August 24, 2010
I believe that FINRA is industry oriented and has an intention of protecting the industry hide or shield itself from attacks by the public investors, even when there has been wrongdoing. The discovery guide does not make it clear that it is only intended to be a starting point, and that counsel are encouraged to make requests, which are relevant to their cases, and that panel members are encouraged to view the discovery guide as a starting place, not as a limit on permitted discovery. It is important that these instructions be added at the outset of the guide.
I believe the guide needs changes but I am opposed to the changes in the following respects:
The new Guide deletes the requirement in the current Guide (List
5, Item 2) to produce all documents reflecting supervision of the associated
person and the customer accounts at issue, when supervision is an issue.
The new Guide eliminates the provision in the current Guide
(List 1, Item 11) for respondents to produce all records of the firm
relating to the claimants' accounts at issue.
The new Guide (List 2, Item 15) requires production of all
documents relating to claimants' other investment opportunities, with no
time limitation and even if the investment was not a security and the
claimants did not take advantage of the opportunity. For example, if
claimants consider purchasing a rental property as an investment after the
filing of the Statement of Claim but decide not to do so, the new Guide
requires production of all documents relating to that post-transaction
investment opportunity that was not exercised.
Under the current Guide (List 2, Item 9), claimants only produce
correspondence between them and respondents. Under the new Guide (List 2,
Item 9), claimants produce all correspondence of any kind about the accounts
or transactions at issue. This change would require claimants to produce
private correspondence in which they have a reasonable expectation of
privacy, such as correspondence with their elderly aunt Millie which might
happen to mention in passing their poorly performing investments, along with
other private information.
Under the new Guide, if respondents write to receivers about the
claimants' investments, this correspondence need not be produced (List 1,
Item 2), but if claimants write to Aunt Millie and mention their investment
losses, then this irrelevant and private personal correspondence is produced
(List 2, Item 9). This difference in treatment is unfair.
Commission runs in the new Guide are too short-as little as 6
months (List 1, Item 20). The requirement to produce at least some
commission runs is an improvement over the current Guide, but the time
limitation in the new Guide will make persuading arbitrators to require
longer commission runs more difficult.
Unlike the current Guide (List 2, Item 1), the new Guide
requires production of Schedule A to federal tax returns and all IRS
worksheets related to Schedules A, B, D, and E (List 2, Item 1). The
information in Schedule A and the worksheets will generally be irrelevant.
Claimants commonly do not have the worksheets and may be required to get
them from their accountants, thereby increasing the frustration that they
already feel about FINRA's discovery requirements. Parties will have
difficulty distinguishing between IRS worksheets and the worksheets that tax
preparation software generates.
Unlike the current Guide (List 1, Item 8), the new Guide allows
respondents to redact customer complaints to prevent the disclosure of
non-public personal information of the complaining customers (List 1, Item
10). Respondents will in every instance redact customer names.
The new Guide frequently restricts respondents' production of
records to the accounts and transactions at issue (see, e.g., List 1, Items
2, 5, 7, and 9), but it requires claimants to produce every document that
they have relating to any account or transaction with the respondents (List
2, Item 5). By contrast, the current Guide, in addition to other specific
requirements, only requires claimants to produce documents signed by or
provided by the claimants to the respondents (List 2, Item 5). Requiring
claimants to produce all of their records relating to all of their accounts,
while requiring respondents to produce only some of their records relating
primarily to the accounts at issue, is unfair.
The new Guide's broad catchall requirement (List 2, Item 5) for
claimants to produce all documents relating to all accounts and transactions
with respondents is vague and potentially covers a large number of documents
with marginal or no relevance. For example, this item could require
production of years and years of claimants' bank account statements which
reflect monthly distribution deposits from mutual fund investments not at
issue, even though other records of these distributions are available and
the distributions are not relevant.
Unlike the old Guide (List 1, Item 2), the new Guide does not
require respondents to produce monthly statements and confirmations. By
contrast, the new Guide requires claimants to produce their monthly
statements, unless they are willing to stipulate that they received these
statements (List 2, Item 4). Claimants can avoid mandatory production of
monthly statements only by making a potentially damaging stipulation, while
respondents can avoid mandatory production of monthly statements as a matter
of course. This difference in treatment is unfair.
Unlike the current Guide (List 5, Item 4), the new Guide limits
production of regulatory examinations reports to the one year before the
transactions at issue through the filing of the Statement of Claim (List 1,
Unlike the current Guide, the new Guide requires respondents and
claimants (List 1 and 2, Item 18) to produce all documents received by
document request to third parties at any time during the case. This
requirement implicates the work product privilege. My opponents should not
be able to take advantage of my efforts to obtain documents that they were
not diligent enough or did not think to get.
Unlike the current Guide (List 2, Item 2), the new Guide
requires production of financial statements in loan applications (List 2,
Item 2). Numbers inserted in the lines of loans applications-which are
usually just estimates, are commonly entered by loan brokers rather than
claimants to increase the chance that the loans will be approved, and are
often incorrect-are not financial statements and are misleading to the
Under the current Guide (List 12, Item 1), telephone records and
logs are produced only in unauthorized trading cases. Under the new Guide
(List 2, Item 8), they are produced in every case. This change is unduly
burdensome and can arguably require claimants in every case to search
through their long distance phone bills for entries that show the
firm/associated persons' phone numbers.
Unlike the current Guide (List 2, Item 12), the new Guide (List
2, Item 11) requires production of non-confidential settlements of
claimants' other formal civil actions and arbitrations. Cases can settle for
numerous reasons unrelated to the merits. Consequently, settlement
agreements will usually be irrelevant and misleading about the merits of the
claim. The new Guide also implicitly encourages arbitrators to violate the
confidentiality of these settlements.
Unlike the current Guide (Lists 8, 10, and 14, Item 1), the new
Guide (List 2, Item 12) requires claimants to produce documents showing
accounts over which they have trading authority if they are also trustees.
This change can require claimants to disclose private information about
other persons and entities not involved in the case who have not consented
to this disclosure. The trusts' investment objectives will also commonly be
different from the claimants' personal objectives, so that the relevance of
these documents can be marginal at best.
Under the current Guide (List 14, Item 2), claimants produce the
documents they relied on in making the investment decisions at issue
production under the current Guide is therefore limited to pre-transaction
documents. Under the new Guide (List 2, Items 13 and 15), claimants produce
every document they have about the investments, even if they did not rely on
them the new Guide thus includes both pre-transaction and post-transaction
documents, such as an internet article about the investment written after
the filing of the Statement of Claim.
The new Guide eliminates the requirement in the current Guide
for respondents to produce order tickets in unauthorized trading cases (List
11, Item 1). Order tickets, however, are essential in unauthorized trading
The new Guide requires respondents (List 1, Item 12) to produce
only those analyses and reconciliations that were prepared during the time
period at issue, but requires claimants (List 2, Item 6, in its most natural
reading) to produce all analyses and reconciliations prepared at any time,
relating to accounts or transactions at respondents during the time period
at issue. The new Guide therefore arguably requires claimants-but generally
not respondents-to produce analyses protected by the work product privilege
This difference in treatment is unfair.
I believe the guide is being used as a limitation of available discovery. In court, discovery is not limited, so long as it is relevant. The various facts of the case warrant various aspects of discovery. In judicial proceedings the parties and their attorneys are encouraged to think "outside the box". The industry attorneys are trying to use the discovery guide as a shield from producing relevant information which, if produced, may shed true light on the facts, and may benefit the public investor.