Attorney Issued Discovery Subpoenas in Arbitration are an Abuse of Process
by Mark A. Tepper Securities Fraud Attorney
Introduction
Counsel for investment fraud victims are engaged in a great debate with
counsel for broker/dealers over the use of attorney issued subpoenas in
NASD and NYSE arbitration. Counsel for broker/dealers ardently argue that
NYCPLR section 7505 and NASD 10322 authorizes them to serve attorney
issued subpoenas to third parties for confidential records relating to parties
and non-parties without any review by the Panel.
Alas, such arrogance and abuse of process is not authorized by the
governing Federal Arbitration Act ("FAA"), New York State law or NASD
Rules. As discussed below, attorney issued discovery subpoenas far exceed
the narrow limits placed on the use of subpoenas in SRO arbitration. Like
an 800 pound gorilla broker/dealers try to throw their weight around to
intimidate arbitrators into disregarding the law of subpoenas. Below is a
summary of arguments available to those with the nerve to battle the beast.
Statement of Facts
Respondent signed and issued 7 subpoenae duces tecum "in the name of
the National Association of Securities Dealers (‘NASD')" on non-parties.
None of Respondent's Subpoenas were signed or issued by the Chairperson.
Incredibly, in its 7 Subpoenas, Respondent seeks private, confidential credit
card account and mortgage records pertaining to Claimant and Claimant's
wife. Claimant's wife is not even a party to this arbitration. Respondent
irresponsibly disseminated Claimant's and Claimant's wife's confidential
social security numbers to unrelated third parties.
Respondent also distributed personal credit card account numbers with
Claimant's confidential social security numbers in some of its subpoenas.
Respondent used Claimant's social security numbers to enable the
subpoenaed non-parties to determine whether responsive documents exist
while facilitating identity theft.
When Respondent's counsel told Claimant of his intent to issue the illegal
subpoenas, Claimant's counsel asked him to follow NASD procedure and
submit Respondent's subpoenas to the Chairperson. Respondent flatly
refused.
Claimant's Statement of Claim alleges that Respondent fraudulently induced
them to purchase the stock based on Respondent's fraudulent research
reports and recommendations. Only defenses responsive to Claimant's
claims are germane to this arbitration. Claimant's credit card usage has no
relationship to any matter in controversy.
The impact of Respondent's Subpoenas is to strip the Chairperson of his
jurisdiction to rule on Claimant's objections, as well as his jurisdiction to make
a determination about the propriety of each subpoena before they are issued.
The damage Respondent's subpoenas are doing to Claimant's reputation, his
business relationships, as well as his, is unconscionable and unnecessary.
Summary of Legal Issues
Claimant objects to Respondent's abuse of NASD Arbitration Procedures and
its unlawful attempt to usurp the authority of the Arbitrators. Respondent
signed a written contract that this arbitration is governed by the NASD
arbitration rules. Even an 800-pound gorilla, like Respondent, has an
obligation to follow those rules.
NASD Arbitration Rules, the Federal Arbitration Act ("FAA") and New York
law prohibit Respondent from rummaging through fraud victims' private
records – which have no relationship to any claim or defense – on the off
chance Respondent might find something to aid its campaign of blaming the
victims of its unconscionable fraud. Respondent's illegal Subpoenas serve
only to harass, vex, and embarrass Claimant and his family.
As a matter of law, Arbitrators have no power to approve Respondent's
substitution of illegal subpoenas for the NASD Arbitration Rules. See below.
To do so is evidence of manifest disregard of the law and of partiality.
Claimant moves to quash Respondent's Subpoenas on the following
grounds:
a. Respondent's Subpoenas are void and unenforceable, since
they were not signed or issued by an Arbitrator, as required by
the applicable provision of the FAA, 9 U.S.C. §7;
b. Respondent is misusing 7 subpoenae duces tecum for general
discovery purposes, which is prohibited by New York law, Bach
v. Fahnestock & Co., No. 13227-02 (N.Y. Sup. Ct. Jan. 27,
2003);
c. Respondent's Subpoenas are void and unenforceable, since
non-party, pre-hearing discovery subpoenas are not permitted
in arbitration under §7 of the FAA, Hay Group, Inc. v. E.B.S.
Acquisition Corp., 360 F.3d 404, 406-07 (3d Cir. 2004);
d. Respondent's Subpoenas contradict NASD Arbitration Rules,
since Respondent issued its Subpoenas without submitting its
subpoena request to the Arbitrators for a determination that
each subpoena complies with the law before they are issued;
and
e. Respondent's Subpoenas are an unreasonable and
unnecessary invasion of the privacy of Claimant and non-
parties.
Legal Discussion
Introduction
Proof that Respondent is engaged in an unlawful fishing expedition is evident
on the face of its Subpoenas, except, "[i]nstead of using rod and reel, or
even a reasonably sized net, [Respondent] would drain the pond and
collect the fish from the bottom." In re IBM Peripheral EDP Devices
Antitrust Litig., 77 F.R.D. 39, 42 (N.D. Cal. 1977).
Respondent's Subpoenas make overly broad requests for categories of
confidential and personal financial records, including records concerning a
non-party, that are not related to the matter in controversy. The time period
of Respondent's subpoenas far exceeds the relevant time period for the
pending claim, and Respondent has failed to identify the specific account
holder for each of its 7 subpoenas.
Subpoenas are not discovery devices. Matter of Terry D., 81 N.Y.2d 1042,
601 N.Y.S.2d 452 (1993). Respondent's reliance on CPLR 7505 and NASD
Rule 10322 is misplaced. Bach, supra, p. 1-2. "New York law . . . grants
neither arbitrators nor counsel of record the power to issue a subpoena
duces tecum for purposes of discovery in arbitration." Id. at p. 2; see
V. Alexander, Practices Commentaries, CPLR §7505, McKinney's at 682
("The subpoena power conferred by CPLR 7505 is limited to procuring
of evidence for the hearing or trial of the dispute. Depositions and
other forms of pretrial disclosure are ordinarily not contemplated in
arbitration proceedings").
Rather than comply with the FAA, New York law and NASD rules,
Respondent illegally disseminated Claimant's confidential social security
numbers to identify possible accounts, violating the privacy rights of
Claimant and Claimant's wife, a non-party. In effect, Respondent has
requested non-parties to conduct a general search of their records to
determine whether Claimant ever had a relationship with the non-parties.
Even more egregiously, Respondent distributed Claimant's confidential social
security numbers together with credit card account numbers in three (3) of
the subpoenas. Respondent's Subpoenas serve only to humiliate, punish and
embarrass Claimant and his family for having the nerve to complain about
being defrauded by Respondent.
Ask yourself, how you would feel if the brokerage firm you trusted committed
a fraud that victimized you, and an arbitrator manifestly disregarded the law
and endorsed the firm's unlawful distribution of your most private information,
facilitating the theft of your identity? Claimant need not warn the Chairperson
about the ease with which identity fraud can occur with an individual's social
security and credit card numbers. Respondent has completely disregarded
common sense in its relentless campaign to harass Claimant and his family.
Respondent has made no showing that the records exist or would be material
to this arbitration, which are mandatory prerequisites to the issuance of any
subpoena. The New York Court of Appeals has specifically rejected
Respondent's anticipated argument that the subpoenaed records might
include material evidence. Matter of Terry D., supra.
Respondent is attempting to circumvent the NASD Code of Arbitration and
applicable law. A subpoena duces tecum is no substitute for the discovery
request requirements under NASD Rule 10321 and may not be used to
supplement discovery. Respondent wants to substitute its self-interest for
the judgment of the Arbitrators by issuing illegal discovery subpoenas to non-
parties over Respondent's counsel's signature. As discussed below,
Claimant seeks an Order quashing Respondent's 7 void and unenforceable
discovery Subpoenas.
The FAA Prohibits Respondent's Attorney-Issued Subpoenas
This arbitration is governed by the FAA, since the dispute involves securities
purchased and sold on a national securities market. 9 U.S.C. §1; Societe
Generale v. Raytheon, 643 F.2d 863, 867 (1st Cir. 1981).
Respondent's attorney-issued subpoenas are invalid under the FAA.
Respondent's counsel lacks the authority to compel the production of
documents and information through a subpoena. Section 7 of the FAA
requires that subpoenas "shall be signed by the arbitrators, or a majority of
them." 9 U.S.C. §7. No arbitrator has signed Respondent's Subpoena.
Therefore, Respondent's Subpoenas do not comply with the FAA and are an
egregious abuse of process.
NASD Rule 10322(a) of the NASD Code of Arbitration does not authorize
attorney-issued subpoenas. Suratt v. Merrill Lynch, Case No. 03-80502
(S.D. Fla. 2003). The Rule "provides that ‘the arbitrators and counsel of
record to the proceeding shall have the power of the subpoena process as
provided by law.'" Id. NASD 10322 "is not an independent grant of power to
attorneys in arbitration proceedings, however, as it allows counsel to issue
subpoenas only ‘as provided by law.'" Id. (FN. 1).
Federal Courts have specifically – and unequivocally – rejected attorney-
issued subpoenas because they violate §7. The Second Circuit
unequivocally held that FAA "section 7 explicitly confers authority only upon
arbitrators; by necessary implication, the parties to an arbitration may not
employ this provision to subpoena documents or witnesses." National
Broadcasting Co. v. Bear Stearns & Co., et al., 165 F.3d 184, 187 (2d Cir.
1999)(emphasis in original); Burton v. Bush, 614 F.2d 389, 390 (4th Cir.
1980)("While an arbitration panel may subpoena documents or witnesses,
the litigating parties have no comparable privilege"); Suratt, supra ("While the
FAA allows arbitrator-issued subpoenas, it is silent on the issue of attorney-
issued subpoenas. Courts have interpreted this silence to mean that
attorney-issued subpoenas in arbitration actions are forbidden").
In Suratt, the Court held that, since the FAA governed, arguments that state
law permits attorney-issued subpoenas in arbitration were not applicable.
"When the FAA conflicts with state law governing arbitration actions, the FAA
controls." Suratt, supra., citing Volt Information Sciences v. Board of
Trustees, 489 U.S. 468, 477, 109 S.Ct. 1248, 1255 (1989).
Under the FAA and NASD arbitration rules, Respondent has the burden of
proving its entitlement to the 7 subpoenas. By Respondent issuing
subpoenas instead of submitting them to the Chairperson, Respondent has
unfairly shifted the burden to Claimant to show improper use rather than
leave the burden where it belongs – on Respondent.
New York Law Prohibits Respondent's Use of a Subpoena Duces Tecum for General Discovery
Respondent is misusing 7 subpoenae duces tecum for "general discovery."
Respondent's Subpoenas seek such items as "all account statements,
account opening documents and account agreements" for Claimant's credit
cards and mortgage records. A subpoena duces tecum is not a discovery
device. Matter of Terry D., supra.
New York courts have rejected Respondent's argument that CPLR §7505
authorizes discovery subpoenas. Bach, supra, p. 2. Under the CPLR,
arbitrators do not have the power to direct discovery. De Sapio v.
Kohlmeyer, 35 N.Y.2d 402, 406. The arbitrator's power to issue a
subpoena pursuant to CPLR 7505 is limited to the procuring of
evidence for the hearing or trial, not discovery. Bach, supra, p. 1-2; see
Goldsborough v. NYS Dept. Of Correctional Svcs., 217 A.D.2d 546, app.
dsmd, 68 N.Y.2d 834; 7B McKinneys Cons. Law of NY, §7505, Practice
Commentaries at p. 682.
Respondent's reliance upon NASD Rule 10322 "is misplaced because that
rule (fn. 2) grants arbitrators and counsel of record ‘the power of subpoena
process as provided by law', and New York law as set forth above, grants
neither the arbitrators nor counsel of record the power to issue a subpoena
duces tecum for purposes of discovery in arbitration." Bach, supra, p. 2.
The New York Court of Appeals has affirmed New York's prohibition against discovery subpoenas:
Generally, a subpoena duces tecum may not be
used for the purpose of discovery or to ascertain
the existence of evidence. Rather, its purpose is
to compel the production of specific documents
that are relevant and material to facts at issue in
a pending judicial proceeding.
Matter of Terry D., supra (internal citations omitted).
Respondent seeks the production of hundreds of confidential records in the
vain attempt to possibly discover something of value. The law of subpoenas
is intentionally designed to prevent attorneys from abusing the subpoena
process in this way. See American Communications Association, Local 10
v. Retirement Plan, 488 F.Supp. 479, 484 (S.D.N.Y. 1980); see also Hay
Group, 360 F.3d at 409.
Pre-Hearing Discovery Subpoenas are not Enforceable against Non-Parties under the FAA
It would be inappropriate for any of the arbitrators to sign and issue
Respondent's subpoenas even if Respondent had followed NASD arbitration
procedure and submitted the subpoenas to the Chairperson in the first
instance.
This arbitration is authorized by the parties' contract to arbitrate before the
NASD. The parties' arbitration contract and the FAA are the only sources of
jurisdiction for the issuance of a subpoena in this arbitration. Integrity Ins.
Co., in Liquidiation v. Am. Centennial Ins. Co., 885 F.Supp. 69, 71 (S.D.N.Y.
1995)("Because the parties to a contract cannot bind nonparties, they
certainly cannot grant such authority to an arbitrator. Thus, an arbitrator's
power over nonparties derives solely from the FAA"); Legion Ins. Co. v. John
Hancock Mutual Life Ins. Co., No. 01-162, 2001 WL 1159852 at *1 (E.D.
Pa.)("It is clear . . . that the [FAA] is the only source of authority for the
validity and enforceability of the arbitrators' subpoena [over a nonparty]").
"The only power conferred on arbitrators with respect to the production of
documents by a non-party is the power to summon a non-party ‘to attend
before them or any of them as a witness and in a proper case to bring with
him or them any book, record, document or paper which may be deemed
material as evidence in the case.'" Hay Group, Inc. v. E.B.S. Acquisition
Corp., 360 F.3d 404, 407 (3d Cir. 2004)(emphasis in original), citing 9 U.S.C.
§7. "Nowhere does the FAA grant an arbitrator the authority to . . .
demand that non-parties provide the litigating parties with documents
during prehearing discovery." COMSAT v. National Science Foundation,
190 F.3d 269, 275 (4th Cir. 1999)(emphasis added).
If Congress had intended to grant arbitrators the power to compel non-parties
to produce documents during pre-hearing discovery, "we believe that the
drafters would have said so, and they would have then had no need to spell
out the more limited power to compel a non-party witness to bring items with
him to an arbitration proceeding." Hay Group, 360 F.3d at 408-09.
"Thus, Section 7's language unambiguously restricts an arbitrator's subpoena
power to situations in which the non-party has been called to appear in the
physical presence of the arbitrator and to hand over the documents at that
time." Id. at 407. Therefore, the law is clear and unequivocal that the FAA
does not grant arbitrators the power to issue Respondent's Subpoenas.
Respondent's Subpoenas Disregard the Chairman's Authority to Review Subpoena Applications before Issuance
Respondent is making an end-run around the NASD Arbitration Rules and
Procedures. Respondent is unlawfully exceeding the limits of arbitration
discovery by issuing void and unenforceable subpoenas to third parties.
Matter of Terry D., supra. ("Respondent, however, cannot use the procedural
mechanism of a subpoena duces tecum to expand the discovery available
under existing law").
Had Respondent followed NASD Arbitration Rules and Procedure, Claimant
could have at least objected to Respondent's distribution of Claimant's
confidential social security numbers and credit card account numbers, and
the Chairperson could have prevented Respondent's wanton violation of the
Privacy Act. Respondent must follow the same rules that govern Claimant
and the Panel in this arbitration – NASD Rules and the FAA. Respondent
compounded its misconduct by not submitting its 7 unlawful discovery
Subpoenas to the Chairperson, usurping the Chairperson's prerogatives.
Respondent's Invasion of Claimant's Privacy Breached its NASD Duties
Respondent's Subpoenas seek records for non-parties' accounts, which do
not relate "to the claim or defense of any party." Fed. R. Civ. P. 26(b)(1);
see Optibase v. Merrill Lynch Investment Mgrs., 2003 WL 1587244 at *3
(S.D.N.Y.). Claimant's and Claimant's wife's credit cards and mortgages are
not material to the claim that Claimant purchased the stock in reliance on
Respondent's fraudulent research reports.
Respondent's Subpoenas constitute an unreasonable and unnecessary
invasion of privacy, since the subpoenaed records are not related to the
matter in controversy. Claimant's wife is not a party to this arbitration or to
the arbitration agreement executed between Claimant and Respondent.
Respondent could not formally request the production of documents by
Claimant's wife, since she is not a party. However, Respondent has ignored
NASD Rule 10321 by unilaterally issuing subpoenas for records unavailable
under NASD Discovery Rules.
Respondent has bypassed its obligation to show that the Claimant has or had
any accounts at banks, brokerage firms and credit card companies, as a pre-
condition to requesting a subpoena. Nevertheless, in violation of the
Privacy Act and in furtherance of its intent to harass Claimant,
Respondent irresponsibly distributed the social security numbers of
Claimant and Claimant's wife to other third parties without
authorization. The Chairperson should not tolerate Respondent's illegal
conduct, which violates Respondent's duty to cooperate in discovery and its
duty to "observe high standards of commercial honor and just and equitable
principles of trade." NASD Arbitration Rule 10321 and NASD Conduct Rule
2110.
Respondent Knows that its Subpoenas are Void and Unenforceable
Respondent's defiance of the FAA was knowing and intentional. Respondent
joined as a moving party in NBC, supra, to quash illegal, attorney-signed
discovery subpoenas. As noted above, the Second Circuit clearly and
unequivocally held that "§7 explicitly confers authority [to issue subpoenas]
only upon arbitrators; by necessary implication, the parties to an arbitration
may not employ this provision to subpoena documents or witnesses." NBC,
supra at 187.
Respondent's Continuing and Documented Pattern of Discovery Abuse
in Customer Arbitrations
How do you stop an 800 pound gorilla? Respondent's latest discovery abuse
against Claimant and his family, including the illegal distribution of their social
security and credit card numbers, justifies the imposition of sanctions against
Respondent.
NASD has previously censured and fined Respondent after documenting
Respondent's pattern of discovery abuse in customer arbitrations. NASD
News Release, July 19, 2004. Respondent is abusing the subpoena
process, in this arbitration, by issuing illegal subpoenas in violation of the
FAA that also exceed the limits of discovery provided by the NASD
Arbitration Rules.
Conclusion
There are those who hesitate to take on this fight because they believe that
the arbitrators who decide these issues will not spend the time required to
read and understand the arguments presented. Instead, they expect that
those arbitrators will submit to the 800 pound gorilla.
At times like this, there is an old legal adage worth remembering: "there are
no stupid judges, just lawyers who did not explain themselves clearly
enough." If you want a level playing field, you must fight for it until the
appropriate use of subpoenas are generally understood by arbitrators. Each
time the argument is made and won, you are making a contribution toward
change.
___________________________________________________________
1. This provision would only have applicability in disputes involving purely intrastate
transactions. Under those circumstances, not present here, the FAA would not apply. Since this customer dispute clearly involves the purchase of securities on a national securities market, it involves interstate commerce, triggering the mandatory application of the FAA. 9 U.S.C. §1.
2. The Court in Bach interpreted NYSE Rule 619, which is the equivalent to NASD Rule 10322.
