In FINRA securities arbitrations, "Discovery" or the parties' quest to obtain important documents and information that are relevant to any claim or defense are very different than what one might generally expect in a court proceeding.
In FINRA securities arbitrations, depositions, or the taking of testimony under oath in the presence of a court reporter prior to a final hearing or trial, is not generally permitted, unless with the permission of the arbitration panel, it is undertaken to preserve the testimony of an ill or dying witness who may otherwise be unavailable at the time of hearing.
In FINRA securities arbitrations, while it "is not intended to remove flexibility from arbitrators or parties in a given case," the FINRA Discovery Guide, sets forth certain categories of presumptively discoverable documents or information in any given type of claim or controversy involving unsuitability, churning, failure to supervise, misrepresentation/omission, negligence/breach of fiduciary duty, unauthorized trading, or unsuitability.
Typically, public customers or "Claiman" are required to produce all documents or communications with their broker or brokerage firms, all documents relating to their account(s), along with their tax returns and statements from other brokerage firms for a period of three years prior to events or transactions at issue giving rise to their claim.
Although an oversimplification, the brokerage firm, generally, is also required to produce certain documents including the broker's compensation records, disclosable complaints against the broker, and other documents supporting the recommendation of a security to a particular customer.
Respondents, i.e. the brokerage firms and their lawyers, frequently object to the production of those documents and information set forth in the FINRA Discovery Guide, as burdensome, irrelevant or oppressive (notwithstanding that the documents sought are business records which are required to be created and maintained in accordance with the record keeping provisions of the federal securities laws). Yet these same entities often relentlessly seek discovery relating to every aspect of a public customer's personal and financial life.
In November 2003, the NASD (now FINRA) announced that it had become increasingly aware of instances in which parties are not complying with their duty to cooperate in the exchange of documents requested by parties or listed on applicable Document Production Lists within the specified time.
According to FINRA, it will not tolerate abuses of the discovery process, and issued this Notice to Members to:
- (1) remind members and associated persons of that duty;
- (2) notify them that NASD Dispute Resolution will continue to monitor compliance with its discovery rules, and will refer perceived abuses to NASD Regulatory Policy and Oversight for disciplinary review.
On July 19, 2004, FINRA (formerly the NASD), announced that it had censured and fined Citigroup Global Markets, Inc., formerly Salomon Smith Barney, Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Morgan Stanley DW Inc. $250,000 each for failing to comply with their discovery obligations.
Unfortunately, such discovery tactics continue by many major brokerage firms, as they affirmatively seek to conceal their wrongful conduct, and quest for profits, which historically has included everything from private partnership sales, to tainted analysts' recommendations, (and the over zealous and often unsuitable retail recommendation of high tech companies to these activities), to most recently, auction rate securities, structured products, and the packaging of preferred shares.
In any event, documents, as opposed to testimonial evidence, are, in substantial part, a more reliable form of evidence that is generally: tangible, unbiased, contemporaneous, or created at or about the time of the events in question, and can be enlarged for any arbitration hearing.
Documents created by a brokerage firm, specifically documents provided to the customer by brokerage firms, are written by the brokerage firms, and as such, through an avalanche of disclosure and duty-shifting, are designed to absolve them from all forms of liability. In substantial part, at least on the surface, these are the only documents that are freely produced, without controversy, in discovery in FINRA Securities Arbitrations.
Conversely, in defense of all claims, almost without exception, brokerage firms will attempt to transmogrify every case into a "suitability" case to determine a person's wealth financial ability to withstand risk instead of the broker's duty and failure to disclose risk, or failure to follow the customers' expressed investment objective with respect to risk, (i.e. conservative or aggressive).
Accordingly, in Discovery in FINRA Securities Arbitrations, the brokerage firm will seek intrusive discovery with respect to every aspect of the customer's financial life, education and employment in an effort show the customer understood risk, could afford to accept risk, and therefore, should have been immune from fraud.