FINRA Arbitrators Start Getting Tough With Discovery Abuses


Two recent FINRA arbitration awards highlight increased focus by FINRA arbitrators concerning discovery abuses by litigants. FINRA’s rules require cooperation of the parties in discovery (Rule 12505) and specifically empower the arbitrators to issue sanctions for lack of cooperation, failing to comply with the discovery rules, or frivolously objecting to the production of documents or information (Rule 12511). Rule 12511 also permits the panel to dismiss a claim, defense or proceeding if prior warnings or sanctions have proven ineffectual.

Miriam Dean v. Wells Fargo Advisors, LLC (FINRA Arbitration No. 11-03911)

Although the power to dismiss a claim is in the rule book, until recently, you would be hard pressed to find an award which exercised that power. That changed with Miriam Dean v. Wells Fargo Advisors, LLC (FINRA Arbitration No. 11-03911), wherein the customer asserted claims in connection with an investment in a reverse convertible note. Apparently, the customer ignored the first discovery order. Somewhat miffed by the customer’s non-compliance, the arbitrator issued a second order giving the claimant the following 3 options:

  1. Proceed with the hearings on the scheduled dates of October 16-18, 2012, but pursuant to Rule 12511(a) of the Code, Claimant will be sanctioned by being precluded from presenting evidence in the pursuit of her case;
  2. Claimant may request a postponement of the hearings, so that Claimant can agree to adhere to the discovery requirements by a mutually agreeable date. All postponement fees incurred will be borne by Claimant;
  3. Claimant voluntarily requests withdrawal of claim. All forum fees will be assessed equally against Claimant and Respondent.

Apparently, the customer chose to disregard the second order as well. Oh well, said the arbitrator, who followed by issuing an award dismissing the customer’s claims with prejudice and assessing motion fees and hearing session fees against the customer. Even though the customer was pro se, the award strikes me as a reasonable outcome for a litigant who chose to ignore prior warnings from the arbitrator.

Robert E. McCarthy, et al. v. AllianceBernstein L.P., et al. (FINRA Arbitration No. 10-05687)

Here, the claimants sought damages resulting from investments in real estate investment trusts. Although the arbitrators awarded no compensatory damages to the claimants, they did assess sanctions in the amount of $30,000 against respondents for apparent discovery abuses. In fact, virtually the entire award is dedicated to describing the “unconscionable discovery practices” advanced by the respondents. Here are the highlights:

  1. Respondents responded to Claimants’ discovery requests by making “voluminous” production without identifying the requests to which the documents responded.
  2. Respondents refused to identify the categories of requests to which respondents had no responsive documents.
  3. Worst yet, one of respondents’ witnesses testified that “much of the research that was relevant to Claimants’ accounts with Respondents was not made available to them.”

Notwithstanding the fact that the respondents’ conduct during discovery “obstructed, prejudiced, and sidetracked the conscientious efforts of Claimants’ counsel to develop their case”, the arbitrators still zeroed the claimants because the “discovery efforts described herein would not have changed the outcome of the case.” This is an interesting award to read.

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