Defamation is More Damaging than Discrimination

We spend a lot of time with clients getting employment terminations right.  The goal is to avoid employer liability while allowing the employee a dignified exit.  But an employer’s defamatory remarks after an employee is fired can subject that employer to much greater liability than a wrongful discharge or discrimination case.

On November 19, 2021, the Appellate Court for the First District of Illinois upheld an $11 million arbitration award granted to Mark Munizzi, a former UBS Financial Service, Inc. (“UBS”) employee who has been embroiled in a three-and-a-half-year legal battle with his former employer for defamatory disclosures made by UBS in a Form U5.

What Defamatory Remarks Were Made in The Munizzi Case?

Munizzi, a FINRA registered broker and financial advisor, was hired by UBS in 2003. Munizzi’s responsibilities included overseeing the securities brokerage managers—who supervise financial advisors and accounts in the Chicago market. In 2018, two of UBS’ accounts holding options suffered unsecured losses of $700,000 and $800,000, which were made worse the next trading day when the market plummeted 1,000 points and those losses ballooned to more than $3 million. Following an investigation into the losses, UBS terminated Munizzi and in accordance with the law, UBS filed a Form U5 disclosing the termination. On the Form U5, UBS falsely stated Munizzi was terminated because he had “failed to adequately supervise employees in association with the risks of an uncovered options strategy” and “gave varied responses during the review”.

Munizzi subsequently filed a Statement of Claim with FINRA alleging claims of defamation per se, violation of the Illinois Wage Payment and Collection Act, and tortious interference with prospective economic advantage against UBS. Because the BrokerCheck database is widely used for employers to vet job applicants, Munizzi alleged he had been “permanently injured by the company’s false and inaccurate reasons for termination” and that UBS had injured him “knowingly and with reckless disregard for [his] wellbeing and future ability to find employment.”

Damages in Defamation Cases are Large

The FINRA Office of Dispute Resolution found UBS’s statements were false, and that UBS was liable for $3,149,656 in compensatory damages, plus interest on the portion that represented Munizzi’s severance pay; $7.5 million in punitive damages; $496,753.36 in attorney fees; and $24,381.50 in costs. UBS appealed the decision seeking to vacate or modify the award based on public policy which “strongly favors the protection of the public through the disclosure of information concerning negligent and dishonest securities professionals” and argued that the staggeringly high penalty would disincentivize “financial firms from providing clear, accurate and comprehensive Form U5 disclosures.” The Appellate Court rejected this argument and confirmed the award, finding that “the arbitration panel found that UBS made false statements about Mr. Munizzi.… There is no public policy favoring false or defamatory disclosures by employers” and further stated that “[p]unitive damages are available under Illinois law upon proof of actual malice.”

Calculate the ROI Before You Say Something “Sharp” About a Former Employee

Employers in the financial services industry sometimes use Form U5 disclosures as a competitive tool by disclosing misleading or even false information to interfere with a former employee’s future job prospects or to scare clients into not following advisors to new firms. However, courts are cracking down on this sort of behavior. According to FINRA’s statistics on dispute resolution,  Form U5 defamation cases are on the rise, with a reported 24% increase from 2019 to 2020 and FINRA arbitration panels have begun to issue substantial awards in such cases, including awards of punitive damages.

Employer Takeaways

The Munizzi case is a cautionary tale to employers; there is a difference between a frank disclosure and a harmful exaggeration or lie.  Employers who are legally required to report the reasons for an employment termination should implement proactive measures for accurate, but prudent filings that satisfy FINRA’s requirements and minimize the likelihood of defamation lawsuits for Form U5 filings.

Such measures include conducting thorough and well documented investigations into any misconduct cited on a Form U5 and limiting disclosures to succinct facts. Employers should consider having Form U5s reviewed by their legal representatives to ensure compliance with regulatory requirements and to avoid problematic language.

For the majority of the rest of our clients who are not required to report the reasons for an employee’s termination, “silence is golden.”