Legal Definitions - Securities dispute resolution: Discovery

In the context of securities dispute resolution, Discovery refers to the formal process where parties involved in a dispute exchange information and evidence relevant to their claims or defenses. This phase is crucial for uncovering the facts and circumstances that led to the disagreement, allowing each side to understand the other's position and prepare their case thoroughly.

During discovery, parties can access various types of information that might have been unavailable to them previously. This often includes requesting documents, such as account statements, trading records, emails, and internal memos. It also involves obtaining sworn testimony from witnesses through a process called a deposition, where a witness answers questions under oath, and their responses are recorded.

While there is an expectation of cooperation, especially in arbitrations overseen by the Financial Industry Regulatory Authority (FINRA) – an independent organization that regulates broker-dealers and exchanges – parties sometimes resist disclosing information they believe is unfavorable. To ensure fairness and compel the production of necessary evidence, arbitration panels can issue orders directing parties to disclose specific information or even impose penalties (sanctions) for non-compliance. Tools like subpoenas can be used to legally compel witnesses to appear for testimony or to force the production of specific documents.

Here are some examples illustrating how discovery works in securities disputes:

• Example 1: Investor Alleges Unsuitable Investments

  An investor files a claim against their brokerage firm, alleging that their financial advisor recommended investments that were too risky for their stated financial goals and risk tolerance. During the discovery phase, the investor's legal team would likely request:

  • All account statements and trade confirmations for the period in question.
  • The financial advisor's notes from meetings with the investor.
  • Any risk assessment questionnaires or suitability forms completed by the investor.
  • Internal communications within the brokerage firm regarding the investor's account or the recommended products.

  Conversely, the brokerage firm might request the investor's tax returns, statements from other investment accounts, or records of their prior investment experience to demonstrate their financial sophistication or overall financial situation. Both the investor and the financial advisor would likely be deposed, providing sworn testimony about their interactions and understanding of the investments.

  This illustrates discovery by showing how both sides gather specific documents and witness testimony (depositions) to build their case regarding the suitability of investments.

• Example 2: Dispute Over Misrepresented Investment Product

  A group of investors claims they were misled about the risks and potential returns of a complex structured product sold by a financial institution. In discovery, their attorneys would seek:

  • All marketing materials, prospectuses, and offering documents for the product.
  • Internal emails and memos among the financial institution's employees discussing the product's development, sales strategy, and risk profile.
  • Training materials provided to financial advisors on how to sell and explain the product.
  • Records of due diligence performed by the institution on the product.

  The financial institution, in turn, might request records of any independent financial advice the investors received, their understanding of investment terms, or their prior experience with similar products. Key employees involved in the product's creation and sales would be deposed to provide their accounts of what was communicated to investors.

  This demonstrates discovery's role in uncovering internal communications, marketing materials, and training documents to ascertain whether misrepresentation occurred, alongside obtaining sworn statements from relevant personnel.

• Example 3: Former Employee's Compensation Dispute

  A former employee of a brokerage firm files a claim alleging they were not paid the full commission or bonus they were owed according to their employment contract. During discovery, the former employee's legal team would request:

  • The employment contract and any amendments.
  • Commission statements, bonus calculations, and payroll records.
  • Internal communications (emails, instant messages) related to their performance, compensation, or termination.
  • The firm's compensation policies and procedures applicable during their employment.

  The brokerage firm might seek records of the employee's performance reviews, attendance records, or any disciplinary actions. Managers and HR personnel would be deposed to provide testimony about the employee's performance, compensation structure, and the reasons for any payment discrepancies.

  This example highlights how discovery is used to gather contractual agreements, financial records, and internal communications to resolve disputes related to employment terms and compensation, supported by depositions from key individuals.