March 18, 2009
I write concerning the proposed changes to the FINRA discovery guide. I write based on many years of experience as an advocate for investors in the FINRA forum. I have served on various FINRA (NASD) committees, including its National Arbitration and Mediation Committee, and am a 2-time past-president of PIABA.
I am very concerned about the proposed revisions. The effect of these revisions is to expand markedly the scope of documents deemed presumptively discoverable from investors in every securities arbitration. The list of documents is already far broader than justified.
When counseling clients, I often refer to the discovery process in securities arbitration as a "financial colonoscopy." Regardless of the nature of the case or claim, investors must produce in discovery years-and-years of every sort of financial record. Every account statement, every confirmation, every brochure, prospectus, letter, e-mail, tax return, bank record, check record, financial statement, (and more) is required. Now that list is to be expanded to include, inter alia, loan applications, and to expand even further the number of years of records to be produced.
The task is onerous for an ordinary person, and especially difficult for the elderly. The number of copies is mind-boggling.
The defense claims to want these documents because they are "relevant", but that is not always so. In fact this wide array is sought because defense lawyers are fishing for whatever hook (or dirt) they can find to try to assert that, e.g., a defrauded client should have known better.
Under the guise of discovery of relevant facts, the defense's ugly tactic is to use this discovery to assert irrelevant facts and turn an arbitration that is supposed to be about whether the broker lied into something altogther different - an attack on the aggrieved investor's character. And in the most abusive situations, aggressive defense attorneys have been known to try to turn an arbitration the equivalent of a tax audit. The newly-proposed discovery lists are bound to encourage that tactic.
The result of the requirement that every Claimant submit to this financial colonoscopy as a condition of seeking redress is that aggrieved individuals and companies are discouraged (and in some cases prevented) from bringing arbitrations.
The proposed revisions make arbitration more burdensome, expand and encourage abuse. They should be rejected by the SEC.
As to further detailed comments regarding the proposed revsions, I express my agreement with the comments in the PIABA comment letter. I nevertheless felt it sufficiently important to express my main concern separately.
Respectfully,
Seth E. Lipner