160 F. Supp. 3d 63
D.D.C.2015Background
- Plaintiffs Thaddeus North and Mark Pompeo, former securities brokers, allege that Smarsh (their firms’ email archiver) produced spoliated/altered ESI that FINRA used in enforcement proceedings against them.
- Smarsh contracted with Southridge and Ocean Cross to archive firm email and other ESI in non-rewritable, preservable formats for the relevant period (2009–2013).
- FINRA received ESI from Smarsh, used it in investigations and disciplinary proceedings (North remains a respondent; Pompeo settled via an AWC).
- Plaintiffs’ forensics vendor reported massive loss and alteration of emails (XML vs. PST discrepancies, missing records, altered metadata/content).
- Plaintiffs sued Smarsh and FINRA for intentional and negligent spoliation and sought monetary and injunctive relief; both defendants moved to dismiss.
- The district court concluded it lacked federal-question jurisdiction, had diversity jurisdiction, lacked personal jurisdiction over Smarsh, and that FINRA was immune for its regulatory acts; claims against Smarsh dismissed without prejudice and monetary claims against FINRA dismissed with prejudice; injunctive claims against FINRA dismissed for lack of jurisdiction.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Federal-question jurisdiction under §1331 | Plaintiffs assert claims implicate Exchange Act, federal recordkeeping rules, and criminal statutes, so federal jurisdiction exists | Defendants say spoliation claims are state torts, no private right to enforce cited federal criminal or SEC rules, and Exchange Act does not create tort remedies | No federal-question jurisdiction; claims are state-law torts and federal statutes/rules do not create private causes of action |
| Whether a federal cause of action for spoliation exists (Grable/Gunn) | Plaintiffs urge recognition of federal tort to ensure consistent national remedy and deterrence | Defendants argue resolution is factbound, not a substantial federal question, and FINRA proceedings are not federal agency actions | Court declines to recognize federal spoliation tort; Grable/Gunn exception inapplicable |
| Personal jurisdiction over Smarsh (D.C. long-arm/due process) | Plaintiffs contend Smarsh’s delivery of ESI to FINRA (D.C.) and participation in hearings establish purposeful availment | Smarsh contends contracts and archiving work occurred outside D.C., minimal D.C. revenue, no continuous/systematic contacts, and production to FINRA was incidental | No general or specific jurisdiction over Smarsh; claims against Smarsh dismissed without prejudice for lack of in personam jurisdiction |
| Jurisdiction to enjoin FINRA proceedings / monetary liability of FINRA | Plaintiffs seek injunction and damages for FINRA’s use of allegedly spoliated evidence | FINRA argues Exchange Act vests exclusive appellate review in the Circuits (TRAC), and FINRA has absolute immunity for regulatory/adjudicatory acts | Injunctive relief dismissed for lack of jurisdiction (TRAC); monetary claims against FINRA barred by absolute immunity and dismissed with prejudice |
Key Cases Cited
- Armstrong v. Executive Office of the President, Office of Admin., 1 F.3d 1274 (D.C. Cir. 1993) (ESI can be the original federal record)
- National Ass'n of Securities Dealers, Inc. v. SEC, 431 F.3d 803 (D.C. Cir. 2005) (describing FINRA/NASD regulatory role)
- In re Series 7 Broker Qualification Exam Scoring Litig., 548 F.3d 110 (D.C. Cir. 2008) (Exchange Act does not create private tort causes of action against SROs)
- Telecommunications Research & Action Ctr. v. FCC, 750 F.2d 70 (D.C. Cir. 1984) (TRAC: district courts lack jurisdiction when statute commits review to Court of Appeals and relief would affect that court’s future jurisdiction)
- Gunn v. Minton, 133 S. Ct. 1059 (2013) (Grable/Gunn substantial federal issue test is narrow)
- Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) (pleading standards for plausibility)
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (legal conclusions need not be accepted as true on a motion to dismiss)
- Helicopteros Nacionales de Colombia, S.A. v. Hall, 466 U.S. 408 (1984) (general jurisdiction requires continuous and systematic contacts)
- Marchiano v. Nat'l Ass'n of Securities Dealers, Inc., 134 F. Supp. 2d 90 (D.D.C. 2001) (district court cannot enjoin NASD/FINRA disciplinary process)