Morgan Stanley Sanctioned THREE MILLION DOLLARS for Discovery Abuse

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


FINRA Considering Rule Changes for Non-Attorneys In Arbitration

FINRA Requests Comment on the Efficacy of Allowing
Compensated Non-Attorneys to Represent Parties in

FINRA Rules do not prohibit non-attorneys from representing parties in arbitrations, although some states do have such a prohibition. While there are some representatives who provide competent advise to parties, there have been a number of issues over the years regarding these non-attorneys.

FINRA is now reviewing this policy and is seeking comment from members and interested parties regarding the use of non-attorneys in arbitrations.

The Regulatory Notice discussing the issue is 17-34.

Interested parties can submit their comments using
the following methods:
0 Emailing comments to

Read the entire notice before submitting a comment, and please note that the Comment Period Expires December 18, 2017



FINRA Proposes Expanded Chairperson Qualifications

FINRA has filed a proposed rule change to provide that an attorney arbitrator would be eligible for the chairperson roster if he or she completes chairperson training and serves as an arbitrator through award on at least one arbitration, instead of two arbitrations, administered by a self-regulatory organization (“SRO”) in which hearings were held.

Proposed Rule Change: Broadening Chairperson Eligibility in Arbitration

Status of FINRA Arbitration Recommendations

On September 30, 2016, FINRA published a status report detailing the progress on the FINRA Dispute Resolution Task Force recommendations. As of October 19, 2016, FINRA’s Office of Dispute Resolution (ODR) staff had discussed all of the recommendations with the National Arbitration and Mediation Committee (NAMC), FINRA’s Board Advisory Committee on the dispute resolution forum. 

The report is available at the FINRA Dispute Resolution website.

Feds Ban PDAAs at Federally Funded Nursing Home Facilities

From the Securities Arbitration Commentator:

 “The Centers for Medicare and Medicaid Services has issued final regulations banning nursing homes and long-term care facilities receiving federal funds from using mandatory predispute arbitration agreements.”

Feds Ban PDAAs at Federally Funded Nursing Home Facilities:

FINRA Proposes Change to Arbitrator Chairperson Qualifications

FINRA’s recent rule change, which effectively removed every attorney with any relevant securities experience from serving as a Chairperson might be negatively effecting the Chairperson roster.

As we discussed in a posting in March, Customer and Firm Attorneys are No Longer Public Arbitrators, since the Chairperson must be a public arbitrator, most securities attorneys were instantly disqualified from serving as a Chairperson. While FINRA’s roster still contains many extremely qualified Chairpersons, the impact on the arbitrator pool has been significant, and placed additional burdens on the remaining qualified Chairpersons.

FINRA has finally filed a proposed rule change to amend  the Code of Arbitration Procedure for both Customer and Industry Disputes which it was discussing back in May of this year. It is proposing to change the rule  to provide that an attorney arbitrator would be eligible for the chairperson roster if he or she completes chairperson training and serves as an arbitrator through award on at least one arbitration, instead of two arbitrations, administered by a self-regulatory organization  in which hearings were held.

This is probably not going to make a significant difference in the Chairperson pool, but it is a start.

SR-FINRA-2016-033 |

Customer, Firm Attorneys Are Not Public Arbitrators

After years of trying to remove anyone with a past relationship with the securities industry from serving on FINRA arbitration panels as public arbitrators, customer attorneys have
succeeded. The SEC has approved a rule classifying arbitrators with former industry relationships as public arbitrators.

The rule also classified attorneys who spend more than 20% of their time representing customers against the industry as non-public arbitrators.

See the commentary at The Securities Law Blog