NASD Gets Tough On Discovery

NASD Gets Tough on Discovery

A warning to firms and customers.

Discovery issues have always been a hot topic in all litigation matters, and arbitration is no different. Parties continually complain that the other side is not producing documents, and while the dispute is often caused by an unreasonable demand, rather than an unreasonable objection, the issue comes up so often, that arbitration panels are forced to decide discovery disputes in most cases.

While the Claimant’s bar has been very vocal in their complaints regarding discovery, given the nature of discovery, it is the respondents who have the most documents to produce, and who have the most objections. But we need to interject a bit of reality in the discussion, and remove some of the hyperbole. Can anyone possibly justify the production of all order tickets in a customer case simply because the customer alleged that two trades were unauthorized? Of course not, but the discovery guide calls for the production of all order tickets if there is an allegation of unauthorized trading, and claimants constantly ask for all tickets in such cases. Even worse, claimants often include a one sentence allegation of unauthorized trading, without any other information or allegation, and then demand all order tickets for the account.

It is plain to any objective observer that such a document request is unreasonable, and that the continued insistence upon compliance with such a demand is unreasonable. Further, in some cases, where the acocunt was in existence for a period of years or was very active, production of order tickets – typically stored by date, not by account, is an extremely time consuming process. While discovery is nice, the process must balance the burdne

Discovery disputes are by their very nature case specific, and often times discovery can be expensive and burdensome. While one would hope that parties who are represented by counsel would be able to resolve discovery disputes by themselves, that is typically not the case, and whether the problem is a claimant who makes unreasonable discovery demands, or a respondent who makes unreasonable discovery objections, teh problem exists.

The NASD attempted to address the issue, and created the NASD Discovery Guide – a series of document lists, based on causes of action, that were presumptively discoverable. While the Guide may have limited the number of disputes, it created a few of its own – the order ticket example being only one such dispute. The reality is that discovery disputes exist, and will continue to exist – it is part and parcel of the dispute resolution process, and uniform lists are never going to solve the problem – at least not without trampling on the rights of the parties, and driving the dispute resolution process through the roof. Lets keep in mind here that the NASD forces its members and their brokers to arbitrate disputes. Firms in turn, force their customers to arbitrate their disputes. While I am a significant supporter of the arbitration process, adding mandatory discovery provisions to a mandatory process is not going to foster cooperation – it is going to make the process abusive. Our court system does not have any significant mandatory discovery process, and our arbitration system, which is designed to be more effecient and cost effective, should not have such a mandatory process.

Discovery cannot be made mandatory by a series of lists. The courts across the country have been dealing with this issue for years and have always come back to teh conclusion that discovery is case specific, that lists and mandatory discovery does not work except for the most basic of documents, nad that there needs to be a mechanizme for resolving discovery disputes.

The NASD added fuel to the fire in November 2003 when it issued Notice to Members 03-70 which reminded members of their discovery obligations, and noted a few examples of arbitrator orders against firms. The NTM was widely viewed as a biased, uniformed, and unjustified attack on the industry, despite the afterthought footnote, where the NASD noted that claimants were also responsible for discovery abuses.

Unfortunately, the NASD made a mistake in NTM 03-70. While the NASD provides ancedotal evidence that discovery abuses are on the rise, it recites 6 examples of parties ignoring arbitrator orders. While I have a problem with making major changes based on stories, but concluding that discovery abuses are on the rise because of arbitration awards for failing to comply with orders fo the panel is illogical

Ignoring an arbitrators order is a serious problem, and one that needs to be addressed. However, I suspect that the case where a party ignores an arbitrator order are very few and far between. It appears to me that Arbitrators are well versed in handling such issues, as evidenced by the awards listed by the NASD, and a recent award which included a sanction for discovery abuses, not mentioned by the NASD.

However, having identified this problem, the NASD’s solution is to make discovery mandatory. The solution has nothing to do with the problem, and simply creates more problelms for the parties and the arbitrators.

If the problem is that some parties are ignoring arbitrator orders. That should not be a problem at all. Fine the party who ignores the order, dismiss his complaint or defenses, and address the issue. The NASD has provided 6 examples of abusive discovery. I am aware from press reports of three additional sanction decisions. While it seems to me that the arbitration panels addressed and dealt with the discovery abuses, the NASD needs to focus a bit. There were 8,000 arbitration cases filed last year, and at least 3,500 cases pending at anyone point in time. If there were 6 or 9 or even 50 instances of a party ignoring a discovery order, that is a problem, but not an indication of a systemic failure of discovery. It is not evidence of parties ignoring discovery, and does not require an industry-wide indictment of discovery, sanction threats and new mandatory lists.

NTM 03-70 was poorly drafted and a mistake by the NASD, as discovery abuses occur on both sides of the fence. . I am presently handling a case where the Panel has ordered a Claimant to produce basic discovery guide documents three times, and the Claimant continues to refuse to do so. Unfortunately, the arbitration Panel is also refusing to dismiss the claim, or to award sanctions against the claimant, but the NASD’s Notice was flagrently one sided, and smeared an entire industry in an unjustified manner.Of course, that NTM has now become the de rigour inclusion in every claimant’s discovery motion, and every claimant now alleges that he is the subject of abusive discovery refusals by every respondent

The Notice was accurate in its discussion of abuses, there are abuses. Unfortuanately the claimant’s bar has jumped on the bandwagon. Substituting the word “abuses” for “objections” the claimants bar now includes the Notice in every discovery motion, claiming that the respondents’ legitimate objections to discovery requests are the very “abuses” that the NASD addressed in NTM

The NASD,without admitting it is doing so, is apparently attempting to “take back” or modify Notice 03-70- and has issued a “Notice to Parties” reminding, all parties, customers included, of their obligation to cooperate in discovery. NTM 03-70 is not mentioned in the Notice to Parties at all, and the Notice to Parties is the notice that the NASD should have sent out in the first place, and while an acknowledgement by the NASD that their original Notice to Members was once sided, biased, and unfair, would have been appreciated by the industry, the industry will have to settle for this new “Notice to Parties” and hope that all sides to the arbitration process take the discovery process seriously.

One of the problems with the Discovery Guide is the requirement that all parties exchange Discovery Guide documents within 30 days of the filing of the answer. In the ___ years since the publication of the guide, has anyone in a customer arbitration done so? I have probably handled 100 arbitrations since then, and not once did my client, or the claimant, produce documents within 30 days of the filing of the answer. I have spoken to dozens of claimant and respondent attorneys who have asaid the same thing, and it is quite apparent to everyone, except the NASD, that the 30 day requirement of the discovery guide is unworkable, unreasonable, and simply ignored by all parties and counsel to the arbitrations.

Given the average turn around time of 17 months for an arbitration, it is no wonder that all parties ignore the 30 day requirement of the Discovery Guide as it is unreasonable and unnecessary. There is simply no need for the parties to race to exchange documents when teh NASD is not going to schedule a hearing for another year and a half, and the NASD does not appoint a panel until 3 to 6 months after the filing of an answer. I am not attacking the NASD here, they are busy, there was a huge increase in filings given the analyst conflict scandal. However, forcing claimants and respondents to serve documents or objections immediately upon filing of the answer serves no useful purpose, and burdens both sides with an unnecessary and arbitratry time frame.

The NASD isgnores the fact that everyone, by action or inaction, modifies this “requirement” of the discovery guide, adn does not advance its stated goals by insistin upon compliance with a discovery requirement that no participant wants or needs.

However, both sides are going to need to address these issues in discovery going forward. Customers, brokers and firms will need to pay more attention to the 30 day requirement, and to the


Securities Attorney at Sallah Astarita & Cox | 212-509-6544 | | Website | + posts

Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.

He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page -, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.