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.
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.