CHICAGO (CN) – A Seventh Circuit panel on Wednesday mulled overturning a $27 million jury award to four former Allstate traders who say the company’s false statements about their ethical conduct effectively made them unemployable in the financial industry.
At stake is a $27 million jury award granted to four former traders in Allstate’s equity division who say that the company made false, public statements about their conduct that left them unable to find another job.
The traders were fired following an internal investigation into allegations that they were timing their trades in order to boost their own performance bonuses, rather than for the benefit of clients’ pension plans.
The entire equity division was shuttered and outsourced to Goldman Sachs, but only the plaintiffs – Daniel Rivera, Rebecca Scheuneman, Deborah Meacock and Stephen Kensinger – were fired for cause and denied severance.
In February 2010, Allstate informed the Securities and Exchange Commission in a public 10K form that “some employees” may have timed the execution of trades to enhance their incentive compensation, and that these trades had adversely affected clients’ portfolio performance by $91 million.
The plaintiffs claim that the “some employees” statement clearly applied to them, since they were the only ones singled out and punished after the investigation.
Allstate paid the pension plans $91 million to make up for this purported loss due to employee misconduct.
But the insurer later conceded to the Department of Labor that its methodology for calculating portfolio losses was unreliable, and the trading practices at the equity desk had virtually no effect on trader bonuses.
In a letter, Allstate told the Labor Department that “[n]o one [at Allstate] believed, then or now, that this was an accurate description of the activity on the equity desk,” according to court records.
The fired traders swiftly sued their former employer for claims of defamation and violation of the Fair Credit Reporting Act, or FCRA.
“As a consequence of Allstate’s defamation, plaintiffs have suffered real and catastrophic damages,” their appeal brief states. “Once sought after by employers in the upper echelons of the investment industry, plaintiffs were made virtually unemployable as a direct and proximate result of Allstate’s statements.”
As their attorney Michael Brody with Jenner & Block LLP in Chicago told the Seventh Circuit on Wednesday, “top-tier investment jobs are filled by word of mouth, not posted on a website.”
A jury agreed, and awarded the former employees $27.1 million, including $10 million in punitive damages.
But at oral arguments, the Seventh Circuit panel expressed grave concern that the traders lacked evidence to show Allstate’s statement injured their job prospects.
Allstate attorney Rex Heinke with Akin Gump in Los Angeles told the court, “Plaintiffs called no employers to say why they did not employ plaintiffs.”
He said the law requires a specific showing of damages in order to protect First Amendment rights to free speech, a point echoed in Allstate’s appeal brief.
U.S. Circuit Judge Diane Sykes appeared to entirely agree.
“There is not any evidence to support a special damages award under Illinois law,” Sykes told attorney Brody. “There is ample evidence that your clients couldn’t find a job, but that’s insufficient for a defamation claim.”
Brody protested that the jury found Allstate’s comments were responsible for the traders’ employment difficulties.
Sykes interjected, “If it was so obvious, why wasn’t there testimony from a single prospective employer?”
U.S. District Judge Sara Darrow, sitting by designation, also expressed reservations about the lack of this kind of testimony.
At trial, the traders each testified about their efforts to find work after their termination, and a headhunter testified about the stigma that Allstate’s statement would have on a person seeking employment in finance, but no prospective employer testified that he or she decided not to hire a plaintiff based on the accusations of misconduct.
Brody sought to convince the Chicago-based appeals court that requiring specific employer testimony was an “unrealistic” requirement when the traders did not even know the person rejecting their applications. He also urged the Seventh Circuit panel to show deference to the jury’s findings.
Sykes also took issue with the plaintiffs’ FCRA claim.
“What does this case have to do with credit reporting?” she asked, and explained from the bench that to apply the FCRA to this case would be a “shocking” expansion of the law in the realm of employment.
However, the issue was never briefed before the lower court.
“I am stunned this point has been overlooked,” Sykes said.
Brody requested that the court consider the issue waived, or at least request additional briefing on the matter.
At this, Sykes smiled and said, “Yes, well this is the claim that wags the dog of attorneys’ fees” – a point Brody readily conceded.
U.S. Circuit Judge Michael Kanne did not comment during oral arguments.
The panel is expected to issue its opinion in the case within three months.