NASD Fines Citigroup, Merrill Lynch and Morgan Stanley a Total of $750,000 for Failing to Comply with Discovery Obligations In Arbitrations
Washington, D.C.—NASD announced today that it has censured and fined Citigroup Global Markets, Inc., formerly Salomon Smith Barney, Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Morgan Stanley DW Inc. $250,000 each for failing to comply with their discovery obligations in 20 arbitration cases during the period 2002 through 2004.
All three firms must also implement written procedures designed to ensure that future discovery violations that lead to sanctions are elevated to senior officers for review and appropriate corrective action.
"NASD is committed to making our arbitration forum faster, fairer, and less expensive than court procedures," said Robert Glauber, NASD Chairman and CEO. "We cannot deliver on this commitment if firms fail to produce all required documents in a timely manner to opposing parties. We will not tolerate any failure by NASD-regulated firms to cooperate fully in the arbitration process and we will bring enforcement actions as necessary to assure full compliance with our arbitration code."
These cases arise from arbitrations conducted before NASD Dispute Resolution, Inc. arbitration panels as well as arbitration panels sponsored by other regulatory forums. Citigroup was a party in six of the arbitrations. Merrill Lynch and Morgan Stanley were parties in seven arbitrations each.
In these arbitrations, arbitration panels cited the firms for failing to produce documents to the claimants, as required by rules involving document discovery. After finding in each of the arbitrations that the firms failed to fully comply with their discovery obligations to produce documents - even after arbitration panels had issued orders compelling that production - the panels sanctioned the firms in amounts as high as $52,000.
As recently as last year, NASD formally reminded firms that "NASD rules require parties to NASD arbitrations to cooperate in the voluntary exchange of documents and information, and to respond to discovery requests from other parties" in a timely manner. NASD's Notice to Members 03-70 pointed out that it had become clear that "despite the guidance provided in the Code and the Discovery Guide, NASD continues to receive complaints regarding possible abuses of the discovery process."
The Notice further stated that "some parties believe that noncompliance with their duty to cooperate in the discovery process - to voluntarily turn over documents listed on applicable Document Production Lists, or requested by other parties under Rule 10321 - is a routine and acceptable part of arbitration strategy."
In the cases announced today, NASD found that by failing to comply with their discovery obligations, each of the firms violated NASD's rule requiring that securities firms adhere to just and equitable principles of trade. NASD also found that in arbitrations conducted before NASD Dispute Resolution, each of the firms violated NASD's Code of Arbitration Procedure, which provides that a failure to produce any document pursuant to the provisions of the Code is deemed a violation of the just and equitable principles of trade.
As part of today's settlements, each firm has agreed to establish a written procedure requiring review, at the management level of the firm, of any instance where an arbitration panel has sanctioned the firm for discovery violations and of instances where the firm is required to produce documents in response to a motion to compel filed in an arbitration. Each firm also agreed to notify all counsel handling arbitration proceedings on its behalf of the firm's policy to comply with discovery requirements in arbitration proceedings.
Citigroup, Merrill Lynch and Morgan Stanley agreed to the sanctions while neither admitting nor denying the allegations.
Investors can obtain more information about, and the disciplinary record of, any NASD-registered broker or brokerage firm by using NASD's BrokerCheck. NASD makes BrokerCheck available at no charge to the public. In 2003, members of the public used this service to conduct more than 2.8 million searches for existing brokers or firms and requested almost 180,000 reports in cases where disclosable information existed on a broker or firm. Investors can link directly to BrokerCheck at www.nasdbrokercheck.com. Investors can also access this service by calling (800) 289-9999.
NASD is the leading private-sector provider of financial regulatory services, dedicated to bringing integrity to the markets and confidence to investors through effective and efficient regulation and complementary compliance and technology-based services. NASD touches virtually every aspect of the securities business — from registering and educating all industry participants, to examining securities firms, enforcing both NASD rules and the federal securities laws, and administering the largest dispute resolution forum for investors and registered firms. For more information, please visit our Web site at www.nasd.com.