Finally, a FINRA Arbitration Panel who enforces their discovery award. In a customer arbitration, Morgan Stanley was ordered to produce documents related to the termination of one of its key employees. It did not do so. During the hearing, the Panel issued the same Order as was previously issued by the Chairperson for production of “all” related documents by midnight.
Morgan Stanley did not send the requested documents to Claimants’ counsel by midnight, nor did Respondent’s counsel provide opposing counsel with the courtesy of an email by midnight explaining why “all” the ordered documents were not being produced. The evidentiary hearing was delayed, for a second time, to permit both parties to provide oral argument on Morgan Stanley’s claim of “settlement privilege” which, to my knowledge, does not exist, and apparently wasn’t claimed prior to the hearing.
Morgan Stanley tried to get the Arbitrators to review the documents “in camera” which would be without the Claimant’s counsel seeing the documents, so they can decide if the privilege applied. The Arbitrators refused, ordered the withheld documents to be handed to Claimants’ counsel,
and not to the Panel for in camera review.
In its award, the Panel took note of the extreme prejudice Morgan Stanley’s failure of compliance caused Claimants’ counsel in preparing their case and asserting their claims without the withheld documents which the Panel deemed were highly relevant to the dispute in question, the central figure of which was the terminated employee whose related documents were being withheld.
The Claimants alleged damages of $2,739,792.00, and the Panel awarded $261,420.63, less than 10% of the amount of damages. We all know that a Claimant’s damage claim is the absolute maximum that they can ask for, and probably not the amount they expect to win, but an award of 10%?
But then, The Panel noted that Rule 12506(b)(2) of the FINRA Code of Arbitration Procedure related to parties’ obligation to “act in good faith when complying with subparagraph (1) of this rule. ‘Good faith’ means that a party must use its best efforts to produce all documents required or agreed to be produced. If a document cannot be produced in the required time, a party must establish a reasonable time frame to produce the document.” The Panel also took note of Rule 12212 of the Code related to sanctions: “(a) The panel may sanction a party for failure to comply with any provision in the Code, or any order of the panel or single arbitrator authorized to act on behalf of the panel. Unless prohibited by applicable law, sanctions may include, but are not limited to:
• Assessing monetary penalties payable to one or more parties; . . .”
The Panel continued and said “[i]n accordance with the above, after due deliberation and upon consideration of the negative effect that Respondent’s noncompliance with the Panel’s Orders had on its efforts to achieve a fair arbitration hearing, the Panel hereby orders Respondent to pay monetary sanctions to Claimants in the amount of $3,000,000.00.”
$261,000 in damages, and THREE MILLION in sanctions for discovery violations.
from The Securities Law Home Page