What is Sauce for the Goose. . .
If a private litigant or its counsel were to lose critical documents in a lawsuit, or fail to take reasonable steps to preserve such documents, they would have to defend against charges of “spoliation of evidence” and face potential sanctions ranging from fines to adverse evidentiary presumptions, or even the entry of a default verdict. What happens when the NASD loses all the evidence submitted at an NASD arbitration proceeding and the tapes of the hearing? Not much.
The Tenth Circuit Court of Appeals considered this very issue recently in Pfannenstiel v. Merrill Lynch, Pierce, Fenner & Smith, Inc., (10th Cir., No. 04-1274, 2/10/07). The claimant in that case accused Merrill Lynch of accounting errors in his account, and claimed over $200,000 in damages. An NASD Panel rejected his claims following a hearing. The claimant subsequently learned that the evidence and the hearing tapes were missing. Apparently, the boxes containing the exhibits and audiotapes of the hearing were delivered to the front desk of the hotel where the hearing was held, and somebody claiming to be an NASD representative took the materials. But the NASD denied taking them, and the materials were never located.
The claimant sought to vacate the award in federal court, and also requested damages against the NASD for losing the evidence and tapes. The District Court adopted the recommendation of the federal magistrate assigned to the case, dismissing the case because service was untimely and because of arbitral immunity. The 11th Circuit affirmed on appeal.
There is a jarring difference between the way litigants and counsel, on the one hand, and the NASD, on the other hand, are treated for the same misconduct. But, that’s not to say that the decision here is unsound. Simply put, a broad arbitral immunity, both for NASD Panel members and the NASD, is absolutely critical for the arbitration process to function. Who would serve as a panel member without it? But, the NASD should not treat this broad and necessary immunity as an excuse for permitting slipshod procedures. Participants in NASD arbitration hearings need to have faith in the integrity of the process. Certainly there are strong reasons for the NASD to implement a protocol for preserving evidence and tapes to prevent this situation from occurring again.
