Galarneau v. Merrill Lynch, Pierce, Fenner & Smith Inc.

United States Court of Appeals
For the First Circuit

No. 06-2410

DEBORAH GALARNEAU,

Plaintiff, Appellee,

v.

MERRILL LYNCH, PIERCE, FENNER & SMITH INC.,

Defendant, Appellant.

APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MAINE

[Hon. William S. Brownell, U.S. Magistrate Judge], and
[Hon. George Z. Singal, U.S. District Judge]

Before

Torruella, Circuit Judge,
Newman,* Circuit Judge,
and Lynch, Circuit Judge.

Evan M. Tager, with whom Andrew Tauber, Mayer, Brown, Rowe &
Maw LLP, James R. Erwin, Pierce Atwood LLP, and Eugene Volokh, UCLA
School of Law, were on brief, for appellant.
Rufus E. Brown, with whom Brown & Burke, Michael A. Nelson,
and Jensen Baird Gardner & Henry, were on brief, for appellee.

October 12, 2007

*
Of the Federal Circuit, sitting by designation.
 TORRUELLA, Circuit Judge. On January 6, 2004, Deborah

Galarneau ("Galarneau") was fired from her job as a stockbroker at

Merrill Lynch, Pierce, Fenner & Smith Inc. ("Merrill Lynch"). In

a form submitted to the National Association of Securities Dealers

("NASD"), Merrill explained that "Ms. Galarneau was terminated

after the firm concluded that she had (I) engaged in inappropriate

bond trading in one client's account and (II) utilized time and

price discretion in the accounts of three clients." Galarneau

brought this action against Merrill Lynch in the United States

District Court for the District of Maine, alleging defamation

(among other claims). The jury found in favor of Galarneau,

awarding compensatory and punitive damages. Merrill Lynch moved

for judgment as a matter of law, challenging the finding of

defamation and the award of special and punitive damages. The

district court denied the motion. After careful consideration, we

affirm the district court's denial with respect to the finding of

defamation and the award of special damages, but reverse with

respect to the jury's award of punitive damages.

I. FACTUAL BACKGROUND

Because Merrill Lynch challenges the sufficiency of the

evidence, we recite the facts in the light most favorable to the

verdict. See Wilson v. City of Boston, 421 F.3d 45, 48 n.2 (1st

Cir. 2005). Deborah Galarneau was employed at Merrill Lynch's

Portland, Maine branch office from February 1989, when she joined

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her husband Preston Galarneau at the firm, until she was terminated

on January 6, 2004. Beginning in 1998, the Galarneaus worked as a

team called the "Galarneau Group," as allowed by Merrill Lynch.

Galarneau was successful as a financial advisor at Merrill Lynch,

ranking in the first or second groupings of producing brokers in

her office, qualifying for a $100,000 certificate bonus by growing

her business by ten percent for ten consecutive years, and earning

other recognition awards and trips.

The Amy Ford Account

Amy Ford became a client of the Galarneau Group in late

2000. Ford was a single woman in her fifties with a portfolio in

excess of $2 million, which served as her primary source of income

along with other investments not managed by Merrill Lynch. Her

portfolio was heavily weighted in nonperforming equities, which

Ford had inherited with a low tax basis. Galarneau testified that

Ford had a history of spending more than she earned from her

investment income. This practice led her to borrow from her

investment account and sometimes required her to sell securities to

pay off her debt, thereby incurring significant capital gains

taxes.

According to Galarneau, she and her husband developed a

three-pronged investment plan for Ford's account: first, to

rebalance her portfolio to reduce the concentration in legacy stock

and increase her investment in fixed income securities (primarily

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bonds); second, to generate more income for Ford to live on; and

third, to minimize the capital gains taxes that would be incurred

from the rebalancing.

Galarneau testified that she and her husband told Ford

that this investment plan would require aggressive and active

trading, including the use of an investment strategy called "tax

advantage bond swap" when the occasions for doing so arose. Tax

advantage bond swaps involve selling bonds that have declined in

market value (in relation to their cost basis) and using the

proceeds of the sale to buy replacement bonds of equivalent or

superior investment value. The intended benefit of such a strategy

is that the client take tax losses without sacrificing the quality

of her investment portfolio. According to Galarneau, in applying

this strategy to the Ford account, the Galarneaus expected to use

the tax losses to offset any capital gains resulting from the sale

of the legacy stock.

The Galarneaus anticipated that the proposed investment

plan could be expensive for Ford if she paid commissions on each

trade. Galarneau testified that she and her husband advised Ford

of the Merrill Lynch Unlimited Advantage ("MLUA") pricing option,

a program through which a client could pay a flat annual fee for

trading instead of paying commissions on each transaction.

According to Galarneau, Ford declined this option and the parties

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arranged a discount for the commissions for trading in the Ford

account.

Merrill Lynch's Review of the Trading in the Ford Account

Galarneau testified that at the outset, she and her

husband approached Edward Coppola, then the compliance officer for

Merrill Lynch's Northern New England Complex, to discuss the

investment strategy for the Ford account. At that time, Coppola

did not raise any objections to the proposed investment strategy.

The trading in the Ford account in 2001 and 2002 was very

active. During that period, the financial markets were "unusually

volatile" in part because of the consequences of the terrorist

attacks of September 11, 2001 and corporate accounting scandals.

According to Galarneau, these conditions provided opportunities for

tax advantage bond swaps, but also required trades that would not

otherwise have been made. In addition, Ford's personal spending

was three times in excess of her investment income.

Such active trading triggered management review within

Merrill Lynch. The firm uses a computer-generated monitoring

system called Armor review, which automatically notifies the

Merrill Lynch compliance officers of accounts with unusually active

trading. The Armor alert may be accessed from either a financial

advisor's computer or a compliance officer's computer. It provides

background information about the targeted account, including a

summary of the frequency and dollar value of trades (with links to

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data for individual trades), a comparison of the value of trades

versus the commissions earned on the account (the "velocity" of

trading), and the commissions for the trading.

The first Armor review took place in July 2001. Coppola

asked Galarneau for an explanation of the production credits, the

performance, and the strategy. Galarneau provided this

information, and Coppola signed off on the trading in the account.

According to Galarneau, Coppola never indicated that the trading in

the Ford account was inappropriate in any way. Before he left the

firm, Coppola reviewed the account again in August 2001 and

commented that the account had already been reviewed the previous

month.

An Armor review was again triggered the next year, in

July 2002, when Richard Heller became the new compliance manager

for the Portland, Maine office of Merrill Lynch. Pursuant to the

review, Heller specifically asked the Galarneaus about the "high

velocity" in the Ford account. According to Galarneau, the

Galarneaus explained the investment strategy for the Ford account,

and Heller approved the trading.

This time, as recommended by Merrill Lynch's Policy

Manual, Heller sent an "activity letter" to Ford dated

September 10, 2002, drawing her attention to (1) the substantial

volume of trading in her account, (2) the relatively high level of

costs associated with that trading ($29,042) in relation to her

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portfolio value, and (3) the sizeable level of her margin account1

($203,542). In the letter, Heller asked Ford to confirm that the

account was being managed in accordance with her investment

objectives and offered to meet with her about the account. Ford

never responded. According to Galarneau, she and her husband met

with Ford to go over the activity letter, at which point Ford

indicated that she was satisfied with how the account was being

managed.

A fourth Armor review of the Ford account was triggered

in November 2002, which again focused on the substantial volume of

trading in the account, including the "high turnover" rate of

6.81%, a very high level of trading. The Galarneaus again

explained their strategy of taking as many losses as feasible to

offset gains from the sale of legacy stock. Heller checked the box

on the Armor review form marked "approved," and noted, "Taking

losses, margin debt decreasing, Letters sent 9-13-02."

This was the last substantive Armor review of the Ford

account. By 2003, the level of trading went down, and most of the

margin debt incurred by Ford to accelerate the rebalancing had been

paid off.

1
A "margin account" is a brokerage account in which the broker
lends her client cash to purchase securities. The loan is
collateralized by the client's securities or cash. If the value of
the stock drops significantly, the account holder will be required
to deposit more cash or sell a portion of the stock.

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 According to Galarneau, the strategy proved successful:

The Ford account earned $101,000 from the fixed income investments

purchased for Ford, saved more than $36,000 in tax liability as a

result of the bond swap strategy, and (as of the time Galarneau was

terminated) increased in value by $65,000.

The Ford Complaint

Ford sent Merrill Lynch a letter on June 7, 2003,

accusing the Galarneaus and Merrill Lynch of "churning" her

account.2 Ford copied her complaint to the Maine Securities

Division, which promptly opened an investigation into Galarneau,

her husband, and Merrill Lynch. In response to this investigation,

Merrill Lynch's Office of General Counsel ("OGC") became involved,

with Kathleen Durning taking line responsibility, supervised by

First Vice President and Assistant General Counsel Andrew Kandel.

Merrill Lynch's Response

After receiving explanatory materials from Galarneau and

consulting with her, Durning responded to the Maine Securities

Division's initial inquiry with a letter defending the trading in

the Ford account. The letter provided detail about the context of

the trading in the Ford account consistent with explanations that

Galarneau provided for the Armor reviews. It explained the

2
Specifically, Ford complained that the turnover in her account
"is much higher than the experts I have worked with consider
reasonable." While acknowledging the need to take tax
considerations into account, she stated that "the goal should be
taking losses that exist, not creating them."

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investment objectives of the account, the trading strategy designed

to achieve these objectives, the offer to Ford of the MLUA pricing

option, the frequent meetings with Ford to review trading, the

difficult market conditions, the rationale for the use of margin to

implement a rebalancing of the account, the problems created by

Ford's excessive personal spending, and other background to the

management of the account.

On August 8, 2003, the Maine Securities Division

responded with a letter asking for additional explanations and

documents relating to the trading in the Ford account. Four days

later, counsel for Ford sent Merrill Lynch a letter accusing the

firm and the Galarneaus of "churning" with a "disastrous" account

performance, and demanding restitution.

On September 8, 2003, Durning wrote the Maine Securities

Division another letter, reviewed in draft by Kandel, in response

to the Division's earlier inquiry for more information. In this

letter, Durning reaffirmed the key points of her July 2, 2003

letter and provided additional support for the legitimacy of the

management of the Ford account.

Merrill Lynch's Internal Review

Ford's complaint triggered an internal investigation by

Merrill Lynch. Pursuant to this investigation, the firm asked

Bates Capital Corporation, an outside firm, to provide a report

analyzing the trading in the Ford account on a security-by-security

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basis (the "Bates report"). For each fixed-income security that

had been traded in the Ford account, the Bates report revealed how

long the security had been held, whether it was sold at a profit or

loss, whether it was subsequently repurchased and resold and, if

so, whether at a profit or loss.

Also pursuant to the internal investigation, Merrill

Lynch reviewed Galarneau's personnel file. Heller contacted Jack

Michaelian, a former manager, asking for personnel information for

Galarneau. He received two memoranda about customer concerns with

respect to Galarneau's management of their accounts years earlier.

Heller also called a number of Galarneau's clients to determine

whether she may have exercised "pure discretion" in managing their

accounts.3 From his first round of telephone calls, Heller

concluded that Galarneau may have exercised pure discretion in five

accounts. Heller sent his findings to Kandel and Scott Gilbert, an

attorney in the OGC assigned to the Ford matter.

As part of the internal review, Galarneau was summoned to

the Merrill Lynch corporate headquarters in New York City on

October 14, 2003 to be interviewed. According to Galarneau,

3
In the securities industry, trading securities without the prior
approval of the investor is referred to as taking "pure
discretion," and is illegal. Merrill Lynch, as a matter of
internal policy, prohibits its brokers from exercising "time and
price discretion," which refers to the exercise of discretion as to
the exact time and exact price at which a broker executes an order
for her client, even with the prior approval of the client. Time
and price discretion is not illegal.

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Gilbert showed little interest in the reasons for the individual

trades in the Ford account and instead focused primarily on whether

she had exercised pure discretion in any of her other accounts.

Galarneau denied that she had exercised pure discretion, but

admitted that she may have unknowingly violated the policy on time

and price discretion on two occasions. Galarneau testified that at

the conclusion of the interview, Gilbert told her that Merrill

Lynch "hoped that they could reach an agreement with Ford's

attorney and the case would be settled, and that normally then the

State goes away."

While the internal review was in progress, Merrill Lynch

reached a settlement with Ford in early November 2003 for $100,000.

The Maine Securities Division investigation, however, remained

ongoing. On November 7, 2003, the Maine Securities Division sent

Merrill Lynch another letter requesting information about Merrill

Lynch's supervision of the Galarneaus and inquiring "whether or not

the Galarneaus are still employed by Merrill Lynch."

Merrill Lynch terminates Deborah Galarneau

Merrill Lynch terminated Galarneau on January 6, 2004.

Edward Hocking, Merrill Lynch's Regional Vice President for the

Northern New England Complex and Heller's superior, was responsible

for the decision. According to Heller, just before meeting with

Galarneau, Hocking told Heller that he had conferred with Merrill

Lynch's OGC and that the reasons for the decision to terminate

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Galarneau were (1) her exercise of time and price discretion; (2)

her prior history, as reflected in two personnel memos and "prior

warnings";4 and (3) the judgment she used in trading in the Ford

account. Hocking showed Heller notes he would use in the meeting

detailing these reasons. Galarneau testified that Hocking gave her

these same reasons for the termination. According to Galarneau, no

specific reference was made in the meeting to inappropriate

trading, excessive trading, or churning.

On the same day Galarneau was terminated, Kandel called

the Maine Securities Division investigator to report the

termination. Kandel recorded in his notes of the conversation that

the Maine Securities Division investigator appreciated being

informed, saying that it "will have an impact." The investigator

asked Merrill Lynch to confirm the termination in writing. Kandel

4
Merrill Lynch claims that on at least two occasions before her
dismissal, Galarneau's bond trading "had been the object of
concern." The firm introduced evidence that in 1998, Galarneau was
summoned to a meeting with her office supervisors "to discuss two
client complaints, and her trading strategy in regards to bond
swaps," and that in 2000, her supervisors warned her not to engage
in active bond trading and that Galarneau responded that she would
not do so anymore.

According to Galarneau, she was never warned about her trading
with respect to bonds. She introduced evidence that the memorandum
memorializing the 1998 meeting does not describe a "warning" or
criticism of her bond trading generally, and that there is no other
memo concerning the 1998 meeting. Galarneau also testified that at
the 2000 meeting, Merrill Lynch objected to a specific business
plan for bond trading (as opposed to equity trading) for particular
clients, but that the firm made no objection to bond trading under
other circumstances.

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also requested an opportunity to make a submission to the Maine

Securities Division to show that Merrill Lynch's supervision of

Galarneau was reasonable.

That submission was made through a letter to the Maine

Securities Division dated January 28, 2004, which was circulated

twice in draft form by Kandel to Gilbert and Durning. The letter

stated that the firm's "review of the Ford account indicates that

while it is somewhat active, it was also well diversified between

fixed income, equities and cash," and that there were additional

features of the portfolio and Ford's investment objectives that

supported the manner in which the account was managed. The letter

continued, "After Ms. Ford's concerns came to light, however, the

Firm learned that Galarneau had exercised time and price discretion

on occasion in Ms. Ford's account." The letter explained that

because time and price discretion is against company policy, "as

well as [other reasons], including management's concerns regarding

the activity in Ms. Ford's account, the Firm decided in late

December that it was necessary to terminate Ms. Galarneau's

employment."

The U-5

On February 6, 2005, nine days after the letter to the

Maine Securities Division, Merrill Lynch filed a Uniform

Termination Notice for Securities Industry Registration (Form U-5)

with the NASD as required by NASD rules whenever a registered

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stockbroker leaves a firm. In the U-5, Merrill Lynch explained the

reason for terminating Galarneau as follows: "Ms. Galarneau was

terminated after the firm concluded that she had (I) engaged in

inappropriate bond trading in one client's account and (II)

utilized time and price discretion in the accounts of three

clients." This was followed by a statement disclosing that

Galarneau disagreed with the firm's conclusions.

After Galarneau was terminated, she unsuccessfully tried

to find employment as a stockbroker at Smith Barney, Edward Jones,

and Morgan Stanley.

Proceedings Below

Galarneau brought an eight-count complaint alleging sex

discrimination, breach of contract, breach of fiduciary duty,

defamation, tortious interference with economic relations, and

violations of the Employee Retirement Income Security Act

("ERISA"), 29 U.S.C. § 1001 et seq., and the Equal Pay Act ("EPA"),

29 U.S.C. § 206(d)(1). Galarneau subsequently withdrew the breach

of fiduciary duty and EPA claims. After the district court denied

Merrill Lynch's motion for summary judgment, the remaining claims

proceeded to trial.

At the close of the plaintiff's evidence, Merrill Lynch

moved pursuant to Fed. R. Civ. P. 50(a) for judgment as a matter of

law on all counts. The district court granted the motion with

respect to Galarneau's tortious interference claim, but otherwise

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denied it. At the close of all evidence, the district court denied

Merrill Lynch's renewed motion for judgment as a matter of law.

Accordingly, Galarneau's claims for sex discrimination, breach of

contract, and defamation were sent to the jury, and her ERISA claim

was submitted to the court. The jury rejected Galarneau's

discrimination and contract claims, and the court rejected her

ERISA claim. The jury found in Galarneau's favor on the defamation

claim, awarding Galarneau $850,000 in compensatory damages (of

which $775,000 were for lost wages) and $2,100,000 in punitive

damages.

Merrill Lynch again moved for judgment as a matter of

law, pursuant to Fed. R. Civ. P. 50(b) or, in the alternative, for

a new trial, pursuant to Fed. R. Civ. P. 59(a). The district court

denied both motions. Merrill Lynch appeals that decision on the

ground that there was insufficient evidence to support the jury's

finding of defamation and its award of compensatory damages and

punitive damages. It also challenges the district court's exclusion

at trial of correspondence between Galarneau and Merrill Lynch

regarding the language in the U-5.

II. DISCUSSION

A. The Sufficiency of the Evidence to Support the
Defamation Claim

1. Defamation Under Maine Law

To prove defamation under Maine law, a plaintiff must

establish that the defendant made a false statement that "lower[ed]

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[her] in the estimation of the community." Ballard v. Wagner, 877

A.2d 1083, 1087 (Me. 2005) (quoting Schoff v. York County, 761 A.2d

869, 871 (Me. 2000)). Accordingly, "truth is an absolute defense

to a charge of defamation." Garrett v. Tandy Corp., 295 F.3d 94,

106 (1st Cir. 2002) (applying Maine law).

False statements are defamatory per se if they relate to

a profession, occupation, or official station in which the

plaintiff was employed. See Saunders v. VanPelt, 497 A.2d 1121,

1124-25 (Me. 1985). In such cases, malice is implied as a matter

of law, and a plaintiff may recover a compensatory award without

proving special damages. Farrell v. Kramer, 193 A.2d 560, 562 (Me.

1963). Per se defamation may not be actionable, however, if it is

privileged. See Bearce v. Bass, 34 A. 411, 413 (Me. 1896). "A

conditional privilege against liability for defamation arises in

settings where society has an interest in promoting free, but not

absolutely unfettered speech." Lester v. Powers, 596 A.2d 65, 69

(Me. 1991).

The parties agree that Merrill Lynch's statement in the

U-5 is conditionally privileged under Maine law. While a

conditional (or qualified) privilege does not change the actionable

quality of words published, it rebuts the inference of malice that

is imputed in the absence of the privilege. See Saunders, 497 A.2d

at 1124. Where a conditional privilege exists, "liability for

defamation attaches only if the person who made the defamatory

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statements loses the privilege [by] abusing it." Lester, 596 A.2d

at 69. A conditional privilege may be abused if the defamatory

statement is made with reckless disregard as to its falsity. See

Cole v. Chandler, 752 A.2d 1189, 1194 (Me. 2000).

2. Standard of Review

In an appeal from a district court's denial of a motion

for judgment as a matter of law, we generally review questions of

law de novo. Negrón v. Caleb Brett U.S.A., Inc., 212 F.3d 666, 668

(1st Cir. 2000). In assessing the sufficiency of the evidence to

support a jury verdict, we usually ask "whether, viewing the

evidence in the light most favorable to the verdict, a rational

jury could have found in favor of the party that prevailed."

Bisbal-Ramos v. City of Mayagüez, 467 F.3d 16, 22 (1st Cir. 2006).

But Merrill Lynch asks us to apply the heightened standard of

review appropriate for cases raising First Amendment concerns. See

Bose Corp. v Consumers Union of United States, Inc., 466 U.S. 485,

499 (1984)("[I]n cases raising First Amendment issues . . . an

appellate court has an obligation to 'make an independent

examination of the whole record' in order to make sure that 'the

judgment does not constitute a forbidden intrusion on the field of

free expression.'" (quoting New York Times Co. v. Sullivan, 376

U.S. 254, 285 (1964))). We decline to do so, however, because

Merrill Lynch failed to argue in the trial court that this case had

any First Amendment implications.

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 In New York Times v. Sullivan, the Supreme Court for the

first time held that the First Amendment limits the reach of state

defamation laws. 376 U.S. at 271. Emphasizing that "freedom of

expression upon public questions is secured by the First

Amendment," id. at 270, the Court held that a public official suing

for a libelous publication critical of his official conduct could

not recover unless he proved, by clear and convincing evidence,

"that the statement was made with 'actual malice' -- that is, with

knowledge that it was false or with reckless disregard of whether

it was false." Id. at 280-81.

Ten years later, the Court again reviewed a defamation

case in light of First Amendment considerations in Gertz v. Robert

Welch, Inc., 418 U.S. 323 (1974). Noting that the libelous

statement at issue was of undoubted public concern, but that,

unlike in New York Times, the plaintiff was not a public figure,

the Court held that the First Amendment protections were reduced.

Id. at 343-46. Balancing the states' "strong and legitimate . . .

interest in compensating private individuals for injury to

reputation" against First Amendment concerns, id. at 348, the Court

held that "so long as they do not impose liability without fault,

the States may define for themselves the appropriate standard of

liability for a publisher . . . of falsehood injurious to a private

individual," id. at 347, but that a state could not allow recovery

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of presumed damages absent a showing of actual malice. Id. at 349-50.

Finally, in Dunn & Bradstreet, Inc. v. Greenmoss

Builders, Inc., 472 U.S. 749, 759-60 (1985), the Court held that

where a private figure is suing over a defamatory statement

involving private matters, "the role of the Constitution in

regulating state libel law is far more limited." Id. at 759. In

such cases, a showing of actual malice is not necessary to

establish liability or to presume damages. Id.

These cases illustrate that questions of whether and to

what extent the First Amendment places limits on state defamation

law are not without nuance. To establish that a particular

defamation case raises First Amendment concerns, a defendant must

show that the purportedly defamatory statement involved either a

public official or a matter of public concern, or both. See

Ramírez v. Rogers, 540 A.2d 475, 477 (Me. 1988) (finding that First

Amendment concerns were not implicated "[b]ecause th[e] case

involve[d] a non-media defendant, defaming a private plaintiff

concerning a matter that [was] not of public concern"). Only if

the defendant succeeds in doing so does the First Amendment impose

a special burden on the plaintiff, and even then the specific

burden imposed will depend on the circumstances of the case. Once

established, it will be the facts underlying that burden that we,

as appellate courts, must independently examine to make sure that

"the [defamation] judgment does not constitute a forbidden

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intrusion on the field of free expression." New York Times, 376

U.S. at 285; see also Bose, 466 U.S. at 508 ("Hence, in New York

Times v. Sullivan, after announcing the constitutional requirement

for a finding of 'actual malice' in certain types of defamation

actions, it was only natural that we should conduct an independent

review of the evidence on the dispositive constitutional issue.").

But Merrill Lynch has never argued, except in this court,

that the First Amendment places any limit on Maine's defamation

laws. It never argued before the district court that Galarneau was

a public figure or that the U-5 statement involved a matter of

public concern. Indeed, at trial, it never sought to impose on

Galarneau the burden of establishing, by clear and convincing

evidence, that Merrill Lynch had acted with "actual malice" in

defaming Galarneau, as required by the First Amendment under the

conditions set forth in New York Times.5 Instead, Merrill Lynch

relied unwaveringly on Maine common law to establish that Galarneau

had the burden of proving falsity and actual malice by a

preponderance of the evidence. Accordingly, the jury was never

instructed as to the First Amendment's role in the case, if any.6

5
Merrill Lynch did argue that Me. Rev. Stat. Ann. tit. 26, § 598,
required Galarneau to establish actual malice by clear and
convincing proof. The district court rejected that argument.
6
With respect to the defamation claim, the jury was instructed
that

[i]n order to prevail on the claim for defamation
regarding the U-5 filing that Merrill Lynch made,

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 As the Maine Supreme Court has noted, the burden imposed

on plaintiffs by the First Amendment is distinct from that imposed

by Maine common law:

Discussion of public officials and public
figures on matters of public concern, the U.S.
Supreme Court has declared, deserves special
favor in a democratic society, and thus such
discussion is subject to a conditional
privilege -- the "First Amendment privilege" -
- that can be overcome only by clear and
convincing evidence of knowledge or disregard
of falsity. We do not require clear and
convincing evidence, however, to overcome a
conditional privilege that arises at common
law and not from the First Amendment.

Lester, 596 A.2d at 69-70 (internal citations omitted). Because

Merrill Lynch failed to make a case for a "First Amendment

privilege" at trial, and instead relied exclusively on the

conditional privilege afforded by Maine common law, it has

forfeited the argument that the First Amendment imposes a special

burden on Galarneau. See United States v. Slade, 980 F.2d 27, 30

(1st Cir. 1992) ("It is a bedrock rule that when a party has not

presented an argument to the district court, [it] may not unveil it

in the court of appeals."). We therefore have no opportunity to

apply heightened review. We review the sufficiency of the evidence

Plaintiff must prove, by a preponderance of the evidence,
that: . . . the defendant knew the communication was
false or spoke with reckless disregard as to whether the
communication was false -- that is, the defendant
entertained a high degree of awareness of probable
falsity or serious doubt as to the truth of the
statement.

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supporting the jury's verdict as we would normally, asking whether,

viewing the evidence in the light most favorable to the verdict, a

rational jury could have found in favor of the party that

prevailed. See Bisbal-Ramos, 467 F.3d at 22.

On appeal, Merrill Lynch argues that the jury's verdict

cannot stand because Galarneau failed to show that its statement

was false and malicious, two requirements for liability under

Maine's common law of defamation.

3. Falsity

We begin with the question of falsity. At trial,

Galarneau argued the statement in the U-5 that she had "engaged in

inappropriate bond trading in one client's account" was false. In

making this argument, she relied heavily on expert testimony from

Gerald Guild, an expert in fixed income securities with forty-five

years of experience in the financial services industry. Guild

testified that after examining all the relevant documentation

(including the Bates report), he concluded that the trading in the

Ford account was appropriate and consistent with the investment

objectives of the account. He testified that in his opinion,

Galarneau's trading in the Ford account was neither excessive nor

inappropriate "[b]ecause there was a good and sufficient reason for

each and every transaction."

In support of her claim that the statement in the U-5 was

false, Galarneau also presented evidence of Merrill Lynch's

-22-
recognition and approval of the trading in the Ford account. There

was testimony and documentary evidence that during the relevant

period -- when the trading in the Ford account was most active --

two of Galarneau's supervisors at Merrill Lynch reviewed and

approved the management of the Ford account on at least four

separate occasions.7 There was also evidence that, in compliance

with Merrill Lynch's policy, when the Armor system triggered a

fourth review of the activity in the Ford account, Heller sent Ford

an "activity letter" on September 10, 2002; Heller drew Ford's

attention to a "substantial volume of trading" in her account and,

while noting that "active trading involves special risks," never

suggested it improper.

In addition, Galarneau introduced two letters Merrill

Lynch sent to the Maine Securities Division on July 2 and

September 8, 2003, in response to inquiries regarding the Ford

7
The jury also heard evidence of other systems of review in place
at Merrill Lynch. In a letter to the Maine Securities Division,
Merrill Lynch explained:

Merrill Lynch managers reviewed each of the trades in Ms.
Ford's account as they occurred. They did so as part of
the daily review of the Firm's End-of-Day Reports and
1028 Reports ("1028"), both of which detail all
transactions entered in client accounts. The 1028, in
addition to listing all daily transactions, provides a
synopsis of the client's investment objectives and risk
tolerance. (Other information, such as age, net worth,
associated accounts, profit and loss, etc.[] are also
available to the managers through the Firm's computer
system.) The 1028 is an important tool in evaluating the
suitability of trades entered in client accounts.

-23-
complaint, which characterized the Galarneaus' approach to the

trading in the Ford account as "prudent" when viewed in the context

of the overall market and economic conditions at the time.

Galarneau also presented testimony from the authors of these

letters, Andrew Kandel and Kathleen Durning, that they always tell

the truth when they communicate with state regulators, and that no

one ever told the Maine Securities Division that either letter was

inaccurate or misleading.

Finally, Galarneau presented evidence that at the time

she was terminated, inappropriate bond trading was not one of the

reasons Merrill Lynch provided for the termination. She also

introduced a letter from Merrill Lynch to the Maine Securities

Division dated January 28, 2004 (after her termination), explaining

that Galarneau was fired for violating the firm's time and price

discretion policy and because of "management's ongoing concerns

regarding [t]he activity in Ms. Ford's account," but also

describing the account as only "somewhat active," and noting that

"[the Ford account] was . . . well diversified between fixed

income, equities and cash."

Merrill Lynch argues that Galarneau's evidence is

insufficient to support a finding of falsity because:

Guild's conclusory opinion is belied by
Galarneau's frequent short-term trading in
long-term bonds; the purported "approval" of
Galarneau's trading was based largely on
Galarneau's own reports and was given before
the Bates report revealed the

-24-
 inappropriateness of her trading; although
Hocking did not use the term "inappropriate
trading," he did tell Galarneau that she was
terminated for exercising "very poor judgment
in the Ford account by pursuing the
complicated strategy" after having been
"warned" of "similar conduct in the past;" and
Merrill Lynch's letter to Maine regulators
specifically noted that Galarneau had been
terminated, inter alia, as a result of
"management's ongoing concerns regarding [t]he
activity in Ms. Ford's account."

But these are all arguments that the jury heard and

apparently rejected. Our task on review is not to weigh the

evidence. It is to ask whether, "viewing the evidence in the light

most favorable to the verdict," there is sufficient evidence

supporting the jury's verdict. Bisbal-Ramos , 467 F.3d at 22. We

find that there is.

The expert testimony that Galarneau's trading was

appropriate, even if active, is strong evidence that Merrill

Lynch's statement on the U-5 Form is false. Merrill Lynch

disagrees, focusing on the fact that Galarneau and Guild admitted

that the trading in the Ford account was "very active." However,

no one contests this fact, mainly because there is no reason to;

that trading is "active" does not necessarily mean that it is

"inappropriate." This much is clear not only from Guild's

testimony, but also from the fact that Merrill Lynch approved of

the trading for so long. The very least that may be inferred from

the firm's repeated approval of the trading in the Ford account is

that there are circumstances in which such activity is warranted.

-25-
As such, that Galarneau and Guild, along with every other witness

to have testified at trial, thought that the trading in the Ford

account was active does not answer the question of whether it was

inappropriate.

The evidence of Merrill Lynch's continuous approval of

Galarneau's trading strategy while the account was at its most

active, and its defense of that strategy long after the Ford

complaint, also support the jury's ultimate conclusion that the U-5

statement is false. Merrill Lynch again disagrees, relying on the

fact that, at the time the firm approved the trading in the Ford

account, it did not have the benefit of the Bates report. But the

jury was free to disregard this explanation in the face of

contradictory evidence presented by Galarneau: First, Galarneau

presented evidence about the distortive effect of the report. She

testified that the report commingled actual securities losses with

securities that were not sold, but declined in market value,

counting as a "loss" a security that at the (arbitrary) date of the

report may have been down, but later increased in value. Galarneau

also pointed out that the report failed to take into account

$101,000 in income Ford received and $36,000 in tax savings to

Ford, as well as the subsequent $65,000 increase in value of

securities retained.

Testimony from Galarneau and Guild, as well as from

Richard Heller, that particular trades should be viewed in the

-26-
context of the overall trading strategy and the market at that time

casts further doubt on the importance of the Bates report, which

was limited to "when a given security was purchased, the purchase

price, when the security was sold, and the sale price." Finally,

we are persuaded that the Bates report could not have been the

revelation Merrill Lynch claims it was, given that Merrill Lynch

defended Galarneau's trading in the Ford account even after the

firm received the Bates report in September 2003.

4. Malice Necessary to Overcome Conditional
Privilege

Having determined that Galarneau presented sufficient

evidence to support a jury finding that the U-5 statement was

false, we turn to Galarneau's evidence of malice. As noted above,

where a statement is conditionally privileged, "liability for

defamation attaches only if the person who made the defamatory

statements loses the privilege through abusing it." Lester, 596

A.2d at 69. As such, Merrill Lynch will have abused its

conditional privilege if it knew the statement it made in the U-5

was false or if it recklessly disregarded its falsity. Id.

Much of the evidence that supports a finding of falsity

also supports a finding of malice. Evidence that Merrill Lynch

approved the trading as it was taking place and defended the

trading after it came under attack supports the jury's conclusion

that the firm either knew the statement was false, or recklessly

disregarded its falsity. See Rippett v. Bemis, 672 A.2d 82, 87

-27-
(Me. 1996) ("Evidence is sufficient to support a finding of

reckless disregard for the truth if it establishes that the maker

of a statement had 'a high degree of awareness of probable falsity

or serious doubt as to the truth of the statement.'" (quoting Onat

v. Penobscot Bay Med. Ctr., 574 A.2d 872, 874 (Me. 1990)).

Because we find there was sufficient evidence to support

the jury's finding of defamation, we affirm the district court's

denial of Merrill Lynch's motion for judgment as a matter of law.

B. Evidence of Special Damages

In tort law, proof of causation is generally required to

sustain an award of special damages.8 See generally Doe v. Chao,

540 U.S. 614, 621 (2004). Accordingly, the district court

instructed the jury that Galarneau had to prove that the defamatory

statement "play[ed] a substantial part in bringing about or

actually causing the injury or damages; and the injury or damages

was a direct result, or a reasonably foreseeable consequence of the

act."

Merrill Lynch argues that there was insufficient evidence

that Galarneau's lost wages were caused by the defamatory statement

8
Throughout this opinion we use the term "special damages" in
accordance with the common-law definition, i.e., "'[g]eneral
damages' are compensatory damages for a harm so frequently
resulting from the tort that is the basis of the action that the
existence of the damages is normally to be anticipated," whereas
"'[s]pecial damages' are compensatory damages for a harm other than
one for which general damages are given." Restatement (Second) of
Torts § 904(1) (1979).

-28-
in the U-5. Specifically, Merrill Lynch contends that there are

other reasons that might explain why Galarneau was not hired by

other firms, including the fact that the U-5 indicated that

Galarneau engaged in price and time discretion.

However, we see no reason why Galarneau was required to

prove special damages in the first place. "The common law of

defamation is an oddity of tort law, for it allows recovery of

purportedly compensatory damages without evidence of actual loss.

Under the traditional rules pertaining to actions for libel, the

existence of injury is presumed from the fact of publication."

Gertz, 418 U.S. at 349. Maine adheres to these traditional rules

of defamation law in certain contexts.

Under Maine law, defamatory words relating to

"profession, occupation or official station" are libelous per se.

See Saunders, 497 A.2d at 1124. "When [defamation] per se is

established, a plaintiff need not prove special damages or malice

in order to recover a substantial award." Marston v. Newavom, 629

A.2d 587, 593 (Me. 1993). There can be no doubt that the

defamatory statement in the U-5 ("Ms. Galarneau was terminated

after the firm concluded that she had . . . engaged in

inappropriate bond trading in one client's account . . . .")

related to Galarneau's profession. As such, she was entitled to

-29-
recover her lost wages without having to prove causation.9 See

Farrell v. Kramer, 159 Me. 387, 390 (1963); Saunders, 497 A.2d at

1124-25. We therefore affirm the district court's denial of

judgment as a matter of law with respect to the award of special

damages on the ground Galarneau was entitled to those damages

without having to show causation.

C. Punitive Damages

Under Maine law, "punitive damages are available based

upon tortious conduct only if the defendant acted with malice."

Tuttle v. Raymond, 494 A.2d 1353, 1361 (Me. 1985). While we have

already found that sufficient evidence was presented to establish

malice in overcoming the conditional privilege, we must address the

issue anew to determine whether the award of punitive damages was

appropriate. "Malice" means different things in different

contexts. As explained above, a plaintiff may satisfy the malice

requirement to overcome a conditional privilege by showing that the

defendant either knew the statement published was false or

published the statement with reckless disregard as to its falsity.

By contrast, to get punitive damages, a plaintiff must show that

the defendant acted with actual ill will toward the plaintiff or in

a manner "so outrageous that malice toward a person injured as a

result of that conduct can be implied." Tuttle, 494 A.2d at 1361

9
While recovery of special damages would have been barred were
the statement privileged, the jury found that Merrill Lynch lost
that privilege due to its recklessness. Bemis, 672 A.2d at 87-88.

-30-
(holding that for purposes of punitive damages, "'implied' or

'legal' malice will not be established by the defendant's mere

reckless disregard of the circumstances"). Moreover, in the

context of punitive damages, the plaintiff has the burden of

proving malice by clear and convincing evidence, not by the

preponderance of the evidence standard applicable in establishing

common law defamation. Id. As the Maine Supreme Court has noted,

"[a]lthough malice (in its ordinary sense of
ill will or deliberately outrageous
misconduct) must be proven by clear and
convincing evidence to support an award of
punitive damages, this standard of proof has
nothing to do with the 'actual malice' -- that
is, knowledge or disregard of falsity --
required to overcome a conditional privilege
in defamation."

Lester, 596 A.2d at 70 n.8.

We review de novo "the legal question of whether the

evidence suffices to justify an award [of punitive damages]."

Zimmerman v. Direct Fed. Credit Union, 262 F.3d 70, 81 (1st Cir.

2001). On appeal, Merrill Lynch argues that the evidence presented

at trial was insufficient to support the showing of malice

necessary for punitive liability. We agree.

In support of her argument that Merrill Lynch acted

maliciously, Galarneau contends that "[t]here can be no question on

this record that Merrill Lynch knew that the false accusation in

the U-5 would almost certainly result in injury to [her]." But

even accepting this as true, Maine law requires more where punitive

-31-
damages are concerned: Merrill Lynch's knowledge must have

motivated its statement, or its actions must have been so

outrageous as to imply malice. See Haworth v. Feigon, 623 A.2d

150, 159 (Me. 1993). There was no evidence that Merrill Lynch made

the statement in the U-5 with the intent to deprive Galarneau of a

job. And Merrill Lynch's actions in filing the U-5, knowing it

"would almost certainly" hinder Galarneau's job prospects, even if

established by clear and convincing evidence, is not sufficiently

outrageous to warrant punitive damages. See Veilleux v. Nat'l

Broad. Co., 206 F.3d 92, 135 (1st Cir. 2000) ("While a jury could

find that the alleged misrepresentations were made knowingly or

even recklessly, it could not reasonably infer common-law malice as

required under Maine law."); Staples, 629 A.2d at 602-04 (finding

that employer's conduct in demoting plaintiff and recklessly

accusing him of sabotaging computer files after plaintiff

criticized employer was insufficient to establish that defendant's

conduct was motivated by ill will or so outrageous that malice

could be implied); Boivin v. Jones & Vining, Inc., 578 A.2d 187,

188-89 (Me. 1990) (finding that employer's conduct in rehiring

employee with promise of employment through retirement, while in

fact intending to retain employee only until inventory was reduced,

was not so outrageous as to justify award of punitive damages). As

such, we find that the evidence presented at trial was insufficient

to support an award of punitive damages and therefore reverse the

-32-
district court's denial of judgment as a matter of law on this

point.

D. Evidence Relating to the Drafting of the U-5

Before trial, Galarneau filed a motion in limine to

exclude all evidence of communications between Galarneau's counsel

and counsel for Merrill Lynch regarding the opportunity to review

and comment upon the language Merrill Lynch proposed to use in

Galarneau's Form U-5. Galarneau claimed that evidence of such

communications was subject to exclusion under Fed. R. Evid. 408

"because it constitutes an offer and/or communication made during

settlement negotiations," or, in the alternative, under Rule 403

because it had "minimal relevance compared to its unfair

prejudice." The district court granted the motion to exclude,

stating:

I'm not going to let it in. I'm not changing
my previous ruling. In think under 408, 403,
and in my discretion in this matter, I think
it opens doors that might well require counsel
to testify. I think they are settlement
discussions.

"[T]he district court's construction of evidentiary rules

is a question of law which we review de novo," United States v.

Barone, 114 F.3d 1284, 1296 (1st Cir. 1989), while the district

court's application of the rule to particular facts is reviewed for

abuse of discretion, Blake v. Pellegrino, 329 F.3d 43, 46 (1st Cir.

2003).

-33-
 Merrill Lynch argues that the exclusion of this evidence

was prejudicial error, and it is therefore entitled to a new trial.

We disagree.

"Although relevant, evidence may be excluded if its

probative value is substantially outweighed by the danger of unfair

prejudice, confusion of the issues, or misleading the jury, or by

considerations of undue delay, waste of time, or needless

presentation of cumulative evidence." Fed. R. Evid. 403. The

trial court employs a balancing test to determine whether Rule 403

applies, weighing the probative worth of the evidence against its

potentially confusing effects. See Fryar v. Curtis, 485 F.3d 179,

184 (1st Cir. 2007). Thus, even where the evidence may shed light

on the disputed issues, the district judge can find the "untoward

effects of the proffered evidence" to be so weighty that the

evidence should be excluded. Faigin v. Kelly, 184 F.3d 67, 80 (1st

Cir. 1999).

We "accord district courts considerable latitude in this

exercise" and review the exclusion of evidence under Rule 403 for

abuse of discretion. Id. at 79-80. The district judge enjoys a

unique advantage in observing first-hand the nuances of trial,

Faigin, 184 F.3d at 80, we therefore give the district court

"significant leeway" in making its determinations, Williams v.

Drake, 146 F.3d 44, 47 (1st Cir. 1998). We have consistently

declined to reverse the district court's judgment "from the vista

-34-
of a cold appellate record" absent "extraordinarily compelling

circumstances." Faigin, 184 F.3d at 81 (quoting Freeman v.

Package Mach. Co., 865 F.2d 1331, 1340 (1st Cir. 1988)); see also

Onujiogu v. United States, 817 F.2d 3, 6 (1st Cir. 1987) ("Only in

compelling circumstances will we reverse the exercise of a district

court's informed discretion concerning the relative weight of

probative value and unfairly prejudicial effect.").

We find that the district court did not abuse its

discretion in excluding the evidence under Rule 403 in this case.

As required under the rule, the district court weighed the

probative value of the evidence against the risk of confusion of

the issues. Finding that the evidence was probative of both

parties' contentions with respect to liability and that it would

likely require testimony from the attorneys as to the motivations

behind the proposed U-5 language and Merrill Lynch's refusal to

adopt it, the district court excluded the evidence. Cf. United

States v. Angiulo, 897 F.2d 1169, 1194 (1st Cir. 1990)

(acknowledging the "advocate-witness rule, which generally bars an

attorney from appearing as both an advocate and a witness in the

same litigation" (internal quotation marks omitted)). We find no

fault in this determination. Moreover, Merrill Lynch has not

shown, nor has it alleged, any extraordinarily compelling

circumstances that would justify our reversal of the district

court's ruling. Rather, they have merely alleged that the district

-35-
judge did not give enough weight to the probative value of the

evidence. In light of the unexceptional nature of Merrill Lynch's

allegations, we decline to disturb the district court's ruling

under Rule 403.10

III. Conclusion

For the reasons stated above, we affirm the district

court's denial of Merrill Lynch's motion for judgment as a matter

of law with respect to (1) the sufficiency of the evidence

supporting the jury's finding of defamation and (2) the award of

special damages. We also affirm the district court's exclusion of

evidence. We reverse, however, the district court's denial of

judgment as a matter of law on the punitive damages question and

vacate that award.

Affirmed in part; Reversed and Vacated in part. Each

party shall bear its own costs.

10
Because we find no abuse of discretion in the exclusion of the
correspondence under Rule 403, we need not address Merrill Lynch's
argument that the evidence was not excludable under Rule 408.

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