Punitive damage awards in arbitration are rare. I was able to obtain one against a major brokerage firm years ago for a disabled investor, but they don’t happen often. However, last year a FINRA arbitration panel ordered UBS to pay $7.5 million in punitive damages to a compliance officer who claimed he was defamed when the firm terminated him. The arbitration panel also award him $3.1 million in compensatory damages, almost $497,000 in attorneys’ fees. It also required UBS to pay all but $800 of the $30,000 of hearing and prehearing session fees,
UBS moved to vacate the award, and the court denied that request, leaving the 11 million dollar award in place. AdvisorHub is reporting that UBS has appealed that decision, but if UBS loses that appeal, it will have 30 days to pay the award, or FINRA will suspend its broker-dealer license.
Defamation claims in the securities industry are difficult, and depending on the state where the employee worked, nearly impossible. Think about New York, where the highest court ruled that firms have absolute immunity in their U-5 filings – absolute, not simply conditional. Absolute, as in you can’t sue them for a defamatory filing.
While that is not 100% true, and knowledgeable attorneys have filed successful claims in New York for false U5 filings, the point is – it is not easy.
And that is true in most jurisdictions. Forms U4 and U5 are government required filings, and one of the requirements of Form U-5 is to state the reason that a broker’s employment was terminated. Most times there is no issue, as the broker resigned. The situation gets dicey when the broker is fired since the firm is between a rock and a hard place – its obligation to be truthful to the regulators, and being sure not to defame the broker.
The Arbitration Award
Most firms meet those obligations without controversy, but in this case, something clearly went wrong. FINRA arbitrators are not required to give a reason for their award, but a careful reading of the award tells its own story:
- $3,149,656 in compensatory damages, the EXACT amount the Claimant asked for.
- $112,500 in interest on the compensatory damages, the EXACT amount the Claimant asked for;
- $7,500,000 in punitive damages
- $496,753.36 in attorneys fees pursuant to the state wage payment act,
- Plus assessing the $30,000 of the $30,800 in hearing costs to UBS and ordering the expungement of the “Yes” answers on Form U5.
The Award doesn’t provide any details of the claim, but UBS’ motion to vacate the award provides some insight. The termination reason on Form U-5 stated terminated “after firm review determined that (1) he failed to adequately supervise employees in association with the risks of an
uncovered options strategy in employee and employee related accounts and (2) gave varied responses during the review.”
Problem: “Enhancing” the Termination Reason
I was not involved in the case, nor do I know anything about the case other than what is in the public filings. But I have represented dozens of brokers and compliance professionals in employment disputes against every major brokerage firm. For some reason, firms have this desire to add an allegation that the employee lied to the firm as a reason for termination. In their court papers, UBS did exactly that, labeling the employee’s conduct as an attempt to conceal the truth and that he presented a “shifting” story during the internal investigation.
Even in UBS’ court papers the evidence of “varied responses” could reasonably be viewed as a failure to recall specific details of events that happened during the course of a day weeks later and even a month later, when interviewed by the firm. The documents do not state this, but my best guess is that the employee was called into a meeting, without notice, not told what the purpose of the meeting was, was not permitted to have an attorney present and was pressed for answers to very specific questions without his notes or files.
When he is later able to review his files he remembers facts that he did not recall during the interview, and so advises the interviewer. UBS called this concealment and a shifting story, and having been involved in similar cases, I imagine that UBS did all it could do to establish that the employee attempted to conceal the truth.
Keep in mind that the employee is a supervisor. He did not place the trades, he is was accused on not supervising the trades and of not advising the customers of the risks involved. That is, at worst, negligence, and a grounds for termination. Not good grounds, but enough to support a termination for cause.
But UBS, and other firms, are not satisfied with that, they want to make sure the termination sticks, so they add allegations that the employee attempted to conceal his negligent conduct.
Problem is, that makes him unhireable anywhere else. The negligence is bad enough.
And apparently the arbitrators saw the conduct for what it was, and it cost UBS 11 million dollars.
Mark Astarita is a national securities attorney who represents financial professionals across the country in employment disputes. He has represented employees against every major broker-dealer. For a free consultation, call 212-509-6544 or email him at email@example.com