FINRA Sanctions Ameriprise Over Arbitration Discovery Abuse Part II

shutterstock_175320083In the prior post we discussed the extremely difficult journey an investor may have to go through in order to obtain relevant discovery documents from the brokerage industry in FINRA arbitration. We also discussed how the system is stacked against the investor’s rights and provides incentives to firms to withhold documents. However, a recent FINRA enforcement order provides some hope that the regulatory watchdog will start taking these issues seriously.

In October 2014, FINRA sanctioned Ameriprise Financial Services, Inc. (Ameriprise) and its broker for altering documents and refusing to produce documents until the eve of hearing. FINRA’s action resulted from the discovery tactics employed by Ameriprise and its broker David Tysk (Tysk) in a FINRA arbitration.

In the Ameriprise case, the FINRA arbitrators found the firm’s conduct so egregious that it referred the matter to FINRA’s Member Regulation Department. The arbitration panel found that Ameriprise and 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 the customer having the initials “GR.” Tysk was responsible for detailing his contact with customers in a computer system maintained by Ameriprise.

However, after the customer had submitted a complaint to Ameriprise, FINRA stated that Tysk went into the system and made changes to appear as if they were notes made contemporaneously with the events described. The client’s attorney became suspicious of the notes because they seemed too perfect, essentially a defense attorney’s dream description of the events leading up to the complaint. However, no one knew that the broker had engaged in revisionist history to bolster his defenses to the claims made against him.

The attorney requested further discovery to determine whether the notes had been altered after he lodged his complaint with Ameriprise. Naturally, and as we discussed in part I, Ameriprise opposed the requests for months and never said anything about the alterations. As the arbitration hearing date approached, the attorney continued trying to obtain information about whether the notes were what they appeared to be.

Then, right on the eve of trial, Ameriprise found an exception report relevant to the alteration claims that should have provided months earlier. The customer claimed that the report was a “smoking gun,” document that may have been intentionally withheld because its existence could have prompted Tysk to change his notes. The client demanded to be allowed to examine Tysk’s computer program to analyze the notes for alterations.

Again Ameriprise objected to the requests but the arbitration panel ordered Ameriprise and Tysk to give the client 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 the customer complaint letter. At the conclusion of the arbitration hearing, the arbitration panel sanctioned Ameriprise and Tysk for violating arbitration discovery rules.

FINRA Enforcement then reviewed the facts of the case and found 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. FINRA found that by altering the customer contact notes and failing to inform Ameriprise of the alterations when he produced them in the arbitration proceeding that Tysk violated the industries rules. FINRA further concluded that Ameriprise violated the rules by failing to inform the customer that Tysk had altered his notes before they were produced in discovery, and by failing to produce the exception report as required by the arbitration rules.

Tysk was suspended for three months and fined $50,000, and Ameriprise was fined $100,000. Hopefully, the Ameriprise fine will send a message to the industry that discovery abuse is a serious offense.