Pershing LLC v. Kiebach et al

Filing 137

ORDER AND REASONS - IT IS ORDERED that Pershing's 133 objections are DENIED and that Pershing is ORDERED to immediately comply with the Magistrate Judge's 132 discovery order. Signed by Judge Lance M Africk. (Reference: All Cases)(bwn)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF LOUISIANA
PERSHING LLC

CIVIL ACTION
No. 14-2549
c/w 16-15220

VERSUS

REF: ALL CASES
THOMAS KIEBACH ET AL.

SECTION I

ORDER AND REASONS
I.
In this consolidated action, Pershing LLC seeks to confirm an arbitration
panel’s decision in its favor. The defendants, “Louisiana Retirees,” Dr. Thomas J.
Kiebach, et al., seek to vacate the arbitration panel’s decision. Since the lawsuits
were consolidated, the focus has been on whether the Louisiana Retirees are entitled
to any discovery before this Court renders its decision.
The Court referred the discovery issue to the U.S. Magistrate Judge. Before
rendering a decision, the Magistrate Judge entertained multiple rounds of briefing
from the parties, heard oral arguments, held multiple status conferences, considered
the statutes, regulations, and case law, and reviewed in camera the numerous
documents that Pershing submitted through three separate productions. The three
separate productions were necessitated by Pershing’s inexplicable and repeated
failure to fully comply with the Magistrate Judge’s discovery orders. Those repeated
unresponsive productions—at least one of which, the redacted production, was clearly
intentionally unresponsive—needlessly delayed the resolution of the discovery issues.

As it stands, the Magistrate Judge ultimately decided that only some of the
documents produced by Pershing for in camera review should be produced to the
Louisiana Retirees. See R. Doc. No. 132. The documents which the Magistrate Judge
held non-discoverable were either not relevant to the present matter or were
protected from disclosure by the Suspicious Activity Report (“SAR”) privilege under
federal law. As to the remaining documents which the Magistrate Judge ordered
produced to the Louisiana Retirees, the Magistrate Judge held that they were
relevant and that they fell outside the protection of the SAR privilege.
Now before the Court are Pershing’s objections 1 to the Magistrate Judge’s
order. Pershing argues that all of the documents the Magistrate Judge ordered
produced to the Louisiana Retirees are protected from disclosure by the SAR
privilege, and it asks this Court to overturn the Magistrate Judge’s order. With
respect to the issues discussed herein, the order of the Magistrate Judge may be
reversed “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 objections are denied.
II.
The Court previously discussed the SAR privilege in its order and reasons
denying Pershing’s first objection to the Magistrate Judge’s discovery order, see R.
Doc. No. 114, though at that time the Court made no ruling as to the applicability of
the SAR privilege to the documents at issue. Instead, the Court simply noted that

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R. Doc. No. 133.
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“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,” and that “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.” See R. Doc. No. 114, at 9.
Because the Court has already discussed, albeit briefly, the fundamental
aspects of the SAR privilege, and considering that the parties agree on the basic legal
framework for analyzing whether a document related to SARs may be disclosed, the
Court wastes no time here repeating that framework. The Court instead proceeds to
directly address each of Pershing’s arguments as to why the Magistrate Judge’s
decision was clearly erroneous or contrary to law.
A.
Pershing first argues that the Magistrate Judge erred in finding that
Pershing’s Incident Reports were prepared in the ordinary course of business as part
of Pershing’s process of internally investigating potential suspicious activity.
Pershing argues that this conclusion flies in the face of the “sole piece of evidence in
the record regarding the role that Incident Reports play at Pershing: the declaration
of Alma Angotti, a former senior enforcement official . . . who reviewed Pershing’s
[Anti-Money Laundering] program.” See R. Doc. No. 133-1, at 3. Ms. Angotti swears
that the Incident Reports are created expressly for the purpose of determining
whether activity is in fact suspicious, requiring a SAR, and that the reports are “not
a record created in [Pershing’s] ordinary course of business about a transaction, an

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account or a business relationship that may give rise to Pershing’s suspicions.” See
R. Doc. No. 89-3, at 5.
As an initial matter, the Court observes that Ms. Angotti is not an employee of
Pershing, but rather an expert whom Pershing hired to review its Anti-Money
Laundering (“AML”) program. 2 Her declaration states that she “understand[s] the
general steps undertaken by Pershing to file SARs.” See R. Doc. No. 89-3, at 4. To
the extent Ms. Angotti is offered her opinion, based on a review of Pershing’s
program, as to whether the Incident Reports were prepared in the ordinary course
of business, the Magistrate Judge was not obligated to accept her conclusion
packaged as an expert opinion.
There is also reason to doubt Ms. Angotti’s conclusion. It goes without saying
that “detecting fraud is simply part of a financial institution’s ordinary course of
business,” see R. Doc. No. 114, at 8, and that Pershing—like other financial
institutions—would investigate suspicious activity even if it was not required by
federal law to adopt AML programs and prepare SARs. Pershing does not argue
otherwise.

Instead, it simply asserts that “[t]here is nothing to suggest

Incident Reports are used for loss prevention, employee discipline, credit
decisions, or other matters.” See R. Doc. No. 133-1, at 5.

Notably absent from

Pershing’s briefing is any explanation of how its procedures for detecting loss
prevention and the like—which undoubtedly exist—are implemented separately
from the AML program.

Pershing seems content to rely on the fact that the

Louisiana Retirees have not introduced evidence that Pershing’s loss
It is unclear from her declaration and from Pershing’s brief whether Ms. Angotti
was hired before or after this litigation commenced.

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prevention procedures overlap with Pershing’s AML procedures. However, as the
party advocating for the privilege, it is Pershing’s burden to demonstrate that the
Incident Reports are not created in the ordinary course of business. See In re Santa
Fe Int’l Corp., 272 F.3d 705, 710 (5th Cir. 2001) (“A party asserting a privilege
exemption from discovery bears the burden of demonstrating its applicability.”).
As Pershing recognizes, the applicability of the SAR privilege largely turns on
whether documents were created “in the ordinary course of business in monitoring
unusual activity,” as opposed to being documents “of an evaluative nature intended
to comply with federal reporting requirements.” In re JPMorgan Chase Bank, N.A.,
799 F.3d 36, 41 (1st Cir. 2015) (internal quotation marks and citation omitted).
However, what Pershing fails to acknowledge is that, “although a bank may
undertake an internal investigation in anticipation of filing a SAR, it is also a
standard business practice for banks to investigate suspicious activity as a necessary
and appropriate measure to protect the bank’s interests, and the internal bank
reports or memorandum generated by the bank regarding such an investigation are
not protected by SAR privilege.” In re Whitley, 2011 WL 6202895, at *4 (Bankr.
M.D.N.C. Dec. 13, 2011) (Stocks, M.J.) (cited favorably in JPMorgan, 799 F.3d at 41).
The Magistrate Judge concluded that Pershing’s Incident Reports are reports
created in the ordinary course of business. The Court does not find the Magistrate
Judge’s decision to be clearly erroneous or contrary to law. 3

The same reasoning holds true for the Magistrate Judge’s decision with respect to
the redacted Summary Reports, which, as redacted, the Magistrate Judge found to
be the equivalent of the Incident Reports.

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B.
Pershing also argues that this Court should reverse the Magistrate Judge’s
decision because the Incident Reports and redacted versions of the Summary Reports
are evaluative in nature.

As set forth in the JPMorgan opinion cited above,

documents shielded from discovery from the SAR privilege are, generally speaking,
those “of an evaluative nature intended to comply with federal reporting
requirements.” 799 F.3d at 41. Pershing seizes on the “evaluative” characterization
of privileged documents in an attempt to bring the contested documents within the
SAR privilege, arguing that the Incident Reports and redacted Summary Reports are
“evaluative” because they “include a Pershing employee’s thoughts and impressions
about why activity appears suspicious.” See R. Doc. No. 133-1, at 8 (emphasis in
original).
But even if Pershing is correct in its characterization of the contested
documents, Pershing neglects to cite another relevant consideration the First Circuit
emphasized in the JPMorgan case—the one which was ultimately determinative of
the Magistrate Judge’s inquiry. As the First Circuit wrote in JPMorgan, “[u]nder the
existing law and guidance previously described, the key query is whether any of [the]
documents suggest, directly or indirectly, that a SAR was or was not filed.” See 799
F.3d at 43-44 (citation omitted) (emphasis added). The Magistrate Judge concluded
that “none of the Incident Reports reviewed by the Court qualify for protection under
the SAR privilege” because the reports “are devoid of any information by which the
reader can determine whether the matter identified therein progressed beyond the

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making of the report, much less whether an actual SAR was ever created.” See R.
Doc. No. 132, at 3-4.
Having reviewed the Incident Reports and the redacted Summary Reports, the
Court agrees with the Magistrate Judge’s conclusion and it adopts his opinion as its
own. The Magistrate Judge carefully reviewed the disputed documents and only
ordered produced those documents which were not protected by the SAR privilege
and relevant to the present controversy.

The majority of the documents the

Magistrate Judge reviewed in camera were not ordered to be produced. Far from
being “clearly erroneous” or “contrary to law,” the Magistrate Judge’s decision clearly
and thoughtfully comports with the weight of the case law as interpreted by this
Court.
III.
For the foregoing reasons,
IT IS ORDERED that Pershing’s objections are DENIED and that Pershing
is ORDERED to immediately comply with the Magistrate Judge’s discovery order
(R. Doc. No. 132).

New Orleans, Louisiana, April 6, 2017.

_______________________________________
LANCE M. AFRICK
UNITED STATES DISTRICT JUDGE

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