Slander / Libel

Slander and libel are two claims made by stockbrokers against their employer, the brokerage firm. They have nothing to do with investor claims. Another legal term that encompasses both of these claims is defamation. The easiest way to distinguish them is to remember that the “S” that begins “slander” is for “speaking”. Slander is when one says something to one or more people that is untrue and harms that person’s reputation.

Libel, on the other hand, is the same crime as slander except the untruth appears in a written or published statement. In brokerage industry parlance, the U-5 is where most stockbroker libel claims originate. The U-5 is a regulatory document on which brokerage firms are required to report the reasons for a broker’s termination from the firm. This regulatory document is viewable by future employers - other brokerage firms where the stockbroker may seek to find work. If the statement put on the U-5 is false or misleading, oftentimes, the damages to the stockbroker’s livelihood and reputation can be huge. In fact, some of the largest arbitration awards are in defamation cases brought by stockbrokers against their brokerage firms.

The Form U-5 requires a brokerage firm to select one of the five reasons when a stockbroker departs employment at a brokerage firm:

1. Voluntary
2. Deceased
3. Permitted to Resign
4. Discharged
5. Other

The firm must provide an explanation if it chooses one of the last three reasons. The first thing that any brokerage firm does when considering a prospective stockbroker for employment, other than examining how big a book of business he has, is to check why he left his previous firm. It is easy to see how a stockbroker’s career could be derailed by untrue or misleading comments on the Form U-5. Damages in defamation cases can be extremely large because of the inability of the stockbroker to find employment.

What is the incentive of a brokerage firm to publish something false or misleading about a departing broker? One reason could be to create a scapegoat in the event of a regulatory investigation. That’s what happened in a December 20, 2016 arbitration award against Southwest Securities. The firm reported on the broker’ U-5 that she had been terminated because she did not cooperate with an audit by the state regulator. The arbitration panel found that the broker was wrongfully fired and defamed in the firm was ordered to amend the U-5 two state that the broker was “a productive employee with an unblemished employment record.

In August, 2016, Morgan Stanley sued a departing broker for the remaining balance on the promissory note. The broker counterclaimed against the firm, claiming that the firm defamed him in telephone calls to his clients. Oftentimes, a counterclaim is designed as a strategy to offset the promissory note claim. In this case, however, the broker won $1.12 million on his counterclaim, over $726,000 in attorney’s fees, over $90,000 in costs and $500,000 in punitive damages. The case was arbitrated for 21 days. The arbitration panel wrote, “Communications with Respondent’s customers conducted in at least a grossly negligent manner (if not with a self-serving, malicious motive) by one or more managers and/or authorized representatives of Claimant MSSB regarding Respondent and his departure from Claimant MSSB that defamed or were intended to defame the Respondent in the minds of his customers

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