Employer Required to Pay $29 Million for Defamatory Regulatory Filings
A Pennsylvania jury recently awarded $29 million to three securities industry professionals who alleged their former employer defamed them in regulatory filings. Constantakis v. Bryan Advisory Services LLC, No. GD-21-001965 (Court of Common Pleas of Allegheny County).
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The dispute arose from certain statements made on form U-5—a form that a broker/dealer must file with FINRA when a registered representative leaves their employment. Form U-5s themselves are not public, but they are available to prospective industry employers. Additionally, many of the statements on form U-5 are republished by FINRA through an online platform. The employees argued that certain of these statements were defamatory. The jury agreed.
Although U-5 litigation is common, it is subject to mandatory arbitration. This case offered Pennsylvania courts a rare opportunity to review the extent to which an employer is entitled to assert a privilege for statements on a form U-5, specifically, whether an employer is entitled to an absolute privilege, making it immune from litigation for false statements, or a conditional privilege, protecting employers from only certain false statements—typically, those that are made in good faith or with reasonable care.
Courts created these privileges to permit employers to make disclosures to regulators without fear of litigation. The intention is to ensure regulators and the public receive the information they need to make informed decisions. However, the courts have to balance this benefit against the potential for employers to weaponize regulatory filings against their former employees. Courts in some states, such as California, Colorado, Massachusetts and New York, have provided employers with an absolute privilege to make statements on a Form U-5 without fear of a damages award. In Constantakis, the Pennsylvania lower court rejected an absolute privilege in favor of a conditional privilege—employers can be held liable if they knowingly or negligently make false statements.
Pennsylvania employers should, therefore, take care to ensure that statements made on regulatory filings that are critical of others—particularly statements regarding former employees on a form U-5—are made in good faith and with reasonable care.
Our attorneys are experienced with U-5 litigation and are happy to answer any questions that may arise. Please feel free to contact Matthew J. McDonald at mmcdonald@klehr.com with any questions.
Co-authors Matthew J. McDonald, partner, and Michael Paul Bannon, associate, are members of the labor & employment practice at Klehr Harrison.