In California, it has long been the case that what a brokerage firm puts on your U5 is protected by “absolute privilege,” making it hard for you to get your record expunged out there.
But California’s Fourth District Court of Appeals recently decided that a firm’s FINRA Form U5 disclosures providing the reason for an employee’s termination was not protected by absolute privilege, because it did not limit its U5 entries to securities-related information.
This decision could lead to more Form U5 defamation claims in California as former employees of FINRA member broker-dealers challenge U5 entries involving non-securities related information, as such would fall outside of the scope of FINRA’s oversight.
Michael Tilkey was a FINRA-licensed agent with Allstate Insurance Co. As reported by the court, Tilkey got into an argument with his girlfriend in Arizona and was arrested for possession of drug paraphernalia and disorderly conduct. The disorderly conduct charge involved accusations of domestic violence. Tilkey pleaded guilty only to the disorderly conduct charge. After he completed a domestic non-violence diversion program, the disorderly conduct charge was dismissed.
Prior to that dismissal, Allstate terminated his employment due to his arrest for a domestic violence offense. The company said it was discharging him for threatening behavior and/or acts of physical harm or violence to another person.
Allstate then put the following on Tilkey’s U5 “Termination of employment by parent property and casualty insurance company after allegations of engaging in behaviors that are in violation of company policy, specifically, engaging in threatening behavior and/or acts of physical harm or violence to any person, regardless of whether he/she is employed by Allstate. Not securities related.”
Tilkey sued Allstate in the Superior Court of San Diego County, California for wrongful termination in violation of California Labor Code Section 432.7 and defamation based on this U5 language.
The jury in that case returned a verdict in Tilkey’s favor on all causes of action, awarding him over $2.5 million in compensatory and over $15 million in punitive damages.
Allstate appealed the verdict to California’s Fourth District Court of Appeal. In its April 21, 2020 decision, the Court of Appeal reversed the wrongful termination verdict, finding that Allstate had not violated Labor Code Section 432.7 by firing Tilkey. But the court upheld the verdict on the defamation claim, determining that substantial evidence existed to support the verdict that the U5 statement was not substantially true.
The court dismissed Allstate’s argument that the Form U5 disclosures were protected by absolute privilege. Allstate had argued that because FINRA required it to provide information regarding Tilkey’s termination on the U5, the statements were protected as privileged.
The court found that the privilege did not apply because Allstate had not limited the U5 disclosures to securities-related information. Under Section 7 of the Form U5, employers are required to provide disclosures based on a limited list of circumstances regarding the reason for the employee’s termination, including the employee being convicted of or pleading guilty to a crime “related to investments, fraud, false statements, bribery, perjury, forgery, counterfeiting, extortion, or wrongful taking of property.”
The court also noted that, “These questions make clear that FINRA seeks termination information that allows it to assess whether the employee’s conduct lacked compliance with regulatory requirements in the securities arena. FINRA does not ask for information about non-securities-related activities because that information falls outside its scope of regulation.”
The court also said that, “the absolute privilege extends to communications required by FINRA, i.e., fraud- and securities-related information. However, the communication of Tilkey’s termination here did not regard improper securities-related conduct, and Allstate did not limit its responses to fraud- and securities-related information.” The U5 statement “did not contain allegations of improper securities conduct, theft, or allegations or charges of fraud or dishonesty. It was not offered in anticipation of or to initiate an investigation; nor was it offered in the course of any other official proceeding. Thus, the absolute privilege does not apply.”
The court went on to say in a footnote that, “Had Allstate instead eliminated the specifics in its statement, privilege may have attached because Allstate was required to report the termination. For example, it could have supplied the following statement: ‘Termination of employment by parent property and casualty insurance company after allegations of engaging in behaviors that are in violation of company policy. Not securities related.’”
If U5 disclosures do not provide specific information about termination decisions that is specifically requested by FINRA such as whether the employee violated investment-related laws or regulations, such information may now be challenged by former employees in California as falling outside the scope of FINRA’s regulation.
Such challenges could be mounted in other states as well, and such may become a trend. Keep in mind, few states other than California ever considered language placed on a broker’s U5 to be “absolutely privileged.”
If you would like more guidance either on completing Form U5s in a way that keeps your firm in compliance and to avoid litigation, or you need to challenge language placed on your U5, contact the Law Offices of Christopher H. Tovar, PLLC.
