Bass, Berry & Sims attorney Chris Lazarini analyzed a case in which Plaintiffs, attempting to overcome an earlier dismissal of their claims, alleged a conspiracy between an email archiving vendor and FINRA in support of their claims that data relied upon in a FINRA disciplinary action had been tampered with and was unreliable. The court found the conspiracy allegations speculative, conclusory and without the required factual support, and dismissed the case as to the email vendor. As to FINRA, the court found that the alleged conspiracy was merely a new theory of liability, based on the same facts alleged in the prior litigation, and was barred here under principles of claim preclusion.

Chris provided the analysis for Securities Litigation Commentator (SLC). The full text of the analysis is below and used with permission from the publication. If you would like to receive additional content from the SLC, please visit the SLC website to sign up for the newsletter.

North vs. Smarsh, Inc. & FINRA, No. 16-1922 (D. D.C., 8/22/17) 

*A conclusory allegation of conspiracy cannot establish personal jurisdiction over an alleged conspirator who has no other contacts with the jurisdiction. 

**When there has been a final judgment on the merits in one case, the doctrine of claim preclusion prevents a party from litigating, in a second action, issues that were or could have been raised in the prior action. 

In 2012, Plaintiffs North and Pompeo were the subjects of FINRA disciplinary actions. Without admitting or denying FINRA’s findings, Pompeo entered into an AWC stating that he sent false and misleading emails to investors in a private placement offering, and he agreed to a $5,000 fine and a 10-day suspension (FINRA Case #2012030527502). North, who served as chief compliance officer of Pompeo’s firm, took his case to hearing. The hearing panel found that he failed to follow the firm’s written supervisory procedures for email review and failed to supervise Pompeo’s actions, fining him $5,000. North appealed, and the National Adjudicatory Council (“NAC”) affirmed (FINRA Case #2012030527503). North’s BrokerCheck reflects that his appeal of the NAC decision to the SEC is pending.

In 2015, Plaintiffs sought to outflank the ongoing regulatory process, suing FINRA and Smarsh, a well-known email archiving vendor, in federal court on claims that the emails and other data stored by Smarsh and relied upon by FINRA in the disciplinary actions had been tampered with and were spoliated. Finding it lacked jurisdiction over Smarsh and that FINRA was protected by absolute immunity, the court dismissed the case. See North v. Smarsh, 160 F. Supp.3d 63 (D.D.C. 2015) (Smarsh I). 

Undeterred, Plaintiffs filed this case, alleging that Smarsh and FINRA conspired to preserve the emails on an unprotected network, which allowed FINRA staff to manipulate them and create inferences of regulatory violations. Smarsh moved to dismiss for lack of jurisdiction under FRCP 12(b)(2). FINRA moved to dismiss under FRCP 12(b)(6), claiming absolute immunity and res judicata.

Taking up Smarsh’s motion, the Court considers whether the conspiracy allegation brings Smarsh into the Court’s jurisdictional reach under the long-arm statute. To succeed, Plaintiffs must plead, with particularity, the existence of a conspiracy and an overt action taken to further it within the forum’s boundaries. Finding the conspiracy allegations speculative, conclusory and without the required factual support, the Court dismisses Smarsh.

Turning to FINRA’s motion, the Court finds that Plaintiffs alleged the same nucleus of facts in this case as they alleged in Smarsh I, rejecting Plaintiffs’ argument that the conspiracy allegations are new “facts.” Rather, the alleged conspiracy is merely a new theory of liability regarding the same facts and, because it could have been brought in the prior litigation, it is barred here under principles of claim preclusion.