inc. v. SEC, 494 F.3d 1059, 1065 (D.C. Cir. 2007).  It is a draconian measure which not only permanently removes you from the securities industry but also subjects you to “statutory disqualification” under Section 3(a)(39)(A) of the Securities Exchange Act of 1934 and all the collateral consequences that come with it.

Given the seriousness of a lifetime bar, a recently released AWC presents an alarming fact pattern in which a supervisor was barred due to the transgressions of an FA he failed to properly supervise.  Let’s consider the case of Michael Leahy, FINRA Case No. 2019063631802.  The question is, why did FINRA go after the supervisor with guns blazing?

The Applicable Rule:  FINRA Rule 3110

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This blog post looks at an interesting FINRA arbitration award issued on January 7, 2020:  Daniel Paul Motherway v. UBS Financial Services, Inc., FINRA Arbitration No. 17-02799.  This case seems to prove the old adage:  a man who is his own lawyer has a fool for a client.  Here we have an FA who proved, quite literally, that UBS defamed him, but was nonetheless ordered to stroke a check to UBS for more than $1 million.

Background Facts

On June 28, 2017, UBS fired Motherway and offered the following termination explanation on BrokerCheck:  “Financial Advisor’s employment was terminated after review concluded that he made false claims of merchant fraud on his personal credit and debit cards to an affiliate of the firm and made conflicting statement during the review.”

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FINRA published an interesting arbitration award on December 27, 2019.  In Raymond James & Associates, Inc. v. Gregory D. Clark (FINRA Case Number 18-04011), Raymond James claimed that Mr. Clark breached a settlement agreement related to the repayment of a promissory note.  Raymond James requested, and was awarded, compensatory damages of $206,000 plus interest pursuant to Florida Statutes § 55.03.  You can access the Award by clicking here.

Things get interesting when analyzing the procedural rulings of this case.

Motion to Bar Presentation of Defenses and Facts

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On December 11, 2019, a Chicago-based FINRA arbitration panel body-slammed UBS in a Form U5 defamation case (FINRA Case No. 18-02179 – Munizzi vs. UBS Financial Services Inc.).  UBS will need to cough up compensatory damages of $3,149,656, punitive damages of $7.5 million, and almost $500,000 in attorneys’ fees.  The bean counters in Zurich can’t be happy.  This case should serve as a warning to brokerage firms who play games with Form U5 disclosures.

 

The issues surrounding Form U5 disclosures are well known.  Firms are required to state a reason for an individual’s termination as either “discharged,” “other,’ permitted to resign,” “deceased,” or voluntary.”  If the reason for termination is designated as discharged, permitted to resign or other, the firm is required to provide a written explanation.  This is where things get funky, particularly where the individual contests the explanation offered-up by the firm.

 

Lawyers tend to squabble over whether a firm can be successfully sued for defamatory statements on a registration termination form (Form U5).  Brokerage firm’s argue that FINRA requires them to provide timely, complete and accurate information on Form U5 concerning the individual’s termination.  Firm’s will often cite to FINRA Regulatory Notice 10-39 [a copy can be viewed here] to support this proposition.  Thus, many firms will claim to enjoy “absolute immunity” for statements made on a Form U5 and rely upon Rosenberg v. Metlife, 8 N.Y.3d 359 (2007) (where New York’s highest court ruled that defamatory statements on a Form U5 are subject to an absolute privilege).  However, as set forth in the tables below, New York’s position on Form U5 immunity is clearly the minority view, since most states that have considered this issue provide brokerage firm’s with only qualified immunity (meaning, immunity for statements made in “good faith”):

 

MAJORITY POSITION:  QUALIFIED IMMUNITY
State Case
Arizona Wietecha v. Ameritas Life Ins. Corp., No. CIV 05-0324-PHX-SMM,  2006 WL 2772838 (D. Ariz. Sep. 27, 2006)
Connecticut Dickinson v. Merrill Lynch, 431 F. Supp. 2d 247 (D. Conn. 2006)
Florida Smith-Johnson v. Thrivent, No. 803CV2551T30EAJ, 2005 WL 1705471 (M.D. Fla. July 20, 2005)
Illinois Bavarati v. Josephthal, Lyon & Ross, 28 F.3d 704 (7th Cir. 1994)
Michigan Andrews v. Prudential, 160 F. 3d 304 (6th Cir. 1998)
Oklahoma Prudential Sec. Inc. v. Dalton, 929 F. Supp. 1411 (1996)
Tennessee Glennon v. Dean Witter, 83 F.3d 132 (6th Cir. 1996)
Texas In re Wakefield, 293 B.R. 372 (N.D. Tex. 2003)

 

 

In addition, a number of states have enacted Section 507 of the Uniform Securities Act, which specifically provides for qualified immunity (the firm can be liable for defamation if the firm knew or should have known that the statement was false, or acted in reckless disregard of the statement’s truth or falsity.

 

 

MAJORITY POSITION:  QUALIFIED IMMUNITY
State Statute
Hawaii HAW. REV. STAT. ANN. § 485A-507 (2006)
Idaho IDAHO CODE ANN. § 30-14-507 (2004)
Kansas KAN. STAT. ANN. § 17-21a507 (2005)
Maine ME. REV. STAT. ANN. 32, § 16507 (2005)
Minnesota MINN. STAT. ANN. § 80A.74 (2007)
Missouri MO. REV. STAT. § 409.5-507 (2003)
Oklahoma OKLA. STAT. ANN. 71, § 1-507 (2004)
South Carolina S.C. CODE ANN. § 35-1-507 (2006)
South Dakota S.D. CODIFIED LAWS § 47-31B-507 (2002)
U.S. Virgin Islands V.I. CODE ANN. 9, § 657 (2004)
Vermont VT. STAT. ANN. 9, § 5507 (2006)

 

In addition, the regulatory community has historically supported the proposition of qualified immunity instead of absolute immunity.  In 1997, FINRA (then NASD) even proposed a rule specifically provided only qualified immunity for Form U5 disclosure [click here to read the Notice to Members].  Additionally, in 1996, then SEC Commissioner, Isaac C. Hunt, Jr., forcefully advocated for qualified immunity [click here to read his remarks].

 

Herskovits PLLC has a nationwide practice representing individuals in the securities industry in employment and compensation disputes, including Form U5 defamation cases and Form U5 reformation cases.  Feel free to view our practice area page or call us at 212-897-5410.

Ever since it was implemented, brokers have relied on the Protocol for Broker Recruiting to be able to take some of their clients with them when they leave a firm, but a recent ruling by a state court in Georgia might jeopardize the Protocol’s protections.

The Appeals court’s ruling concluded the case against four former Aprio brokers, who failed to give 60 or 90 days’ notice before moving to Morgan Stanley, as it was established in their employment agreements.

Instead of giving Avrio a heads up, they announced they were leaving and quit on the same day. As soon as they had a foot out the door, they reached out to all their clients, in an attempt to bring them over to Morgan Stanley. Naturally, many followed, and Aprio lost a significant amount of business.

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As Merrill Lynch brokers appear to lag behind their competitors at Morgan Stanley, some FAs at the firm are probably not looking forward to seeing their paychecks this summer season.

Based on Merrill’s new compensation program, FAs who do not hit specific targets are going to endure punishment in the shape of a pay cut, compliments of the firm’s parent company, Bank of America.

There is much controversy about the management’s plans, mainly because it rewards practices like cross-selling. The fact that they are going to apply the new compensation program retroactively is not sitting well with brokers either. Actually, the FAs have referred to this particular element as a “clawback” tactic.

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