Presented for your consideration is a regulatory odyssey. This rambling, shambling tale sort of begins in 2008 with an unhappy customer complaining about his Ameriprise stockbroker. That takes us to a 2010 FINRA Arbitration by the unhappy customer against Ameriprise and the stockbroker. As a result of some shenanigans that may or may not have gone on in preparation for and during that arbitration, we wind up with a 2014 FINRA Office of Hearing Officers Decision, which suspends the stockbroker for three months and fines him $50,000. On appeal, in 2016, FINRA's National Adjudicatory Council increases the suspension to one year. Not taking his punishment without more of a fight, the stockbroker appeals to the Securities and Exchange Commission, which, in 2017, remands the regulatory case back to FINRA. Now, in 2019, FINRA's NAC re-visits the entire mess via the SEC's remand and, well, what can I say: here we go again.
At the arbitration hearing. Claimant requested that the Panel award sanctions against Respondents due to various issues in regard to discovery problems with Respondents. After considering the pleadings, testimony and evidence presented, the Panel will award sanctions based on the following findings:
*Respondent Tysk altered the record of his contacts with Claimant after Claimant complained about the suitability of the annuity he purchased:*Ameriprise failed to update its discovery responses to Claimant after it became aware that Tysk had altered the file;*Only after an Emergency Motion to Compel Discovery was filed at the eve of the rescheduled hearing did Ameriprise make Tysk's computer available to Claimant and allow Claimant to discover the changes; and*Respondents engaged in other attempts to block discovery by Claimant . . .
The FINRA Arbitration Panel ordered Ameriprise and Tysk to jointly and severally pay Claimant Roth $197,000 compensatory damages; $36,000 in witness fees; $213,000 in attorneys' fees; and $20,000 in sanctions.
2014 FINRA OHO Decision
By altering computer notes of customer contacts after the customer complained about the suitability of a recommendation, and failing to inform his firm of the alterations when he produced a copy of the notes in discovery in an arbitration proceeding, Respondent David B. Tysk violated NASD Rule 2110, FINRA Code of Arbitration Procedure for Customer Disputes IM-12000, and FINRA Rule 2010. For this misconduct, Tysk is suspended in all capacities for three months and is fined $50,000.By failing to inform the claimant in an arbitration proceeding that a copy of computer notes of customer contacts produced in discovery had been altered, Respondent Ameriprise Financial Services, Inc., violated FINRA Rule 2010. By failing to inform the claimant of the alterations, and failing to produce an exception report in discovery as required, Ameriprise violated FINRA Code of Arbitration Procedure for Customer Disputes IM-12000 and FINRA Rule 2010. For this misconduct, Ameriprise is censured and fined $100,000.Respondents are assessed the costs of the hearing
Pages 2 -4 of the OHO DecisionThis disciplinary proceeding originated from a referral by a FINRA Dispute Resolution arbitration panel to FINRA's Member Regulation Department pursuant to FINRA Code of Arbitration Procedure for Customer Disputes Rule 12104.1 The arbitration panel made the referral because Respondents Ameriprise Financial Services, Inc. and David B. Tysk produced documents in an arbitration proceeding without disclosing that Tysk had altered the documents after receiving a complaint letter from a customer.The altered documents were printouts of notes of Tysk's contacts with customer GR, which Tysk had maintained in a computer program. Tysk made the changes appear as if they were notes made contemporaneously with the events described. GR became suspicious because the notes seemed to be too-perfectly tailored to the defense of his claim. GR requested further discovery to determine whether the notes had been altered after he lodged his complaint with Ameriprise. Respondents opposed the requests.For months after the firm provided the notes in discovery, Tysk said nothing about the alterations. In a meeting to prepare for the arbitration hearing, he finally disclosed to Ameriprise that he had altered the notes. Nonetheless, neither Ameriprise nor Tysk informed GR that the notes had been altered.As the arbitration hearing date approached, GR continued trying to obtain information about whether the notes were what they appeared to be. Ameriprise and Tysk opposed GR's efforts.Just before the hearing, Ameriprise found an exception report relevant to GR's claim, which it should have provided months earlier. As soon as it could, Ameriprise turned it over to GR. GR claimed that the report was a "smoking gun," which may have been intentionally withheld, because it could have prompted Tysk to doctor his notes. GR demanded to be allowed to examine Tysk's computer program to analyze the notes.Over Respondents' objections, the arbitration panel ordered Ameriprise and Tysk to give GR access to Tysk's computer hard drive. A forensic examination of the hard drive revealed for the first time substantive edits that Tysk had made to the notes after receiving GR's complaint letter.At the conclusion of the arbitration hearing, the arbitration panel sanctioned Ameriprise and Tysk for violating arbitration discovery rules. The panel referred the matter to FINRA's Member Regulation Department for a disciplinary investigation.After the investigation, the Department of Enforcement filed a Complaint, which it subsequently amended. The gravamen of the Amended Complaint is that Ameriprise and Tysk violated just and equitable principles of trade and the Code of Arbitration Procedure by producing the notes during the arbitration without disclosing that Tysk had altered them.The underlying facts are largely undisputed. Respondents assert nonetheless that they did not act unethically. In summary, Respondents contend that Tysk altered his computer notes in good faith, to make them more accurately reflect the substance of conversations he had with GR. They argue that they complied fully with FINRA's arbitration discovery rules because they produced the notes at the arbitration hearing. Respondents maintain that they planned to have Tysk disclose the alterations during his testimony at the arbitration. They argue that this was the appropriate approach because arbitration procedures do not provide for extensive discovery, such as pre-hearing depositions and written interrogatories, and do not require an explanation in advance of the hearing that the notes had been altered. As to the separate claim that Ameriprise failed to produce the exception report as required, the firm attributes this failure to simple error, which it corrected promptly. . . .
"GR had 'over $29,000,000 invested with me' and 'does not and will not need this money during his lifetime'"
Tysk felt strongly that GR's annuity was suitable and that Ameriprise's review confirmed that "everything" concerning the annuity was "in order." However, while preparing for his interview with Storrar's delegate, Tysk noticed that his Act! notes relating to GR were deficient, "not like all of my other notes, with the exception of my mother." The Act! notes contained no references to the annuity, its cost, or surrender charge. At the hearing, Tysk testified that "[i]t bothered me that I had a lot of information and things in my head and pieces of the story that weren't there and I wanted to add them." Therefore, Tysk said, "I added electronic notes in my contact management system." Tysk made most of the edits from May 13 through May 27, 2008.55 He added:
notes regarding meetings that I had with [GR] to essentially kind of preserve my thoughts and recollections . . . I thought it was important to write things down. I think it felt good to review the file, I think it made me feel good, frankly, to just go through things kind of beginning to end.
In response to a Rule 8210 request, Tysk explained further:
At the time I thought it was rational and prudent for me to preserve facts and details known to me in chronological order . . . to write down the details of his complex file and our complicated relationship for my personal use so I would not forget them over time . . . My only thought and purpose was to preserve for myself and my file the details of my personal and business relationship with [GR] as I recalled those details at the time.
Tysk testified that "[t]he notes weren't written for another reader"; he wrote them for himself. Tysk denied he acted to protect himself in light of GR's complaint letter. He also claimed that he was not worried that the references in GR's letter to NASD, the SEC, and the Minnesota attorney general were an implied threat that GR would report the matter to regulatory authorities if Ameriprise refused his request to waive the surrender charge. While Tysk asserted that he "wasn't concerned" about the complaint, he conceded that he did have some "concerns with the letter . . . because I knew the letter contained things that were not true."
Acting on that hunch, on May 8, 2009, GR's counsel sent a supplemental request to Ameriprise and Tysk to produce "[a]ll documents showing edits made by Mr. Tysk to the notes in the contact report . . .including but not limited to the edits made on May 27, 2008." This prompted Tysk's counsel on June 22, 2009, to ask Tysk by e-mail, "Do you know anything about any edits being made to the contact reports?" The e-mail continued, "I assume he picked the date [May 27, 2008] b/c that is the 'created date' stamped on the contact report . . . My assumption was that was simply the date the report was printed off the computer." Tysk responded, "You are correct with your assumption. There are no other documents showing edits per the request."Tysk did not reply to his counsel's query asking if he knew "anything about any edits."Tysk testified that after receiving the June 22 e-mail, he searched Act! attempting to locate earlier versions of his notes but was unsuccessful.On August 21, 2009, Tysk met for the second time with counsel to prepare for the arbitration hearing. This was when Tysk first disclosed that he had altered his Act! notes. His counsel immediately informed Ameriprise's legal department and asked Tysk to try to locate additional versions of his notes.
Tysk concedes that "a rep who modifies his notes makes us wince," and that altering the Act! notes was "not a best practice." But he insists that Enforcement failed to prove that he acted unethically in violation of NASD Rule 2110 and FINRA Rule 2010.First, Tysk denies that he altered his notes to bolster his defense. He made the substantive edits in May 2008, six months before GR filed his arbitration claim. Even though this was after GR complained to Ameriprise about him, Tysk claims that he did not expect GR to file an arbitration action. Tysk points out that Ameriprise's review of GR's complaint concluded that "there was no question" that the annuity was a suitable investment for GR. Therefore, he was justifiably "100 percent comfortable with the transaction," and confident that nothing would come of the concerns expressed in GR's letter.Second, Tysk argues, he acted ethically and in good faith, because his motivation was to "make sure that his notes were accurate. Therefore the first cause of action must fail because it requires proof that he acted unethically, or in bad faithAs for the allegation that Tysk violated Ameriprise's document retention policies, Tysk argues that he "could not have knowingly or intentionally violated the firm's policies because he didn't know about the firm's policies."158 Furthermore, Ameriprise, which wrote and enforced the policies, evaluated Tysk's conduct and concluded that he did not violate them, a finding that Tysk believes the Panel should deem dispositive.
Tysk backdated a customer record and concealed the revisions he made during the discovery stage of an arbitration proceeding. We intensely condemn such deception . . .In making our sanction determination, we have weighed Tysk's claims of mitigation, and found only aggravating factors associated with his misconduct. Tysk admitted to his actions, and they were intentional. The extent to which Tysk attempted to conceal his misconduct and avoid detection, even after knowing that he was a party to an arbitration proceeding, is also aggravating. As an example, during the arbitration proceeding his attorney directly asked Tysk whether he knew about any revisions to his notes. Rather than being forthright, Tysk chose to remain silent about his wrongdoing until several months after being confronted. By entering the backdated descriptions and attempting to conceal them, Tysk demonstrated a troubling lack of integrity. We agree with the Extended Hearing Panel that Tysk subverted the arbitration process, which is an aggravating factor. See Noonan, 52 S.E.C. at 265 ("If arbitration is to be a meaningful alternative to litigation, its processes must be fair and free of abuse.") If Tysk's misconduct had not been discovered by a forensic investigation, the ability of the arbitrators to find the truth would have been undermined. The fact that Tysk's concealment was revealed does not lessen its potential to harm the arbitration process; his concealment is an aggravating circumstance.
[H]e violated just and equitable principles of trade. He asserts that he supplemented his notes to make them more complete before his customer filed the arbitration demand and observes that FINRA does not contend that the revisions he made were false. Among other things, Tysk argues that his firm's policies did not prohibit his revisions, that FINRA did not conclude that they did, and that he responded to discovery requests as required by FINRA arbitration rules. FINRA argues, among other things, that Tysk's revisions were misleading and were backdated" because he added detailed entries in the present tense to his notes as late as years after the events he documented.
[F]INRA's first cause of action alleged that Tysk violated just and equitable principles of trade by violating his firm's document retention policies, but it is unclear from the opinion under review if FINRA concluded that Tysk violated these policies. FINRA's second cause of action alleged that Tysk violated just and equitable principles of trade by violating arbitration discovery rules, but FINRA did not explain in its decision why Tysk's conduct during discovery violated just and equitable principles of trade. For the reasons explained below, we remand this case to FINRA to clarify its findings.
We cannot discern from the NAC's decision whether it concluded that Tysk violated firm policies by altering his notes. The NAC explained in a footnote that it "support[ed] the Extended Hearing Panel's finding that Tysk's actions called into serious question whether he complied with Ameriprise's retention policies" (emphasis added). This determination does not appear to constitute a finding that Tysk in fact violated his firm's policies. The NAC also stated, however, that it "support[ed] the Extended Hearing Panel's finding," which unambiguously concluded that "Tysk Violated Ameriprise's Policy." Indeed, Tysk's briefs evidence confusion over what exactly FINRA found in holding him liable under the first cause of action because, despite arguing that FINRA failed to find he violated firm policy, Tysk also challenges FINRA's "finding that Tysk unethically violated Ameriprise policy."
Although the NAC found that Tysk "stonewalled producing the requested information until he was compelled by an arbitration order to have his computer examined by a forensic expert," it did not clearly address Tysk's argument that he relied on his counsel's advice in doing so. Elsewhere in its decision, the NAC determined that, because Tysk did not consult an attorney before he altered his notes, his claims of reliance on counsel were not mitigating. But that addresses Tysk's alteration of his notes before the arbitration was filed, rather than the second cause of action based on alleged discovery violations during the arbitration proceeding.
[A]fter reviewing the record anew, a preponderance of the evidence demonstrates that Tysk's conduct contravened Ameriprise's retention policies under its Code of Conduct. We determine that Tysk's misconduct violated FINRA's ethical rule because, by altering his ACT! Notes, Tysk created the false impression that he wrote contemporaneous notes of his conversations with GR.
Going beyond a cursory recitation of its rationale for finding that Tysk had engaged in unethical conduct, the 2019 NAC Opinion tackles the issue head-on:
Page 9 of the 2019 NAC DecisionWe also find that Tysk's actions were unethical. Tysk did not just enter additional new note entries after GR complained to the firm. He deliberately created misleading evidence regarding when he documented his conversations with GR. Specifically, Tysk created for the first time 54 note entries and intentionally backdated them to make it appear that he had written down notes of detailed discussions with GR, when he had not. Tysk also supplemented 13 preexisting note entries to make it appear that his alterations were part of the original notes. Tysk's altered notes included new details about events and conversations he had with GR that occurred up to three years prior. Many altered notes directly addressed Tysk's investment recommendations that were the subject of GR's complaint. We find that Tysk engaged in a deceptive business practice that did not conform with the moral norms or standards of professional conduct when he altered his ACT! Notes to create the false impression that he entered notes of his conversations with a customer at the time of those conversations. His unethical conduct violated NASD Rule 2110 and FINRA Rule 2010.
Although GR requested Tysk's edits to his ACT! Notes during discovery, Tysk did not produce them when asked. Having a hunch that Tysk's ACT! Notes were doctored, in May 2009, GR's counsel made another discovery request that Tysk provide "[a]ll documents showing edits made by Mr. Tysk to the notes . . . including but not limited to the edits made on May 27, 2008." Tysk's counsel asked Tysk outright whether he knew anything about "any edits being made to the contact reports." Instead of admitting that he altered his ACT! Notes extensively, Tysk responded: "There are no other documents showing edits per the request." Tysk's counsel then repeated Tysk's falsehood in response to GR's discovery request, stating "there are no such responsive documents." It was only when the arbitration panel granted GR's motion to compel discovery and ordered a forensic search of Tysk's computer that GR learned of Tysk's 54 new note entries and 13 note entries with additional details added. Tysk's intentional withholding of discoverable information was conduct inconsistent with just and equitable principles of trade. See Dep't of Enforcement v. Westrock Advisors, Inc., Complaint No. 2006005696601, 2010 FINRA Discip. LEXIS 26, at *19 (FINRA NAC Oct. 21, 2010) (finding the intentional withholding of discoverable information that is in one's possession or control constitutes conduct inconsistent with just and principles of trade).Tysk also failed to satisfy the discovery rules under the Arbitration Code. When GR's counsel requested Tysk's edits to the ACT! Notes, FINRA Rule 12506(b)(1) required Tysk to produce them, object to the production, or state the reason why he could not supply the documents showing the edits to his ACT! Notes. The evidence shows that Tysk took none of these courses of action. For example, although Tysk argues that he did not possess previous versions of his ACT! Notes, he still had the obligation under FINRA Rule 12506(b)(1) to explain his inability to produce the requested edits. By failing to act as required in response to GR's discovery request, Tysk violated the rule. Tysk also failed to meet the requirements of FINRA Rule 12506(b)(2). Instead of "us[ing his] best efforts to produce all documents required or agreed to be produced," as required by the rule, the evidence shows that Tysk made no reasonable attempts to search the saved ACT! database files on his computer and determine whether back-ups of his ACT! Notes existed.We find that Tysk's discovery violations of the Arbitration Code also contravened just and equitable principles of trade because Tysk acted in bad faith when he knowingly withheld providing his edits to his ACT! Notes in response to GR's discovery request. When Tysk responded to his counsel that there were no documents showing any edits and revealed nothing regarding his extensive alterations, Tysk was deliberately concealing important information from GR and the arbitration panel. He was acting in bad faith. See Blair Alexander West, Exchange Act Release No. 74030, 2015 SEC LEXIS 102, *23 (Jan. 9, 2015) (finding respondent's concealed actions from his customer and his deceit further demonstrated deliberate intent and bad faith), aff'd, 641 F. App'x 27 (2d Cir. 2016). Had the arbitration panel not granted GR's motion for a forensic search of Tysk's computer, Tysk may well have hidden the truth from the arbitration panel. Tysk's misconduct threatened the integrity of the arbitration process." His failure to adhere to the discovery provisions under the Arbitration Code and withholding of discoverable information in bad faith violated IM-12000 and FINRA Rule 2010. . .
Page 17 of the 2019 NAC Decision[W]hile Tysk claims that he relied on his attorney to make decisions about documents and information to produce in discovery and for litigation strategy, we find no evidence that Tysk solicited advice from, and was advised by, his attorney to withhold his edits until he was compelled to do so by an arbitration order. In fact, during discovery, Tysk's attorney outright asked Tysk whether he knew about any edits to his notes. Instead of openly admitting to his actions, Tysk diverted the question and answered that no documents showed his edits. Moreover, Tysk testified that, after his confession, he had no discussion with his attorney about whether to disclose to GR that he altered his ACT! Notes. We therefore find no basis to mitigate the sanctions under a reliance on advice of counsel claim.