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Pershing LLC v. Kiebach: If Not Precedent, Then Prescient! Word to the NAMC!
Posted on Categories Court Decisions, Securities ArbitrationTags , , ,

My first reaction when a West Coast defense attorney proposed we give coverage to a recent decision in Pershing LLC v. Kiebach,[1] an Award confirmation by a Louisiana federal court, was: "What could be her interest in the case?" Then, we received the summary of the decision from SOLA Contributing Editor Jack Ballard[2] and I knew this was a special case. Mr. Ballard's commentary, after reporting the facts, issues and holding of the decision, began:

The arbitrators in this case made a mistake by granting the motion to protect documents based on privilege without first conducting an in-camera review. This decision left open grounds for an appeal on the basis of fundamental unfairness, and risked seeing the Award overturned and a new hearing ordered.[3]

That was enough to make me want to read the decision.

A Sympathetic Court

The case concerned a challenge by a group of investor-Claimants, coined by the Court with the sympathetic appellation, "the Louisiana Retirees," (home team -- already you knew Pershing was in trouble), who lost $80 million (second nail) in the huge Ponzi scheme run by Allen Stanford (third nail) and were zeroed by the FINRA Arbitrators (lid tightening) after the Panel refused discovery of (allegedly) "pertinent and material" documents on the basis of Pershing's untested claim of privilege (coffin lid nailed shut!).

The Court's reaction, recorded in an earlier decision (see SLA 2017-10), was to take discovery upon itself. It ordered Pershing to produce a privilege log, reviewed the documents in camera, and produced to Plaintiffs selected documents (presumably, on the basis that they were incorrectly denoted as privileged) for their review and use in arguing their claims of prejudice and fundamental unfairness. Between the time of production and the Court's decision to confirm, Plaintiffs were unable to persuade the Court that the evidence revealed by the newly-produced documents would have made a real difference in the outcome, had the Arbitrators done as the Court had done.

An Unusual Case

Now I understood my West Coast colleague's interest in the case! One is first taken aback at the Court's easy willingness to interfere and second-guess the Arbitrators. Permitting discovery into the merits of the dispute inflicts a major dent in the protective shield of finality -- that principle based on speed and economy, which persuades courts to refrain from re-litigating that which arbitrators have decided. And, a Court’s questioning of counsel's privilege claim creates additional concern. But, I shortly moved from there to asking, was the Court really second-guessing? Since the Arbitrators had done nothing, evidently, to test or question the privilege claims, wasn't the Court just answering an open invitation? Assuming this is a court that is not just openly hostile to arbitration --- and nothing in the decisions suggest that -- one asks whether the Arbitrators could have preempted the Court's irresistible urge to intervene?

Jack was right -- the arbitrators should have done more! Here's most of the rest of what he wrote:

A wiser course would have been to review the documents for privilege prior to deciding the motion for protection.  The appellate court does note that arbitrators have broad discretion in how to handle discovery disputes.  But as a practical matter, taking a litigant’s word on privilege rather than reviewing the documents themselves poses a big risk. FINRA should consider amending the Arbitrator Guide to address how to handle privilege issues.

In Kiebach, it was less the Court that was wrong than the Arbitrators. The Court did what the Arbitrators should have done, in which case the Court could not have reasonably questioned their earnest pursuit of all material evidence. In the courts, ordering in camera review is a discretionary power of the Court, to be judiciously applied. Arbitrators should know they have that power and can apply it in the appropriate circumstances.

Food for Thought for FINRA?

This line of reasoning took us to the FINRA Arbitrator Guide and the Chairperson Training materials, because, after all, I'm not looking to Monday-morning quarterback a particular Panel's decision. One reacts to the facts at hand in the Kiebach case; the case simply points to the need to treat a clear case of aggressive judicial intervention. The questions come as to whether FINRA might have played a more helpful role here and, more importantly, whether FINRA can do more to equip future panels.

In few places in the training materials can one find references to claim-of-privilege situations. The general admonition we found in the Arbitrator Guide stated baldly:

Arbitrators shall not issue an order or use a confidentiality agreement to require parties to produce documents otherwise subject to an established privilege, including the attorney-client privilege and the attorney work product doctrine (emphasis added).

"Shall not..."? Just as an aside, does the term "shall not" appropriately reside in a forum training guide for arbitrators? Arbitrators have immense discretionary powers about the cases they handle. The staff (or the National Arbitration and Mediation Committee for that matter) has no business curtailing those powers absolutely. "Shall nots" should be the subject of rulemaking! Of course, the privilege is sacrosanct and strong words are appropriate, but the imperative command begs the harder question: how does an arbitrator determine whether the privilege applies to a particular document or testimony?

Chairperson Training materials also discuss privilege, but only in connection with non-party subpoenas; it simply suggests the Arbitrator get on the phone with the non-party and the parties and then render a decision. The final reference to privilege arises in a hypothetical where the Claimant asserts privilege at the Initial Prehearing Conference as to documents listed in the Discovery Guide. The only sensible answer among those offered advises that the arbitrator "schedule discovery motion deadlines. After reviewing the discovery motions, the Chairperson should either rule on the document production issues or schedule a conference to hear arguments from the parties before ruling."

See what is missing? No guidance is offered relating to the decision-making structure. How does one go about addressing challenges to privilege claims? NAMC has experienced litigators from both sides who can provide guidance to panels in deciding when in camera review is necessary and appropriate. Such guidance should explain the purpose of a privilege log, how to use the privilege log to isolate the documents that require inspection, and how to perform the in camera review. The "how to perform" requires instruction on the standard to apply -- privilege first. The Magistrate in Kiebach determined if documents were protected and then she produced documents, from among those that were not protected, to the Louisiana Retirees. The Magistrate stopped there and left it to Plaintiffs to demonstrate that the documents were "pertinent and material." Task Force guidance should also prepare the Chairperson to deal with issues of recusal, if she reads something in camera that might be prejudicial; arbitrators, unlike judges, must decide both the law and the facts impartially.


Making good decisions about privilege requires delicate and skillful treatment and chairpersons should be as fully equipped as FINRA can make them to operate with surgical precision. NAMC has a job to do here. At least let the arbitrators know that there are choices. The "shall not" admonition in the Arbitrator Guide implicitly chokes off the possibility that the arbitrators might question a claim of privilege. Tell the arbitrators that discretion exists and guide them appropriately. Either trust your arbitrators or expect courts to do the job! The latter path shirks responsibility and not only risks increased vacatur numbers, but also embarrassing revelations of material evidence that was effectively suppressed. From a policy standpoint, it encourages disrespect from the courts and judicial suspicion and resentment that will only build. We must recognize that, among the audience that arbitrators must serve, are the courts. They are the final arbiters of panel fairness.


Author's Addendum

In this short article, I resisted mentioning that Kiebach also involved the SAR ("Suspicious Activity Reports") privilege. In addition to the attorney-client privilege, Pershing resisted production of SARs-related materials. FINRA says nothing about issues surrounding SARs or AML in its training guides, but it has published (2005) and re-published (Vol. 3-2008) in its Neutral Corner publication an article explaining the ins and outs of SARs and the absolute privilege against disclosure. FINRA also produced a workshop video on SARs and AML considerations. While both incline, as they should, to emphasizing the absolute nature of the SARs "privilege," neither provides a decision-making structure to arbitrators for handling a fair challenge. The overall effect is to intimidate arbitrators from allowing any SARs "stones" to be overturned.

To their credit -- and unlike the training guides -- these materials do stress that the privilege extends only so far and that "the underlying account and transactional information are not subject to the same restrictions." At the same time, they do not deal with documents closer to the borderline, like compliance memos, exception reports, and internal audit reports. Are they protected and how should the inquiry be structured? Here's an excerpt from an article on Mayer Brown's website that begins the path to a solution: "Where internal reports or memoranda citing suspicious activity are legitimately part of the process for complying with a bank’s SAR-reporting duties, they should be protected by privilege. But '[a] bank may not cloak its internal reports and memoranda with a veil of confidentiality simply by claiming they concern suspicious activity or concern a transaction that resulted in the filing of a SAR.'” (citation omitted)

[1] No. 2:14-cv-02549 (E.D. La. May 22, 2017).

[2] Jack Ballard is one of ten Contributing Editors to the Securities Online Litigation Alert. He is a Principal in Ballard & Littlefield LLC, Houston, TX, and covers the Fifth Circuit and related courts for SOLA.

[3] Mr. Ballard’s summary of the decision and his commentary on it may be found here (subscription required) in SLA 2017-22 on the SOLA website.

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