Pershing LLC v. Kiebach et al

Filing 114

ORDER AND REASONS denying 89 MOTION for APPEAL/REVIEW OF MAGISTRATE JUDGE DECISION to District Court re 85 Order on Motion for Discovery. Signed by Judge Lance M Africk on 2/15/2017.(Reference: ALL CASES)(blg)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF LOUISIANA
PERSHING LLC

CIVIL ACTION

VERSUS

No. 14-2549
REF: ALL CASES

THOMAS KIEBACH ET AL.

SECTION I

ORDER AND REASONS
In this consolidated action, Pershing LLC seeks to confirm an arbitration
panel’s decision in its favor. The defendants, “Louisiana Retirees,” seek to vacate the
arbitration panel’s decision. Before the Court is a motion 1 filed by Pershing LLC
asking this Court to overturn in part the U.S. Magistrate Judge’s order compelling
Pershing to produce certain discovery. The order of a Magistrate may be reversed
only “where it has been shown that the magistrate judge’s order is clearly erroneous
or contrary to law.” 28 U.S.C. § 636(b)(1)(A); see also Fed. R. Civ. P. 72(a). For the
following reasons, the motion is denied.
I.
“In light of the strong federal policy favoring arbitration, judicial review of an
arbitration award is extraordinarily narrow.” McKool Smith, P.C. v. Curtis Int’l, Ltd.,
650 F. App’x 208, 211 (5th Cir. 2016) (citation omitted). “Under this review, an award
may not be set aside for a mere mistake of fact or law.” Id. “Instead, Section 10 of
the FAA provides the only grounds upon which a reviewing court may vacate an

1

R. Doc. No. 89.

arbitrative award.” Id. Section 10 of the FAA provides the following grounds for
vacating an award:
1) where the award was procured by corruption, fraud, or undue means;
2) where there was evident partiality or corruption in the arbitrators, or
either of them;
3) where the arbitrators were guilty of misconduct in refusing to postpone
the hearing, upon sufficient cause shown, or in refusing to hear
evidence pertinent and material to the controversy; or of any other
misbehavior by which the rights of any party have been prejudiced; or
4) where the arbitrators exceeded their powers, or so imperfectly executed
them that a mutual, final, and definite award upon the subject matter
submitted was not made.
9 U.S.C. § 10(a).
The Louisiana Retirees assert multiple bases for vacatur in this lawsuit.
Relevant to the present motion, they claim that the arbitration panel made an
erroneous evidentiary ruling denying them discovery of certain documents possessed
by Pershing over which Pershing had no valid privilege. Further, they claim the
panel made a procedural error by failing to review the contested documents in camera
before making its decision regarding discoverability. The Louisiana Retirees claim
that the errors evidence (1) partiality in the arbitrators, (2) that the panel exceeded
its powers, and (3) that the arbitration proceeding was fundamentally unfair, 2 all of
which are grounds for vacating an arbitration award.

See Gulf Coast Indus. Workers Union v. Exxon Co., USA, 70 F.3d 847, 850 (5th Cir.
1995) (Court deciding whether to vacate an arbitration award under the FAA must
ask “whether the arbitration proceedings were fundamentally unfair”).

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2

The Fifth Circuit has addressed similar evidentiary arguments in the context
of a motion to vacate an arbitral award. As it stated in Karaha Bodas Co.:
An arbitrator is not bound to hear all of the evidence tendered by the parties.
He must give each of the parties to the dispute an adequate opportunity to
present its evidence and arguments. It is appropriate to vacate an arbitral
award if the exclusion of relevant evidence deprives a party of a fair hearing.
Every failure of an arbitrator to receive relevant evidence does not constitute
misconduct requiring vacatur of an arbitrator’s award. A federal court may
vacate an arbitrator’s award only if the arbitrator’s refusal to hear pertinent
and material evidence prejudices the rights of the parties to the arbitration
proceedings.
Karaha Bodas Co. v. Perusahaan Pertambangan Minyak Dan Gas Bumi Negara, 364
F.3d 274, 300-301 (5th Cir. 2004) (quotations and citations omitted).
II.
Before the Court decides whether to vacate or confirm the arbitration panel’s
decision, the first question raised is whether the Louisiana Retirees are entitled to
discovery before this Court. Pershing argues that they are not and the Louisiana
Retirees argue that they are. The Court referred 3 this issue to Magistrate Judge
North. He ordered 4 briefing by the parties and he held a hearing. 5 Following the
hearing, Magistrate Judge North granted in part and denied in part the Louisiana
Retirees’ discovery request. See R. Doc. No. 85. Magistrate Judge North’s order
provided:
For the reasons stated more fully in open court, from the first category of
documents sought by the Louisiana Retirees, Pershing is to produce the
documents that were reviewed and were ordered to be produced in the
Weatherly matter.
R. Doc. No. 56.
R. Doc. No. 68.
5 R. Doc. No. 85.
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4

3

With respect to the second category of documents sought, Pershing is to create
and thereafter produce to the Court and the Louisiana Retirees a privilege log
as to incident reports that are responsive to the discovery requests made in the
arbitration proceeding. The documents that are identified on the privilege log
are to be provided to the Court for an in camera inspection.
As respects categories three and four, the Court will not order Pershing to
produce documents that it attests do not exist and allowance of discovery as to
category four would be unnecessarily and inappropriately intrusive upon the
procedural determinations of the Arbitration Panel and its interpretation of
the FINRA rules regarding Louisiana Retirees’ requests for those documents.
R. Doc. No. 85, at 2.
Pershing appeals Magistrate Judge North’s decision regarding the second
category of documents—the one for which Magistrate Judge North ordered the
creation of a privilege log and subsequent in camera review of the documents by the
Court. Pershing argues that the order should be overturned as clearly erroneous and
contrary to law. It claims the decision was erroneous both because post-arbitration
discovery is rare and because, even if allowed in some circumstances, discovery
should not be permitted because the requested documents are privileged.
III.
With respect to Pershing’s first point, the Court initially observes that
Pershing’s argument for reversal of only a portion of Magistrate Judge North’s
discovery order is somewhat in tension with Pershing’s position that no discovery
whatsoever should take place in this action. After all, irrespective of how the Court
rules on Pershing’s motion at least some discovery will go forward. But placing that
inconsistency to the side, the Court finds that Magistrate Judge North’s decision to
allow some discovery is neither clearly erroneous nor contrary to law.
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Discovery in the context of a motion to confirm or vacate an arbitration panel’s
decision is extremely limited. See Legion Ins. Co. v. Ins. Gen. Agency, Inc., 822 F.2d
541, 542-544 (5th Cir. 1987). Indeed, courts have recognized that “[i]f we permit
parties who lose in arbitration to freely relitigate their cases in court, arbitration will
do nothing to reduce congestion in the judicial system; dispute resolution will be
slower instead of faster; and reaching a final decision will cost more instead of less.”
DMA Int’l, Inc. v. Qwest Commc’ns Int’l, Inc., 585 F.3d 1341, 1346 (10th Cir. 2009).
If the record is adequate to permit the court to decide the issues presented, no
discovery should take place. See Legion Ins. Co., 822 F.2d at 542-544.
However, it does not follow that discovery is never permitted in proceedings to
review an arbitration panel’s decision. If the requested discovery is reasonable, if the
requesting party provides more than “vague assertions that additional discovery will
produce needed, but unspecified facts,” and if the court determines that more
information is needed before the court can resolve the disputed issues, discovery may
go forward. See Karaha Bodas Co., 364 F.3d at 304-305. The Fifth Circuit explained
in Karaha Bodas Co.:
In judging discovery requests in this context of an arbitration award
confirmation proceeding, the court must weigh the asserted need for hitherto
undisclosed information and assess the impact of granting such discovery on
the arbitral process. The inquiry is an entirely practical one, and is necessarily
keyed to the specific issues raised by the party challenging the award and the
degree to which those issues implicated factual questions that cannot be
reliably resolved without some further disclosure.
Id. at 305. A district court’s decision whether to allow discovery is reviewed for an
abuse of discretion. Id. at 304.

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Magistrate Judge North decided that limited discovery was warranted in this
case. The part of the Magistrate Judge’s order which Pershing contests only requires
Pershing “to create and thereafter produce to the Court and the Louisiana Retirees a
privilege log as to incident reports that are responsive to the discovery requests made
in the arbitration proceedings. The documents that are identified on the privilege log
are to be provided to the Court for an in camera inspection.” R. Doc. No. 85, at 2.
Accordingly, compliance with the order does not immediately reveal any documents
to the Louisiana Retirees which Pershing believes to be privileged. The order is not
overly broad and it does not unfairly burden Pershing. It simply affords Magistrate
Judge North the information he needs to determine whether the claimed privilege
applies.
Further, it is difficult for this Court to see how it will be able to decide “the
specific issues raised by the party challenging the award,” see Karaha Bodas Co., 364
F.3d at 305, without the benefit of Magistrate Judge North’s decision on the privilege
issue. If the claimed privilege is denied, this Court must review the documents in
order to ascertain whether such documents are pertinent and material to the
controversy. If so, this Court must further determine whether the Louisiana Retirees
were prejudiced by the panel’s refusal to consider the evidence. See Karaha Bodas
Co., 364 F.3d at 300-301. This Court cannot make those determinations in a vacuum.

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IV.
With respect to Pershing’s second argument for overturning the order,
Pershing has not convincingly demonstrated at this stage that the SAR privilege is
clearly applicable to all of the documents which were withheld from the Louisiana
Retirees in the arbitration proceedings. Without getting into unnecessary detail,
federal law requires banks and other financial institutions such as Pershing to report
suspicious transactions to the appropriate authorities. See 31 U.S.C. § 5318(g). The
“suspicious activity reports” or “SARs,” which financial institutions must submit
pursuant to the relevant statutes and regulations, are protected from disclosure. See
31 C.F.R. § 1023.320(e)(1)(i); see also BizCapital Bus. & Indus. Dev. Corp. v.
Comptroller of Currency of U.S., 467 F.3d 871, 873 n.3 (5th Cir. 2006). There is an
“unqualified discovery and evidentiary privilege” against disclosure of SARs “that
courts have held cannot be waived.” Whitney Nat. Bank v. Karam, 306 F. Supp. 2d
678, 682 (S.D. Tex. 2004).
But the SAR privilege protects more than simply the SARs themselves. Courts
have recognized that while the privilege “does not shield from discovery reports,
memoranda, or underlying transactional documents generated by a bank’s internal
investigation procedures,” Wiand v. Wells Fargo Bank, N.A., 981 F. Supp. 2d 1214,
1217 (M.D. Fla. 2013), it does cover “documents related to the preparation and filing
of a SAR that are not factual documents created in the ordinary course of business.”
S.E.C. v. Stanford Int’l Bank, Ltd., No. 3:09-CV-0298-N, 2014 WL 3702558, at *5

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(N.D. Tex. July 25, 2014) (Frost, M.J.). Of course, drawing the line between these
two categories of documents is not always an easy matter.
The documents Pershing seeks to withhold as privileged are “Incident Reports”
which Pershing says it uses “to begin the process of internally investigating potential
suspicious activity.”

R. Doc. No. 89-1, at 8.

Incident Reports are prepared by

employees and then provided to anti-money laundering (“AML”) investigators who
review them, conduct further investigation if necessary, and determine whether a
SAR should be filed. R. Doc. No. 89-1, at 8. Because Incident Reports are related to
the preparation and filing of SARs, Pershing claims they are protected by the
privilege.
In response, the Louisiana Retirees provide a string of case law which
distinguish between documents that reveal whether an SAR exists and documents
which identify suspicious activity but do not reveal whether an SAR was filed. See
R. Doc. No. 94, at 4-8. According to a number of courts, the SAR privilege does not
extend to the latter category of documents because detecting fraud is simply part of
a financial institution’s ordinary course of business, and to hold all such documents
encompassed by the SAR privilege would bar investigative documents from disclosure
entirely. See, e.g., In re JPMorgan Chase Bank, N.A., 799 F.3d 36, 40 (1st Cir. 2015);
United States v. LaCost, No. 10-CR-20001, 2011 WL 1542072, at *7 (C.D. Ill. Apr. 22,
2011); First Am. Title Ins. Co. v. Westbury Bank, No. 12-CV-1210, 2014 WL 4267450,
at *2-3 (E.D. Wis. Aug. 29, 2014) (Goodstein, M.J.).

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Pershing’s reply brief devotes much space to criticizing the Louisiana Retirees’
briefing, and little space to challenging the case law described above. But having
read the cases provided by the Louisiana Retirees, the applicability of the SAR
exception to the documents described by Pershing is not as black-and-white as
Pershing would have the Court believe. As such, this Court is not prepared to hold
that Magistrate Judge North’s decision to order the creation of a privilege log and
have the documents produced for an in camera review was clearly erroneous or
contrary to law.

If Pershing is correct regarding the applicability of the SAR

exception, its case should be that much clearer when Magistrate Judge North reviews
the Incident Reports themselves. Having referred the parties’ discovery disputes to
Magistrate Judge North, this Court is not about to deny him the information he needs
to adequately resolve them.
V.
For the foregoing reasons,
IT IS ORDERED that the motion is DENIED.

New Orleans, Louisiana, February 15, 2017.

_______________________________________
LANCE M. AFRICK
UNITED STATES DISTRICT JUDGE

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