This is the second in a three-part series on broker-dealer U5 Forms. You can read Part I here.
If a broker thinks the language on a Form U5 disclosure is defamatory, they have an uphill battle, to say the least, if they want to fight it. And they will lose time and money even if they ultimately win in arbitration.
According to an examination of Finra awards, 50% of brokers who sought arbitration based on defamation in 2015 won their cases. In 2019, the percentage was 57%, the highest rate in the last seven years. In 2021, the percentage was back to 51%.
Although all the industry sources interviewed for this article expressed surprise that the percentage wasn’t higher, it’s a mystery why the win rate still gives roughly the same odds as a coin flip. That’s because the arbitration panel’s decisions are largely unexplained, especially when claims are denied. Most of the time, the language simply reads that they are “denied in their entirety.”
Every now and then the panel reminds the claimant of the definition of “defamation.” It doesn’t count if a broker-dealer simply uses harsh language in the termination form, even if that’s an obstacle to future employment. Defamation can only be found if the U5 statement and underlying facts are false. So if a broker does a favor for a client that bends the rules because the employer has a “never say no” policy, the behavior can later be used against the broker as cause for termination. It also means that under the defamation ground rules, the U5 would be true and the Finra panel would not alter its language. That’s about as verbose as a denial will get.
However, when U5 language is either partially overturned or an accusation fully expunged, occasionally a panel will give some insight into what went into the verdict, and how long it took to get there.
In one such case, a broker formerly with Odeon Capital Group was awarded more than $1 million, and granted expungement and a change in the termination language. The explanation on the U5 now reads that the broker left Odeon because “continual disagreements over compensation and job duties interfered with the employer's ability to conduct its business in a collegial and effective manner." The broker’s legal team successfully argued that, whatever happened, it was clearly not a customer-related transgression that should have given the broker a black eye on BrokerCheck. The vindication was slow to come, however, as it took from June 2014 to November 2015 before the remedy was granted.
In another case, the arbitration panel concluded that a defamatory U5 had been filed when a broker left UBS Securities to go to another firm. The broker was not alerted to the language in the U5 until he received a letter in the mail saying he was the subject of an official investigation into trading improprieties. The panel itself described the U5 as “retaliation” for the broker’s departure and recommended expungement, also recommending that a checkbox indicating the broker was under investigation for fraud should change from “Yes” to “No” and that the Internal Review Disclosure reporting page should be deleted in its entirety. The final decision was rendered in December 2015, more than two years after the September 2013 initial complaint.
And it took a full year for an arbitrator to determine that 11 complaints against another UBS broker were false. “It is far from clear how or why these customer claims were reported on [the claimant’s] CRD record, excepting, for the most part, confusion caused by various interoffice ‘team’ cross-coverage arrangements between [the claimant] and other financial advisors at the same branch office,” the arbitrator wrote in 2021.
In all these cases, the firms fought the brokers’ claims tooth and nail, sometimes over several years and while investing a lot of resources, despite having access to the same facts that the Finra panel ultimately had. If the truth of the matter ended up obvious to the panel, it seems to raise the question of why the firms didn’t just retract their U5 statements earlier in the process.