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Andrews v. Prudential Securities, Inc.

    Brief Fact Summary. A brokerage firm, Prudential Securities, Inc. (Prudential) (Defendant), was accused of amending forms to be filed with the National Association of Securities Dealers (NASD) by Andrews (Plaintiff), Meehan (Plaintiff), and Stout (Plaintiff), all former broker-employees (Plaintiff), claiming the forms were amended in a way that was defamatory towards them.

    Synopsis of Rule of Law. A complete defense to purportedly defamatory statements made in a Uniform Notice of Termination for Securities Industry Registration (Form U-5) is truth. Form U-5 is to be filed with the NASD by brokerage firms that believe they have information involving past employees that needs to be disclosed on said form. 

    Facts. The Securities Exchange Commission (SEC) filed suit against Prudential, a brokerage firm, for misconduct in connection with the sale of limited partnership interests, where Andrews, Meehan and Stout were brokers.  A Uniform Notice of Termination for Securities Industry Registration (Form U-5) is required by NASD to be filed whenever a firm ends a broker’s employment with them. Firms are also required to file an amended Form U-5 once a broker leaves if it is knowledgeable about circumstances or facts that would require an affirmative answer to line 13 of the form. A settlement between Prudential and the SEC consummated in a claims resolution process during which many of Prudential’s customers filed claims listing Andrews, Meehan and Stout as brokers for the buying of the limited partnerships, even after no longer a Prudential employee. Every claim was being settled for various amounts in excess of $5000. Prudential filed amended U-5 forms for Andrews, Meehan, and Stout that detailed the settlement amounts, customer complaints, and out-of-pocket losses.  Andrews, Meehan, and Stout, in response to the filing of the amended U-5 forms, filed a complaint against Prudential asserting, inter alia, defamation. Prudential’s motion for summary judgment is granted by the district court, finding that the U-5 forms were protected by a qualified privilege that could only fail upon demonstration of actual malice, and that there was no evidence offered by the plaintiffs as to actual malice.  On the other hand, it was also held by the district court that because the U-5 forms included only true statements (and an absolute defense to defamation is truth), the defamation claims could not be maintained. The court of appeals granted review.

    Issue. Is a complete defense to purportedly defamatory statements made in a Uniform Notice of Termination for Securities Industry Registration (Form U-5), to be filed with the NASD by brokerage firms that believe they have information involving past employees that needs to be disclosed on said form, is truth?

    Held. (Kennedy, J.) Yes. A complete defense to purportedly defamatory statements made in a Uniform Notice of Termination for Securities Industry Registration (Form U-5) is truth. Form U-5 is to be filed with the NASD by brokerage firms that believe they have information involving past employees that needs to be disclosed on said form. A plaintiff must prove four components to maintain a defamation action under state law: (1) a defamatory and false statement regarding the plaintiff; (2) fault equaling at least negligence on the publisher’s behalf; (3) an underprivileged publication to a third party; (4) defamation per se or special harm caused by the publication. A complete defense to defamation is truth and in this case, Andrews, Meehan and Stout failed to offer evidence that the U-5 forms that Prudential submitted were false. They failed to contest that they were brokers of record when the limited partnerships were bought; failed to contest that the stated allegations were made by their customers; nor did they allege that the amounts of actual losses or settlements were incorrect, so no defamatory statement was ever spoken and no statement included in any of the U-5 forms was false.So, the granting of summary judgement to Prudential by the district court was correct. The plaintiff’s argument that Prudential defamed them by indicating that their allegations were consumer-initiated complaints (the idea that the allegations were made not by consumers, but as a result of Prudential’s solicitation) was also rejected. A constricted interpretation like “consumer-initiated complaint†is unnecessary, seeing that many of the consumer claims included information that the brokers may have participated in misrepresentation and the NASD’s purpose of the U-5 form-filing rule by enlightening NASD of behavior it is made aware of was furthered by Prudential. Following the SEC investigation and general solicitation by Prudential made the complaints no less consumer-initiated; so Prudential (the NASD member here) needed to report a broker whom had a complaint filed against him, regardless that the complaint was also against the brokerage firm and was created to respond to solicitation caused by litigation against the brokerage firm. The process by which Prudential was made aware of the plaintiff’s conduct was explained in the U-5 so Prudential  could answer in the affirmative to Item 13 without being deceitful, and the plaintiffs could not show that the forms statements were false. Affirmed.

    Discussion. Currently, there is no state with an absolute immunity provision for statements made on Form U-5 in its securities statute; however, as witnessed here, no state has rejected immunity in this context by judicial decision (it is of note that several states have adopted qualified immunity by judicial decision).  Agents who have been the subject of a U-5 form are permitted response to adverse statements therein with their responses reported in the Form U-5.



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