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The New York Appellate Division, 1st Department, is sticking to its guns that broker-dealers are entitled to the broadest possible immunity for the statements they make in required U-5 forms about why their employees departed, even though in recent years several federal courts have ruled that broker-dealers enjoy only a limited form of immunity. Writing for a 3-2 majority, Justice David B. Saxe said the policy reasons that justified the court’s 1991 ruling that broker-dealers are entitled to absolute immunity from damages for any statements they make in the U-5 forms apply with equal force today. But in dissent, Justice Betty Weinberg Ellerin, citing recent developments in case law, wrote that the time has come to limit broker-dealers to qualified immunity so that maligned employees have legal redress. Justices John T. Buckley and George D. Marlow provided Justice Saxe with a majority. Justice Milton L. Williams joined the dissent. Federal law (18 USC �78f) requires broker-dealers registered with either the New York Stock Exchange or the National Association of Securities Dealers to fill out a U-5 form each time an employee departs. The forms, which are kept on file at a central repository maintained by the securities industry, are designed to alert customers and future employees that a broker may have violated industry standards. Absolute immunity bars a defamation action arising out of statements made in a U-5, while qualified immunity would allow recovery where a plaintiff could show that the employer acted with malice in making a defamatory statement. The majority’s ruling rebuffed Kethe Cicconi, who sued his employer for defamation over a statement it made on the form after he left the brokerage. Cicconi’s employer, McGinn, Smith & Co., had stated on the U-5, which was filed with the National Association of Securities Dealers, that Cicconi left in December 2002 for “performance based” reasons. Cicconi had come to work for McGinn Smith in 2001 when it acquired a firm with 12 retail stock brokers that Cicconi had founded. As a part of the acquisition, Cicconi was given a five-year contract to work as McGinn’s director of retail sales. Though the 1st Department affirmed Manhattan Justice Karla Moskowitz’s dismissal of Cicconi’s defamation claim, litigation continues between the two parties over the breakup of their business relationship. Wednesday, just as 14 years ago, Justice Saxe wrote in Cicconi v. McGinn, Smith & Co., 601463/03, it is important that broker dealers have broad immunity from damages for statements they are required to make in U-5 forms. The forms are required to be filed, he wrote, as part of “a broad and complex regulatory scheme which is overseen” by the Securities and Exchange Commission. Broker-dealers need absolute immunity so they will not “hesitate to clearly state the exact ground for termination” for fear that their statement will expose them to liability for defamation. “Only by clear descriptions of questionable conduct by brokers can we best insure that any future employers and customers have notice of any such conduct in their interactions with those brokers,” Saxe wrote. Justice Ellerin, however, wrote that there have been too many instances where employers have made “distorted and false filings for tactical, competitive business reasons” to warrant absolute immunity that would leave injured employees “without any realistic recourse.” Moreover, she wrote, in 1996 the 6th U.S. Circuit Court of Appeals opted for qualified immunity ( Glennon v. Dean Witter Reynolds, 83 F3d 132) as did the 7th Circuit in 1998 ( Dawson v. New York Life Insurance Co., 135 F.3d 1158). In addition, she pointed out, the 2nd Circuit had adopted qualified immunity two months before the 1st Department issued its initial 1991 ruling embracing absolute immunity in Herzfeld & Stern v. Beck, 175 AD2d 689. The 2nd Circuit’s ruling was in Fahnestock & Co. v. Waltman, 935 F2d 512. Cicconi was represented by David B. Wechsler and Marc O. Sheridan of Wechsler & Cohen. Marc R. Rosen of Gersten Savage represented McGinn Smith.

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