Vol 10 No.4

Goliath Refuses to Yield

By Mark A. Tepper

Securities Fraud Attorney
                               
Stock traders say, the trend is your friend.  But it has not been friendly to Merrill Lynch. The recent trend in confidentiality orders is that Merrill Lynch has been ordered to produce its compliance and supervision manuals without a confidentiality order.  Similar orders have been entered against other broker dealers.  The trend supports the conclusion that manuals are ordinary business records that have previously been disclosed without a confidentiality order. 

Successful counsel have reported that Merrill Lynch produced its manuals or portions of them pursuant to these orders.  Disclosure of confidential material is a waiver of a claim of confidentiality, but Goliath refuses to yield.  In spite of the record of its public disclosure, Merrill Lynch continues to fight for blanket confidentiality orders for its ordinary business records.  The following arguments were drafted in opposition to a request for a confidentiality order relating to compliance and supervision manuals.  We acknowledge the assistance received from many PIABA members in compiling the
following arguments and authorities:        

              
Claimant's Opposition to Respondent's Improper Insistence on a Confidentiality Order
                               
Respondent's demand for a burdensome confidentiality order to protect ordinary business records is unreasonable.  Rules protecting confidential records do not apply because Respondent's business manuals and related materials are not confidential.  Respondent knows they are not confidential or proprietary.  Respondent has disclosed its internal supervision and compliance manuals to other parties without a confidentiality agreement which places them in the public domain. 

In its motion, Respondent did not disclose to the Chairperson that Respondent has previously been ordered to produce the same records to other parties without a confidentiality agreement.  A proposed order is attached which conforms with the text
of previous orders denying Respondent's request for the same confidentiality order.  Grounds for denying Respondent's frivolous motion are discussed below. 
                               
                               
Respondent's Manuals Are Not Confidential
                               
Claimant has made a routine request for ordinary non-confidential business manuals under section II and Document Production list 1, item 9 of the NASD Notice to Members 99-90 ("Discovery Guide").  According to the Discovery Guide, Respondent was
required to produce its manuals and compliance memos in June, 2003, 30 days after the filing of its Answer.  Respondent's refusal to produce them without an onerous confidentiality order is unnecessary, unsupportable and unfairly delays discovery.

Within the past six months, NASD Chairpersons have repeatedly held that Respondent's manuals and Compliance Memos are not confidential and are discoverable without a confidentiality agreement.  See Order on Discovery, Crumpler v. Merrill Lynch et al., NASD Case No. 02-03178 (August 15, 2003); See Order on Discovery Hohlfelder v. Merrill Lynch, Pierce, Fenner, & Smith, Inc., NASD Case No. 02-06771 (October 17, 2003);  See Order on Discovery Bosley v. Merrill Lynch, et al., NASD Case No. 02-04965 (June 2, 2003); See Order on Discovery, Chiswell v. Merrill Lynch, NASD Case No. 02-04112 (March 18, 2003). 

On information and belief, a NYSE Chairperson also ordered Respondent to produce its manuals in discovery without a confidentiality agreement.  Stapleton v. Merrill Lynch, NYSE No. 2002-09730.  Other broker-dealers have also been ordered to produce their internal supervision and compliance manuals without a confidentiality agreement.  Respondent knows that its manuals are in the public domain and can no longer be confidential.

Respondent's counsel also represented Respondent in Chiswell, referenced above, when Respondent was ordered to produce its Manuals without a confidentiality agreement.  See NASD Dispute Resolution Letter dated March 24, 2003.  Based on Respondent's prior disclosure of its Manuals in these other cases, Respondent's argument that its manuals are confidential is not supported by the facts.

In Miller v. Smith Barney Harris Upham, 85-86 Fed. Sec. L. Rep.  92,498 (S.D.N.Y. 1986), the court addressed the confidentiality of brokerage compliance manuals.  In that case, the court specifically held that brokerage compliance manuals are not confidential.  In reaching that holding, the court noted, among other things, that a brokerage firm was required to develop and maintain compliance manuals by the SEC, NASD and New York Stock Exchange and that such manuals were routinely inspected by those regulatory bodies.  The court noted that given "these external requirements to compile and make available internal regulations" the documents cannot be regarded as confidential or privileged. Id.

                               
Respondent has the Burden of Proof

The party seeking to impose the confidentiality order must show that a "clearly defined and very serious injury" will result if a confidentiality order is not issued and must provide the court with "information from which it can reasonably conclude that the nature and magnitude of the moving party's interests are such that a protective intervention by the court is justified."  Koster v. Chase Manhattan Bank, 93 F.R.D. 471, 478 (S.D.N.Y. 1982)(quoting other cases).  The court must then consider "whether the Order will prevent threatened harm, whether there are less restrictive means to preventing the threatened harm, the interests of the party opposing the motion and the interests of the public."  Id.

The confidentiality issue was recently addressed in Dahdal v. Thorn Americas, Inc., 1997 U.S. Dist. Lexis 14 (D. Kan. 1997).   In Dahdal, the defendants, like Respondent in this case, sought an Order restricting the disclosure of certain business manuals.  The defendant argued that, "the manuals at issue contain proprietary and confidential business information which likewise should have restricted access."  The court held that the following standard should apply in deciding whether to enter a confidentiality order:

               The party seeking a protective order has the burden to show
               good cause for it.  Sentry Ins. v. Shivers, 164 F.R.D. 255, 256 (D.
               Kan. 1996).  To establish good cause, the party must submit "a
               particular and specific demonstration of fact, as distinguished
               from stereotyped and conclusory statements."  Gulf Oil Co. v.
               Bernard, 452 U.S. 89, 102 n. 16, 68 L. Ed.2d 893, 101 S. Ct. 2193
               (1981).  To limit the dissemination of items and information
               received in discovery, the movant must show "that disclosure of the
               information will result in a 'clearly defined and very serious
               injury.'"  See Zapata v. IBP, Inc., 160 F.R.D. 625, 627 (D. Kan.
               1995) quoting Koster v. Chase Manhattan Bank, 93 F.R.D. 471,
               480 (S.D.N.Y. 1982)).

Dahdal v. Thorn Americas, Inc., supra. (emphasis added).

After articulating the applicable standard, the court denied the requested protective order.  The court concluded that the defendant did not meet its burden of showing "good cause" for keeping the documents secret and did not present adequate evidence that disclosure would result in "a clearly defined and serious injury."  The court stated:

      Defendant has shown no good cause, however, for any further protection.
  A conclusory statement that proprietary, confidential business documents
  deserve special protection does not suffice.  Business documents as a
  category do not qualify as intrinsically confidential and personal.  Their
  disclosure does not necessarily cause a clearly defined and serious injury.
       Some business documents may be confidential or personal.  The party
       seeking to protect them, however, bears the burden to show that.  There
       are many types of business documents and manuals, some of which
       necessitate protection and some that do not.  The court will not enter a
       blanket protective order protecting all documents in this case.  To obtain
       an order protecting the confidentiality of business documents, the movant
       must do more than simply state that such documents are proprietary and
       confidential.

Dahdal v. Thorn Americas, Inc., supra. (emphasis added) 

Respondent has done nothing more than state that its manuals are "proprietary documents [that] are central to [its] operations, quality control, and business."  Respondent's argument is both conclusory and, as a matter of law, does not present adequate evidence.  What makes these documents confidential, proprietary, and valuable remains unexplained.  If Respondent's manuals were confidential and disclosure would cause serious harm, its top management would be filing affidavits to prove it.  The absence of affidavits from Respondent's management shows that Respondent knows that its manuals are neither confidential nor proprietary.

Respondent has not proved good cause.  There is no evidence that Respondent will suffer serious harm.  There is no specific demonstration of fact, only conclusory statements.  Respondent has not proved that any portion of its manuals contain any
trade secrets.  Respondent's legal citations do not prove the existence of any trade secret in its manuals.   

The rationale behind requiring good cause for confidentiality orders is clear.  Confidentiality orders are disfavored by the law.  The purpose of discovery is to ensure that a trial or arbitration is "less a game of blindman's bluff and more a fair contest with the basic issues and facts disclosed to the fullest practicable extent."  United States v. Proctor & Gamble Co., 356 U.S. 677, 682 (1958). 

Given the applicable legal standards, it is evident that no justification exists for requiring the Claimants in the present case to enter into a burdensome confidentiality agreement.  Indeed, it is clear that the only reason that Respondent is seeking that confidentiality order is to improperly prevent the Claimants' counsel from "comparing notes" with other attorneys to determine if the documents produced by Respondent are complete and contain all of the information relevant to this case. 

"Courts 'should be extremely skeptical about any rule that silences [an attorney's voice].'"  Koster, supra. at 476 (citation omitted).  The importance of allowing the Claimants' attorney to speak with other attorneys about the documents is evident from developments in this case.  Claimant's counsel has already learned that Respondent is proposing to produce manuals in this case that do not contain all of the information needed by the Claimant.  Attorneys handling other cases against Respondent have informed the Claimant's counsel that Respondent has supplemented its Compliance Manuals with numerous compliance memos that deal with a variety of compliance topics.  If the attorneys in those other cases had been forced to enter into confidentiality agreements similar to the one that Respondent is seeking to impose in the present case, counsel for those parties could not have conveyed that important information to counsel in the present case.
    
Respondent is not seeking to impose a confidentiality agreement because it is truly concerned about the confidentiality of the information in its Compliance Manuals.  Rather, Respondent wants to force each person who has a claim against Respondent
to fight to obtain every relevant document.  In addition, Respondent wants to prevent opposing counsel from knowing whether it has obtained all of the pertinent information.   In essence, Respondent wants to make it as difficult and burdensome as possible for each claimant to prosecute their claim.  This panel should not facilitate Respondent's cover-up of its misconduct by forcing the Claimants to enter into a confidentiality agreement. 

                               
Respondent's Case Law does not Prove Respondent's Manuals are Confidential
                               
Respondent's reliance on Bercow v. Kidder Peabody & Co., 39 F.R.D. 357 (SDNY 1965) is misplaced.  The court in Bercow did not rule that all supervisory and compliance manuals were confidential, only the manual before the Court.  Its ruling was
limited to an "operations manual" and "Security Releases" that were written over 40 years ago.  The manual reviewed in Bercow was not the Respondent's manuals in this case.  It was a different manual.  The ruling in Bercow is limited to its facts and does not relieve Respondent from its burden of proving that its manuals are confidential, which it has failed to do.  As interpreted by Respondent, Bercow is inconsistent with the well settled legal standard for obtaining a confidentiality order  proof of good cause.  As explained earlier, this standard has been approved by the United States Supreme Court.
    
Respondent's reliance on Boehme v. E.F. Hutton & Co., Inc., 1987 WL26811 (S.D.N.Y.) also misses the mark.  Boehme is not even a securities fraud case.  It is a sexual harassment claim.  The fact that in different circumstances a company proved that its particular manuals contained confidential information is no evidence that, in the current circumstances, Respondent's manuals contain any confidential information.

Respondent similarly attempted to keep all relevant evidence secret when it was being investigated by New York Attorney General Elliot Spitzer.  Respondent marked virtually every page of its documents that it produced to Spitzer's office as,
"Confidential" or, "Proprietary," including its analyst policy and procedures manual.  Respondent thus tried unsuccessfully to "keep the lid on" its alleged criminal violations.  Attorney General Spitzer's response was the same as the one this panel should adopt in the present case: he flatly rejected Respondent's demand for secrecy, and released the documents publically.
                   

Allowing Respondent to Unilaterally Determine Relevance is Improper
                               
Respondent's manuals and compliance memos are relevant to prove that Respondent did not follow its own procedures.  Evidence that Respondent did not follow its own procedures proves Respondent's failure to supervise, making it liable to Claimant for
statutory damages.

The Court in Miller explained the importance of the manuals and memos requested by
Claimant:
           "Only disclosure of the material facts of the contents of
           the manuals relating to internal supervisory procedures
           and compliance will reveal the possible extent of the
           firms' liability under state law. ... other cases have based
           findings of liability on material contained in the internal
           procedural manuals. See Hecht v. Harris, Upham & Co.,
           283 F.Supp. 417, modified in 430 F.2d 1202 (9th Cir.1970).
           The internal manuals described in (b) above must be
           disclosed."

Miller, supra. at *5 & *7 (emphasis added). 

Respondent has not produced a single page from its manuals, the table of contents, the index or its list of compliance memos.   This is not a case where Respondent has been asked to spend vast amounts of time or manpower scouring its files for material that is not of any significance to the issues.  There is nothing burdensome about producing the manuals in their entirety.   Indeed, it would be easier to produce whole manuals than to produce redacted versions that delete supposed "irrelevant" materials.

Respondent has overstepped its attorney powers by seeking the "judicial" power to unilaterally determine the relevance of Claimant's requests for its manuals.  Respondent's demand is equivalent to asking the fox to guard the chicken coop.
 
The intent of Respondent's motion for a confidentiality order is to obtain an unfair litigation advantage and devalue the claim.  If granted, the confidentiality order unfairly prevents Claimant from comparing production with other counsel to verify the accuracy of production and gives Respondent unilateral control over relevance determinations.  This is a blatant conflict of interest.  With the checks and balances removed, Respondent can withhold unfavorable records without fear of exposure.  Respondent's proposed order creates the appearance of impropriety and should be denied by the Chairperson.

Respondent's Proposed Confidentiality Order is Burdensome
                               
Respondent asserts that Claimant should return all of Respondent's documents at the  end of trial.  Respondent wants to impose a burdensome task and cost on Claimant that serves no purpose.  These manuals are not confidential because they have been disclosed to third parties without a confidentiality agreement, and therefore makes the task of returning Respondent's documents unnecessary.

Respondent's proposed confidentiality order would limit Claimant's ability to compare Respondent's production with other Claimants, providing Respondent with the opportunity to conceal critical, unfavorable evidence in its possession.

Conclusion

Contrary to Respondent's argument, applicable principles of law and the Discovery Guide do not support Respondent's motion for a confidentiality order.  Respondent's manuals are not confidential because they have been previously disclosed to third
parties, without a confidentiality agreement, and contain no trade secrets.  Respondent has failed to meet its burden of proving good cause for the extraordinary remedy of limiting Claimant's use of discovery with a confidentiality order.
 
Wherefore, Claimant requests that the Chairperson DENY Respondent's Motion for Entry of a Confidentiality Order, and that the Chairperson follow the decisions of other NASD Arbitration Chairs who considered the same arguments, and order Respondent to produce its manuals, updates, and compliance memos without a confidentiality agreement since Respondent's manuals are relevant to the Claimant's pending claim of failure to supervise and are not confidential.

________________________________________________________________________________________________________________

1.  Respondent’s counsel owes a duty of candor to the tribunal.  Florida Bar Rule 4-3.3.

2.  See Order on Discovery, Balke v. Wachovia Securities, Inc, NASD Case No. 02-07295 (Sept. 23, 2003); See Order on Discovery, Gallucci v. Fleet National Bank, Case No. PC02-6837, Sup. Ct. of R.I. (July 16, 2003); See Order on Discovery, Sprengels v. Salomon Smith Barney, NASD Case No. 02-06064 (July 2003); See Order on Discovery, Mutter v. Salomon Smith Barney, NASD Case No. 02-03929 (June 2003); See Order on Discovery, Rich v. Salomon Smith Barney, NASD Case No. 02-03627 (Feb. 27, 2003); See Order on Discovery, Davis v. Raymond James, NASD Case No. 02-2863 (Jan. 28, 2003); See Order on Discovery, Miller v. Smith Barney, Harris Upham, 85-85 Fed. Sec. L. Rep. 492, 498 (S.D.N.Y. 1986). 

3.  “A conclusory statement that proprietary, confidential business documents deserve special protection does not suffice.”  Dahdal, 1997 U.S. Dist. Lexis 14 (D. Kan. 1997)(emphasis added).  Reed v. Bennett, 193 F.R.D. 689, 691(D. Kan. 2000)(denying party’s protective order, stating “As drafted, the proposed protective order would protect any document defendant ‘reasonably contends contain proprietary and confidential information... By failing to identify specific documents or types of documents to be protected within the proposed protective order, defendant fails to meet the good cause standard.”

4.  “Painting the word “Bull” on the side of a cow does not change that animal’s gender.”  Johnson v. Florida, 382 So. 2d 693, 694 (Fla. 1980)(dissenting opinion).  See footnote 2.

5.  Respondent’s Compliance Manual does not even come close to meeting the definition of a trade secret as defined by the Uniform Trade Secrets Act (the “Act”), nor has it articulated any rationale as to why the panel should consider it to be protected as a trade secret in this case.  Such is Respondent’s burden.  The Act defines a trade secret as “a formula, pattern, compilation, program, device, method, technique, or process, that:
  
  1. Derives independent economic value, actual or potential, from
  not being generally known to, and not being readily ascertainable
  by proper means by, other persons who can obtain economic value
  from its disclosure or use, and
  2. Is the subject of efforts that are reasonable under the
  circumstances to maintain its secrecy.

See, e.g. Fl. Stat. Ann. Ch. 688.002 (2003)(emphasis added).   See also, Black’s Law Dictionary, 1039 (Abridged 6th ed. 1991). 

6.  See Edwin Kantor, 51 S.E.C. 440, 446 (May 20, 1993) (holding “that reasonable supervision requires ‘strict adherence’ to internal company procedures,....”).

7.  See section 517.211 Fla. Stat. of the Florida Investor Protection Act. 

8.  In a footnote, the Boehm court stated that Defendant had initially refused to produce any documents.  The court stated that this refusal was “disingenuous at best, deliberately dilatory at worst.” Boehm v. E.F. Hutton & Co., Inc., 1987 WL 26811, *3 (S.D.N.Y.).  Six months ago when the Panel was not available, as a compromise, Claimant provided Respondent with a confidentiality agreement that conformed with the Discovery Guide to avoid delay in receiving Respondent’s manuals which were critical to Claimant’s hearing preparation.  Incredibly, Respondent still refused to provide its manuals.  Thereafter, Claimant withdrew its agreement since, under the circumstances, Respondent’s manuals were not confidential as a matter of law. 

9.  Reed, 193 F.R.D. at 691(denying party’s protective order, stating “Under [the protective order] term’s, defendants could unilaterally choose to designate any such document as ‘confidential’...By failing to identify specific documents or types of documents to be protected within the proposed protective order, defendant fails to meet the good cause standard.”