made on a Form U-5 are cloaked with absolutely immunity and that, in any
case, the statements were truthful, which constitutes a complete defense
to a defamation claim.
1. Form U-5 Immunity
118] The issue of qualified versus absolute immunity for statements made
on an employee's Form U-5 is a hotly contested issue in the securities
industry. See Zamansky Aff., Ex. C (Evan J. Charkes, "Qualified Privilege
for the Form U-5,", N.Y.L.J., March 19, 1998 at 1). The NASD requires
stock brokerage firms to file a Form U-5 when an employee is terminated.
Fahnestock & Co. v. Waltman, 935 F.2d 512, 514 (2d Cir. 1991). The form
is designed to protect a new firm and its customers from hiring a person
who has exhibited a disregard for industry regulations or policies at the
former firm. Pet.'s Mem. Law at 4. However, derogatory or false Form U-5
statements can effectively "blackball" a broker from the industry. See
Zamansky Aff., Ex. B (Michael Siconolfi, "`Blackballing' of Brokers is
Growing on Wall Street, "Wall St. J., February 27, 1998 at C1 ("Wall
Street firms seem to have found a new weapon in battling brokers and
branch managers who ruffle feathers: termination notices.")).
In recent years, courts have overwhelmingly granted Form U-5 statements
qualified, rather than absolute, immunity.*fn8 Qualified immunity serves
the industry purpose while protecting the interests of the employee.
Recently, the Seventh Circuit concluded that "wiser policy leads to the
conclusion that a qualified privilege adequately protects the interests
of all parties concerned."*fn9 Dawson v. New York Life Insurance Co.,
135 F.3d 1158, 1164 (7th Cir. 1998). Under a qualified immunity
standard, the employee has the opportunity to dissolve the immunity if
she can demonstrate that the former employer spoke with malice. See
Liberman v. Gelstein, 80 N.Y.2d 429, 437, 590 N.Y.S.2d 857, 605 N.E.2d 344
(1992). If malice is shown, the defamation action may proceed.
Against this backdrop, the parties in the instant action presented the
Arbitration Panel with conflicting legal precedents in New York.*fn10
Respondents argued that it is well settled New York law that statements
on a Form U-5 enjoy absolute immunity, citing Herzfeld & Stern, Inc. v.
Beck, 175 A.D.2d 689, 572 N.Y.S.2d 683 (1st Dept. 1991), appeal
dismissed, 79 N.Y.2d 914, 581 N.Y.S.2d 666, 590 N.E.2d 251 (1992) and
Culver v. Merrill Lynch & Co., No. 94 Civ. 8124 (LBS), 1995 WL 422203
(S.D.N Y 1995) (finding statements on Form U-5 are absolutely immune from
liability under New York law and dismissing diversity
defamation suit).*fn11 Thus, argued Respondents in their Memorandum of
Law to the Arbitration Panel, Petitioner's defamation claim was
substantively barred. Am. Cross-Petition to Vacate, Ex. X. at 3.
Conversely, Petitioner pointed to Second Circuit law interpreting New
York law and reaching the opposite conclusion. The Second Circuit ruled
in Fahnestock & Co. v. Waltman that statements on the Form U-5 enjoyed
only qualified immunity and could be "vitiated upon a showing that the
communication was made with actual malice." 935 F.2d 512, 516 (2d Cir.
1991) (upholding an arbitration award for U-5 defamation). The Second
Circuit also noted with approval that the arbitrators in the original
proceeding had "declined to extend the doctrine of absolute immunity" to
statements made on the Form U-5. Id. Thus, argued Petitioner, a
defamation claim could stand assuming the Panel made a finding of malice
to destroy the qualified immunity defense.
Respondents insist that the absolute immunity standard articulated in
Herzfeld, decided fewer than two months after Fahnestock, is controlling
law in New York and was binding on the arbitrators. Respondents clearly
made the Arbitrators aware of the Herzfeld decision but apparently did
not address the applicability of Herzfeld given the conflicting Second
Circuit case.*fn12 It is evident, by the Panel's defamation awards, that
the Panel did not find Herzfeld controlling.
Nor does this Court agree that a single New York Appellate Division
ruling is necessarily controlling over a Second Circuit Court of Appeals
decision interpreting New York law. See Pahuta v. Massey-Ferguson, Inc.,
170 F.3d 125, 134 (2d Cir. 1999) (requiring federal courts to apply
intermediate appellate court rulings absent persuasive evidence to
suggest that the New York Court of Appeals would reach a different
conclusion). Given the general controversy and weight of conflicting case
law, there is ample evidence to suggest that New York's highest court may
some day reach a different conclusion on Form U-5 immunity. However,
there is no need for this Court to make an independent legal conclusion
on the substantive law.
The limited purpose of this motion is to determine whether the
arbitration award will be set aside for manifest disregard of the law. An
award will be vacated only where a court determines the panel clearly
knew of and ignored a governing legal principle, which was "well
defined, explicit, and clearly applicable to the case." Halligan,
148 F.3d 197, 202 (internal citations omitted). Given the conflicting
case law from the Second Circuit and elsewhere, coupled with the failure
to brief the arbitrators on the complex choice of law issues, the Court
concludes that the Herzfeld rule was not a "governing legal principle"
within the meaning of the manifest disregard doctrine. See Merrill
Lynch, Pierce, Fenner & Smith, Inc. v. Bobker, 808 F.2d 930, 934 (2d
Cir. 1986) ("We are not at liberty to set aside an arbitration panel's
because of an arguable difference regarding the meaning or applicability
of laws urged upon it"). See also Park v. First Union Brokerage,
926 F. Supp. 1085, 1089 (M.D.Fla. 1996) (finding that when an arbitration
award is challenged for manifest disregard of state law, the mere fact
that two inferior courts decided the issue in opposite ways "totally
vitiates any potential `manifest disregard' or `wholesale departure' from
For the same reasons, the Court concludes that the Herzfeld rule is not
"well defined, explicit, and clearly applicable to the case," such that
the arbitration award must be vacated for manifest disregard of the law.
Halligan, 148 F.3d at 202. Manifest disregard of the law requires that
the error be "obvious and capable of being readily and instantly
perceived by the average person qualified to serve as an arbitrator."
Merrill Lynch, 808 F.2d at 933. The complex issues raised by the
conflicting legal sources and controversial debate over U-5 defamation
make the Arbitrators' error, if any, far from obvious.
Under Fahnestock's qualified immunity standard, a Form U-5 defamation
claim can only be granted upon a finding that the statements were made
with malice. 935 F.2d 512, 516. See also, Liberman v. Gelstein,
80 N.Y.2d 429, 437, 590 N.Y.S.2d 857, 605 N.E.2d 344 (1992) ("The shield
provided by a qualified privilege may be dissolved if plaintiff can
demonstrate that defendant spoke with `malice'"). Accordingly, the Panel
made an explicit finding that Respondents acted with malice. (Petition to
Confirm, Ex. A at 4).
Before this Court, Respondents first argue that the Panel's finding of
malice must be overturned because there was not enough evidence to
support such a finding. However, the Arbitration Panel's finding of
malice is a question of fact, unreviewable on a motion to vacate absent
clear error. See Fahnestock & Co., Inc. v. Waltman, No. 90 Civ. 1792,
1990 WL 124354 (S.D.N.Y. Aug. 23, 1990), aff'd 935 F.2d 512 (2d Cir.
1991); ConnTech, 102 F.3d 677, 686.
Alternatively, Respondents argue that no malice could be found if, as
Respondents assert, Petitioner was discharged for cause. For the reasons
previously stated, this argument must fail. Considering the testimony
presented to the Panel, the Panel's finding of malice was not clear
Finally, Respondents argue that the defamation awards should be
overturned because the statements made on the Form U-5 were substantially
true. Resp.'s Mem. Law. at 21. Respondents contend that "substantial
truth" is an absolute defense to a claim of libel. See Masson v. New
Yorker Magazine, 501 U.S. 496, 111 S.Ct. 2419, 115 L.Ed.2d 447 (1991).
The Court notes that the amendments ordered by the Arbitration Panel
were significant. The new Form U-5 as amended would state only that
Acciardo was terminated for "failure to perform duties" and that he was
the subject of a consumer-initiated complaint. The Panel ordered
Respondents to excise an allegation that Acciardo failed to perform his
supervisory duties. The Panel also ordered deletion of a statement that
Acciardo was under an internal investigation for fraud, wrongful taking
of property, or regulatory violations. based on the amendments ordered by
the Panel, it is clear that the Panel did not find the statements on the
original Form U-5 to be substantially true. Thus, the Panel did not act
in manifest disregard of the law in awarding damages based on the
The Court finds the Panel's application of a qualified immunity
standard and award of damages for defamation were not made in manifest
disregard of applicable law.
D. The Punitive Damages Award
Making a specific finding that Respondents acted with malice, the
Arbitration Panel awarded Acciardo $100,000 in punitive damages with post
judgment interest of seven (7) percent per annum. The Panel held
Respondents Millennium, Rome, and Sitomer jointly and severally liable
for the full $100,000 punitive award and Respondent Rockley jointly
liable for $5,000 of punitive damages.
Respondents argue by supplemental letter brief that, even if a
defamation award is permissible, the punitive damages award granted by
the Panel is excessive and overly burdensome under the circumstances.
Respondents point to the lack of proportionality between the compensatory
and punitive awards and to the alleged failure of the Arbitration Panel
to consider Respondents' ability to pay in support of their Motion to
Vacate the punitive damages award.
The Panel clearly had authority to grant punitive damages. See
Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 115 S.Ct.
1212, 131 L.Ed.2d 76 (1995). Respondents contend that the Arbitration
Panel acted in manifest disregard of the law because the punitive damages
award was excessive. The Supreme Court has identified three "guideposts"
to assist in assessing the validity of a punitive damages award: (1) the
degree of reprehensability of the defendant's conduct; (2) the ratio of
punitive damages to compensatory damages; and (3) a comparison of the
civil penalty to the comparable criminal penalties available. BMW of
North America, Inc. v. Gore, 517 U.S. 559, 575-85, 116 S.Ct. 1589, 134
L.Ed.2d 809 (1996).
Respondents' principal argument is that the award violates due process
because the ratio between punitive and compensatory damages renders it
excessive. Pickholz Ltr., Jan. 3, 2000 (citing BMW). The Arbitration
Panel granted $100,000 in punitive and $5,000 in compensatory damages,
this is effectively a 20 to 1 ratio. As the Supreme Court cautioned in
BMW, "we have consistently rejected the notion that the constitutional
line is marked by a simple mathematical formula." 517 U.S. at 582, 116
S.Ct. 1589 (internal quotations omitted). The Court declines to apply
such a rigid rule here. This is especially true given the relatively
small compensatory award. See id. ("Indeed, low awards of compensatory
damages may properly support a higher ratio than high compensatory
The Panel heard testimony suggesting that Respondents had engaged in
repeated, malicious and vindictive misuse of its employees' U-5 Forms.
The behavior is reminiscent of the "blackballing" complained of by some
in the securities industry. See supra. The Panel made a specific finding
of malice and was within its authority in granting a $100,000 punitive
Finally, Respondents suggest that the Panel acted in manifest disregard
of the law by failing to ascertain their ability to pay before imposing
punitive damages. The Court notes that, although they have long had notice
of the $100,000 award, Respondents raised this argument for the first
time in their letter brief of January 3, 2000. This suggests that the
argument may be disingenuous. In addition, Respondents offered no
verification of their inability to pay.
It is true that the financial standing of the defendant, should be
considered before imposing punitive damages. TXO Production Corp. v.
Alliance Resources Corp., 509 U.S. 443, 463, 113 S.Ct. 2711, 125 L.Ed.2d
366 (1993). Arbitrators have also been encouraged to consider the ability
to pay in making large punitive awards. See, e.g., Daily News, L.P. v.
Newspaper & Mail Delivers' Union of New York, No. 99 Civ. 5165 (TPG),
1999 WL 1095613 (S.D.N Y Dec. 2, 1999) (remanding to arbitrators to
determine newspaper's ability to pay $3.5 million in wage increases). On
the record before this Court, it is not clear whether the Arbitrators
ability to pay when awarding punitive damages. However, even if the Panel
did ignore Respondents' financial standing, the Panel's joint and several
award of $100,000 against three securities industry professionals and a
securities business, if error, was not so obvious or egregious as to
require overturning the award.
The Court has considered Respondents' other arguments and finds them to
be without merit.
For the reasons stated above, the Court GRANTS Petitioner-Respondent
Acciardo's Petition for Confirmation of Arbitration.
Respondent-Cross-Petitioners' Cross-Petition to Vacate is DENIED in its