U-5 Notices Get Absolute Privilege

The court said, in the 4-2 opinion in the case Rosenberg v. MetLife written by Judge Victoria Graffeo, that the U-5 notices detailing the reasons for termination – which are available to regulators and potential employers – have absolute privilege, rather than qualified privilege, because they can be the first step in formal disciplinary charges in NASD’s quasi-judicial process of punishing securities dealers.

According to the New York Law Journal, an absolute privilege protects a securities firm from liability for a defamation claim regardless of motive, whereas a qualified privilege is more limited and may be vitiated upon a showing of actual malice, which may include recklessness or negligence

“The form is designed to alert the NASD to potential misconduct and, in turn, enable the NASD to investigate, sanction and deter misconduct by its registered representatives,’ Graffeo wrote. She went on to say that the U-5 forms pose a threat to the public, which “faces the potential for substantial harm if exposed to unethical brokers.’

Former MetLife Inc. employee Chaskie Rosenberg, along with others in the firm’s All-Boro agency, were involved in efforts to market products to members of the Hasidic population in Brooklyn, New York. MetLife closed that agency in 2000 after two audits revealed it was accepting checks from third-parties for the payment of life insurance premiums, which can mean that brokers are involved in the “speculative insurance’ or money laundering.

Rosenberg was reassigned after the All-Boro agency was closed, but was later terminated after another audit found he had “appeared to have violated company policies and procedures involving speculative insurance sales and possible accessory to money-laundering violations.”

Following his termination, Rosenberg sued MetLife over claims of misrepresentation and libel, but Southern District of New York Judge Jed Rakoff dismissed his claim, at which point Rosenberg brought his case to the appeals court.

The appeals court deemed the U-5 notices as having absolute privilege, but Judge Eugene Pigott Jr. filed a dissenting opinion and disputed the fact that U-5 notices can be used as the “first step’ in a quasi-judicial proceeding against a securities industry employee.

“Because the Form U-5 is not a part of any judicial process, and given the serious potential damage to an employee’s reputation and business prospects, any communication associated with the Form is amply protected by a qualified rather than an absolute privilege,” Pigott wrote.