Recent NASD arbitration awards reinforce securities brokers' rights as employees.

In an era of intense scrutiny by the courts and society, in general, of employer-employee relationships and interaction in the workplace, the securities industry has managed to limit the exposure and accountability to which employers within virtually every other industry in this country have been subjected. This has resulted not from mere happenstance, but through concerted action by brokerage firms, which more than a century ago first created a system to arbitrate all disputes and, thereafter, imposed that system on all of their employees.

As a condition to employment in the securities industry, brokers (or "associated persons" as they are known within the industry) must sign a Form U-4. The Form U-4 requires that all disputes against employers be arbitrated. Despite the fact that employees are unable to obtain industry jobs without signing pre-dispute arbitration agreements, these contracts have been upheld by the United States Supreme Court. As recently as 1991 in the case of Gilmer -vs- Interstate/Johnson Lane Corp., the Supreme Court affirmed that employees who sign such agreements must arbitrate their claims and, in most cases, cannot pursue court actions which would likely subject brokerage firms to substantial jury verdicts.

Traditionally, juries have not been reluctant to impose significant compensatory and punitive damage awards in employment disputes; this has served to sober employers in their dealings with employees and has had a salutary effect on employer-employee relationships generally. Conversely, arbitration panels within the National Association of Securities Dealers (NASD) have demonstrated little willingness to make awards of similar magnitude. Multi-million dollar damage awards by NASD arbitration panels have been virtually non-existent. This has led to a general perception that because employees must arbitrate their disputes in forums sponsored by the securities industry, that NASD panels are biased in favor of the industry. The inclusion of an "Industry Representative" within each three-member panel of arbitrators lends further support to the perception of potential bias.

Two recent cases, however, have served to dispel the perception of bias within the securities industry. These cases should serve as a "wake-up call" to brokerage firms and offer hope to brokers that they can receive redress through the compulsory arbitration process.

On May 6, 1996, the 6th Circuit Court of Appeals handed down its decision in the case of Glennon -vs- Dean Witter Reynolds, Inc., in which it affirmed the award of an NASD arbitration panel in favor of John Glennon, a Dean Witter, Nashville Tennessee Branch Manager. Glennon claimed in his arbitration proceeding that Dean Witter had defamed him in connection with the filing of a Uniform Termination Notice Form U-5, a document that is customarily used within the securities industry and becomes a part of the employee's permanent record. Glennon argued that the defamatory Form U-5 resulted in his being "black-balled" and his inability to obtain similar employment with any other brokerage firm.

The NASD panel found that Glennon had in fact been defamed by Dean Witter's malicious filing of the erroneous Form U-5 and awarded him $728.250 in compensatory damages, $750,000 in punitive damages and $213,000 in attorney fees. The case was then appealed by Dean Witter to the United States District Court and later to the 6th Circuit Court of Appeals, in which the firm argued, among other claims, that securities firms have an "absolute privilege" that protects them from defamation suits and other legal actions that may arise because of information supplied by firms on U-5 forms; both courts rejected this argument and affirmed the NASD award.

Perhaps of greater significance than the amount of the award in Glennon, was the filing of amicus briefs on appeal by both the NASD and the Securities and Exchange Commission (SEC) supporting the panel's award in favor of the terminated broker. This action reflects a manifest desire on the part of the NASD and the SEC to ensure that the authority to impose awards of this type remain unfettered so as to promote their ability to regulate employer misconduct within the securities industry.

Just last month and on the heels of the Glennon decision, a Los Angeles NASD arbitration panel award in the case of Merrill Lynch Pierce Fenner & Smith, Inc. -vs- Rochelle Atlas Maize, further underscored the NASD's commitment to hold brokerage firms accountable for misconduct towards employee-brokers. In Maize, an award totalling $2.15 million was imposed against Merrill Lynch and its Branch Manager arising from their misconduct in the recruitment, termination and defamation of Rochelle Atlas Maize, one of the nation's top producing commodities brokers, who had developed an outstanding reputation and expertise during her twelve-year career.

Ms. Maize, who had been recruited by Merrill Lynch to head up a new Commodities Resource Center in Century City, alleged that she had been fraudulently induced to leave her lucrative position as a successful Senior Vice-President with Smith Barney and to transfer her "book" of some 574 commodities clients to Merrill Lynch. Maize claimed that the promises made to her by Merrill Lynch and its Branch Manager never materialized and that the Commodities Resource Center never became fully operational; within a short span of two months she was wrongfully terminated and subsequently subjected to defamation through Merrill Lynch's filing of an erroneous Form U-5 which accused Maize of dishonest conduct. Maize argued that as a result of these acts by Merrill Lynch and its Branch Manager, the career to which she had so diligently devoted herself had been destroyed and that she had been denied suitable employment within the securities industry.

Although the NASD's award in favor of Maize does not contain specific findings as to the wrongdoing of Merrill Lynch and its Branch Manager, the unprecedented amount of the award in excess of $2 million and the fact that the panel saw fit to also assess an award against the Branch Manager, individually, reflects the panel's conviction that both Merrill Lynch and its Manager had engaged in egregious misconduct towards their employee, as well as a desire to redress that wrong.

As the attorney who represented Ms. Maize in the NASD arbitration proceedings, I was in a unique position to observe the panel's conduct of a serious and bitterly contested employer-employee dispute. While I was of course gratified with the outcome, I was thoroughly impressed throughout the course of this twenty-six session proceeding with the three-member panel's diligence, and their willingness and desire to provide the parties with latitude in the presentation of their respective claims. The panel obviously took this case very seriously in accommodating counsels' requests for additional sessions which inevitably went late into the evening and included several Saturdays, as well. Contrary to the general perception of bias within the industry, I found the panel to be objective, thorough, forthright and diligent in conducting this arbitration involving serious claims of wrongdoing by a brokerage firm employer.

Whether the Glennon and Maize cases can be said to constitute a trend towards accountability in employer-employee relations within the securities industry remains to be seen, although they certainly do much to dispel the mantle of bias that has clung to securities arbitration proceedings for so long.

Following the award in the Maize case and in the wake of the nationwide attention that it received, it appears that firm misconduct toward brokers may be widespread throughout the industry. We have been inundated with telephone calls and inquiries from brokers employed by virtually every major firm in the country regarding claims of mistreatment by brokerage firm employers. While recognizing that not every claim can be meritorious, the sheer volume of calls received lends credence to the belief that brokerage firms have become complacent in their dealings with employees and that they tend to conduct themselves in a manner reflective of their perceived immunity from sanctions.

As Justice William O. Douglas stated in his impassioned dissent in the United States Supreme Court case of Barsky -vs- Board of Regents, some forty years ago:

"The right to work I had assumed, was the most precious liberty that a man possesses. Every man has indeed as much right to work as he has to live, to be free, to own property... It does a man little good to stay alive and free and propertied, if he cannot work. To work means to eat. It also means to live. For many it would be better to work in jail, than to sit idle on the curb. The great values of freedom are in the opportunities afforded to mankind to press to new horizons, to pit his strength against the forces of nature, to match skills with his fellow man." (Needless to say, Justice Douglas' observations apply with equal force to women, as well).

Perhaps the Securities Industry will now take notice that it must deal fairly and responsibly toward employees or otherwise subject itself to increasing awards from the very arbitration forums that it created.

Michael Blumenfeld is the managing partner of Fierstein & Sturman Law Corporation in Century City and heads up its Litigation Department.