During the evidentiary hearings, Claimants made an oral Motion for Discovery Sanctions against Respondent. Respondent opposed the Motion. The Panel held any ruling on the Motion for Discovery Sanctions in abeyance until the conclusion of the evidentiary hearings. After the hearings concluded, the Panel issued an Order on April 30, 2019, instructing the parties to file briefs on the Motion for Discovery Sanctions. Both parties filed briefs on or about May 31, 2019. In its Motion for Discovery Sanctions post-hearing brief, Claimants argued that Respondent failed to produce critical documents responsive to Claimants' discovery request and thereby concealed documents relevant to the central issues in the matter. In its opposition to the Motion for Discovery Sanctions post-hearing brief, Respondent argued, among other things, that it complied with all discovery obligations and did not engage in any conduct warranting sanctions. . . .
SIDE BAR: FINRA Arbitration Code Rules for Imposing SanctionsFINRA Code of Arbitration Procedure for Customer Disputes Rule 12212: 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;
- Precluding a party from presenting evidence;
- Making an adverse inference against a party;
- Assessing postponement and/or forum fees; and
- Assessing attorneys' fees, costs and expenses.(b) The panel may initiate a disciplinary referral at the conclusion of an arbitration.(c) The panel may dismiss a claim, defense or arbitration with prejudice as a sanction for material and intentional failure to comply with an order of the panel if prior warnings or sanctions have proven ineffective.FINRA Code of Arbitration Procedure for Customer Disputes Rule 12511: Discovery Sanctions(a) Failure to cooperate in the exchange of documents and information as required under the Code may result in sanctions. The panel may issue sanctions against any party in accordance with Rule 12212(a) for:
- Failing to comply with the discovery provisions of the Code, unless the panel determines that there is substantial justification for the failure to comply; or
- Frivolously objecting to the production of requested documents or information.(b) The panel may dismiss a claim, defense or proceeding with prejudice in accordance with Rule 12212(c) for intentional and material failure to comply with a discovery order of the panel if prior warnings or sanctions have proven ineffective.
Claimants (joint and several): $2,000 Initial Claim Filing Fee; $200 discovery-related motion fees; $32,900 in hearing session feesRespondent Morgan Stanley: $3,025 Member Surcharge; $6,175 Member Process Fee; $200 discovery-related motion fees; $33,350 in hearing session fees
During the course of the evidentiary hearing, the Panel was made aware of Respondent's alleged failure to comply with a discovery request Order, which was granted pre-hearing by the prior Chairperson with respect to the production of documents related to the termination of a key employee of Respondent. After hearing oral argument on the issue by both parties, the full Panel issued the same Order as was previously issued by the prior Chairperson for production of "all" related documents by midnight. The Panel noted that the prior Chairperson's Order did not limit itself to "pre-termination" or "post-termination" documents when it stated "all." Respondent 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 the "settlement privilege" which Respondent's counsel alleged applied to the documents that Respondent was withholding and proposing to have the Panel review "in camera." The Panel again ordered the withheld documents to be handed to Claimants' counsel, and not to the Panel for in camera review. The Panel took note of the extreme prejudice Respondent'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. Claimants' counsel repeatedly requested that Respondent be assessed monetary sanctions for its failure of compliance with the Panel's Orders. At the conclusion of the evidentiary hearing, the Panel ordered both parties to submit post-hearing briefs on the issue of the sanctions requested by Claimants against Respondent.The Panel noted that Rule 12506(b)(2) of the Code 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 timeframe 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:
In 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. . . .
[T]he Panel took note of the extreme prejudice Respondent'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. . . .
additional charges relating to the firm's failure to provide required supervisory materials to numerous arbitration claimants. The settlement announced today is the first of its kind - in that it provides for distribution of $9.5 million to two groups of customers who had arbitration claims against the firm. FINRA estimates that several thousand customers may be eligible to receive payments. FINRA also imposed a $3 million fine on the firm for its failure to provide pre-9/11 emails and updates to a supervisory manual.
Also as part of the settlement announced today, Morgan Stanley is required - again, at its own expense - to retain an independent consultant acceptable to FINRA to review the firm's procedures for complying with discovery requirements in arbitration proceedings relating to the firm's retail brokerage operations. The firm will be required to implement the independent consultant's recommendations for improving those procedures, or alternative improvements acceptable to the independent consultant.
"The integrity of our process demands that brokerage firms comply with their obligations to search diligently for, and provide in a timely way, information and documents required in arbitration proceedings and regulatory investigations," said Susan Merrill, FINRA Executive Vice President and Chief of Enforcement. "The action announced today underscores FINRA's commitment to ensuring that firms live up to those obligations. We are particularly pleased that this unique settlement directs the bulk of the monetary sanction to the customers in arbitrations, to remedy MSDW's discovery failures."