The FINRA investigative process and the arbitration process exist side-by-side; at times, the misconduct that is alleged by a claimant in a Statement of Claim may simultaneously be the subject of an examination by Member Regulation, or even an Enforcement Complaint. Ordinarily, Enforcement doesn’t pay much attention to what happens in a parallel arbitration, except in those relatively rare situations where the hearing panel makes a disciplinary referral.  A very recent Enforcement case highlights the potentially grave danger of not taking seriously one’s discovery obligations in a FINRA arbitration, and how that can morph into an Enforcement case.

David Tysk is a registered rep with Ameriprise. In 2006-2007, Mr. Tysk sold his customer “GR” $2 million in variable annuities.  At least a year later, the customer sent a letter to Ameriprise, complaining of the suitability of the annuity purchases, and demanding his money back.  Shortly after the complaint letter was received, Mr. Tysk went about making “substantial alterations”[1] to his client contact notes about his meetings/conversations with GR, seemingly in an effort to lend better documentary support for the defense of his recommendations to GR to purchase the variable annuities.  This was contrary to Ameriprise’s Code of Conduct.

In 2008, after Ameriprise denied his complaint, GR initiated a FINRA arbitration against Mr. Tysk, and Ameriprise. As any practitioner knows, in customer arbitrations, FINRA has created a list of presumptively discoverable documents for respondents to produce, including “[a]ll notes by the firm/Associated Person(s) or on his/her behalf, including entries in any diary or calendar, relating to the custom[]er’s account(s) at issue.”  In response to this item, Mr. Tysk produced the revised version of his client notes; more importantly, he did not tell GR’s counsel that he had altered them.  GR’s counsel was sharp, however, and he noticed that the notes reflected that they had been “edited” by Mr. Tysk after the date of the initial complaint letter to Ameriprise.  So, he followed up and asked to see the edits Mr. Tysk had made.

Mr. Tysk’s lawyer then dutifully asked Mr. Tysk about the edits. Mr. Tysk told his lawyer that there were no documents reflecting any edits.  Based on that response, Mr. Tysk’s counsel told GR’s counsel that there were, in fact, no responsive documents.

Unfortunately, that turned out to be false. GR convinced the arbitration panel to order a “forensic search” of Mr. Tysk’s computer and server, and that search uncovered all of Mr. Tysk’s previously undisclosed edits.  Perhaps not surprisingly, the arbitration panel found Mr. Tysk and Ameriprise jointly and severally liable “for obstructing the discovery process,” and slapped a $20,000 sanction on Mr. Tysk.  More importantly, it made a disciplinary referral to FINRA, to review the conduct of Mr. Tysk and Ameriprise in connection with their discovery obligations in the arbitration.

A hearing panel ultimately concluded that both Ameriprise and Mr. Tysk were liable, but only Mr. Tysk appealed to the National Adjudicatory Council.[2]  On appeal, the NAC affirmed the $50,000 fine the hearing panel had imposed on Mr. Tysk, but increased his suspension to one year.

Now, finally, to the lesson of the case: the hearing panel, as well as the NAC on appeal, concluded that Mr. Tysk violated IM-12000 of the Code of Arbitration Procedure – and, therefore, FINRA Rule 2010 – by deliberately submitting in discovery a document that was “misleading.”  It is at this precise point where the arbitration process and the Enforcement process intersect.  Failing to produce relevant evidence in an arbitration, or producing altered evidence, can cause a dramatic impact not just in the arbitration, but, as Mr. Tysk learned the hard way, in a subsequent Enforcement case.

And, it was not simply the production of the altered notes by Mr. Tysk that got him in trouble; it was also the fact that he (and Ameriprise) concealed the fact that he had changed his notes. According to the NAC, Mr. Tysk “subverted the arbitration process” in two ways, by producing an altered document and then by not “providing full information during the discovery process” about that document.  Specifically, the NAC found that Mr. Tysk’s argument that “providing explanations about discovered documents . . . is contrary to arbitration practices . . . constricts too narrowly his obligations under the Arbitration Code, and FINRA’s conduct rules.”

The NAC was also unimpressed with Mr. Tysk’s argument that, in the end, his alterations all came to light before the arbitration hearing itself, so no one was harmed: “If Tysk’s misconduct had not been discovered by a forensic investigation, the ability of the arbitrators to find the truth would have been undermined.  The fact that Tysk’s concealment was revealed does not lessen its potential to harm the arbitration process.”  See, even in the absence of any “actual” harm to the arbitration process, the “potential to harm” was enough to get Mr. Tysk in hot water.

At times, the arbitration process can seem like a bit of circus. Because not every chairperson is sufficiently experienced to identify misconduct when they see it, or, equally bad, strong enough to do anything about it when they do, over the years I have witnessed countless examples of parties ignoring their responsibilities under the Code of Arbitration Procedure, seemingly with no consequences.  Claimants, who are not subject to FINRA’s Conduct Rules, are, generally, safe no matter what they do, or don’t do – and maybe that’s a subject for another blog post.  But respondents, like Mr. Tysk and Ameriprise, present a very different picture.  For them, the threat of a disciplinary referral exists in every case.  Accordingly, their discovery obligations in arbitration must be taken seriously.  In FINRA’s transparent world, one’s disciplinary history, like those Mr. Tysk and Ameriprise now have as a result of their actions here, cannot be concealed quite so easily as Mr. Tysk’s after-the-fact revisions to his client notes.

[1] Mr. Tysk added 54 new entries and supplemented 13 pre-existing entries to provide additional details.  Interestingly, FINRA did not charge that Mr. Tysk’s altered notes were “false or untrue statements,” even though they were backdated.

[2] The hearing panel fined Ameriprise $100,000 for failing to inform GR’s counsel immediately that Mr. Tysk’s notes were altered once it learned that fact (and for not producing a relevant exception report until the eve of the hearing).