North v. Smarsh, Inc. ( 2017 )

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
__________________________________
)
THADDEUS J. NORTH, et al., )
)
Plaintiffs, )
)
v. ) Civil Action No. 16-1922 (RMC)
)
SMARSH, INC., et al., )
)
Defendants. )
_________________________________ )
MEMORANDUM OPINION
Thaddeus J. North and Mark P. Pompeo were registered securities brokers who
were charged by the Financial Industry Regulatory Authority (FINRA) with improprieties and
ultimately subjected to fines and suspensions. Both men vehemently insist that FINRA relied on
false data, made available to it by Smarsh, Inc., its alleged co-conspirator. Both Defendants have
filed motions to dismiss. In these circumstances, the Court gives Plaintiffs’ Complaint a
generous reading and allows all reasonable inferences to fall in their favor. Having done that, the
Court nonetheless concludes that Plaintiffs’ claims are precluded by this Court’s decision in
North v. Smarsh, Inc., 160 F. Supp. 3d 63 (D.D.C. 2015) (North v. Smarsh I), which dealt with
the same nucleus of facts at issue here. Additionally, Plaintiffs allege no factual basis to show
that any part of the alleged conspiracy took place in the District of Columbia and the Court has
no jurisdiction over Smarsh, which does no significant business in D.C. The strong advocacy of
Plaintiffs’ counsel cannot overcome the applicable law and uncontested facts. The Complaint
against both Defendants will be dismissed.
1
I. BACKGROUND
Thaddeus J. North and Mark P. Pompeo were securities brokers who were the
subject of enforcement actions by FINRA. Pursuant to the Securities Exchange Act of 1934, 15
U.S.C. § 78a et seq. (Exchange Act), FINRA initiated disciplinary actions against Plaintiffs for
alleged improprieties and noncompliance with securities laws and regulations. In pursuing its
investigations, FINRA asked Smarsh, Inc.—the email archive vendor for Plaintiffs’ former
firms—to produce copies of Plaintiffs’ internal and external electronic communications.
In the immediate case, Plaintiffs allege that FINRA and Smarsh engaged in
“tortious, unlawful, and conspiratorial actions towards them.” Compl. [Dkt. 1] at 1. In a prior
dismissed case, Plaintiffs “allege[d] that the data produced by Smarsh and relied upon by FINRA
was spoliated and tampered.” North v. Smarsh I, 160 F. Supp. 3d at 70. Defendants again urge
the Court to dismiss Plaintiffs’ Complaint and Plaintiffs, insisting that the instant matter is
entirely different and based on new evidence, vehemently oppose.
The Court summarizes the background facts, which are described in greater detail
in North v. Smarsh I, 160 F. Supp. 3d at 70-74. Mr. North, a resident of Connecticut, was the
Chief Compliance Officer of Southridge Investment Group, LLC (Southridge), from February
2008 to August 2011. Compl. ¶ 5. In 2010, FINRA began investigating Southridge because of
various alleged improprieties. See id. ¶ 41. As a result, Mr. North and about half of his
Southridge colleagues left that firm and became registered brokers with Ocean Cross Capital
Markets, LLC (Ocean Cross). Id. ¶ 5. Mr. North was also Chief Compliance Officer at Ocean
Cross from August 2011 to January 2013. Id. Mr. Pompeo, a resident of Massachusetts, was a
registered securities broker with Southridge from January 2010 to September 2011 and with
Ocean Cross from September 2011 to September 2012. Id. ¶ 6. Messrs. North and Pompeo were
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charged by FINRA with alleged improprieties. Mr. Pompeo settled the case against him. Mr.
North continues to challenge two FINRA cases in which he is named as a respondent.
Smarsh is a New York corporation with its principal place of business and
headquarters in Portland, Oregon. Id. ¶ 2. It identifies itself as “the leading provider of
archiving [and] compliance solutions for companies in regulated and litigious industries.” Id.
¶ 8. Smarsh contracted with Southridge and Ocean Cross to “provide regulatory compliance
archiving and compliance services according to the requirements of the Securities Exchange
Act.” Id.; see also North v. Smarsh I, 160 F. Supp. 3d at 71-72 (stating Smarsh contracted with
Southridge and Ocean Cross “to preserve exact and unchangeable copies of internal and external
communications for all registered representatives of the two (2) firms for compliance at all times
from July 1, 2009 through July 1, 2013 (Relevant Period) . . . and according to the requirements
of the Exchange Act”).
FINRA1 is a private not-for-profit Delaware corporation and a self-regulatory
organization (SRO) in the securities industry. Compl. ¶ 2. FINRA is registered with the
Securities Exchange Commission (SEC) as a national securities association pursuant to the
Maloney Act of 1938, 15 U.S.C. § 78o-3 (2010), and has its headquarters in Washington, D.C.,
with offices in major cities. Compl. ¶¶ 2, 9. FINRA serves as both “a professional association,
promoting the interests of its members, and . . . as a quasi-governmental agency, with express
statutory authority to adjudicate actions against members who are accused of illegal securities
practices and to sanction members found to have violated the Exchange Act or . . . [SEC]
regulations issued pursuant thereto.” Nat’l Ass’n of Sec. Dealers, Inc. v. SEC, 431 F.3d 803, 804
(D.C. Cir. 2005) (citations omitted).
1
On July 30, 2007, the National Association of Securities Dealers, Inc. was renamed FINRA.
3
In North v. Smarsh I, this Court determined that Smarsh was not susceptible to
legal process in the District of Columbia, see 160 F. Supp. 3d at 80-83, and that FINRA was
protected by absolute immunity; and therefore, it dismissed the allegations against both. See id.
at 83-87. Plaintiffs did not appeal.
The instant Complaint contains five counts. It accuses Smarsh and FINRA of
various conspiracies and breach of contract. The premise of Plaintiffs’ current case is that
Smarsh contracted with Southridge and Ocean Cross to provide archiving services for all
electronic communications in a manner that ensured that they could not be altered in any way
and would be compliant with SEC rules and regulations; but that FINRA and Smarsh then
conspired to preserve Plaintiffs’ communications on a non-compliant server in a non-compliant
collaborative network which allowed access by FINRA, whose agents altered and changed the
electronic communications to make them appear violative of the law and SEC regulations.
Count I alleges that Smarsh and FINRA conspired to commit and did commit
common law fraud by use of mail services, citing 18 U.S.C. §§ 1341, 1346. It alleges a
conspiracy requiring that: (1) “FINRA identify target firms and individuals who used Smarsh for
archiving and related compliance actions”; (2) Smarsh transfer the target’s “unlawfully
intercepted electronic communications [to a] private collaborative network”; whereupon (3)
“FINRA agents and employees altered, tampered with, and changed critical compliance
information . . . to cause the electronic files to falsely appear to reflect, to infer, and to suggest
securities law violations.” Compl. ¶ 77. Smarsh’s promises that it would archive, preserve
untouched, and ensure compliance for Plaintiffs’ electronic communications was allegedly
necessary to the conspiracy. Id. ¶¶ 78-79. “The intentionally altered, falsified, and tampered
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with records were designed to force Plaintiffs into non-compliance and create inferences of
regulatory failures.” Id. ¶ 83.
Count II alleges that Defendants conspired to commit and did commit common
law fraud using wired and wireless media, citing 18 U.S.C. §§ 1343, 1346. The gravamen of this
Count is that Plaintiffs’ “business and personal electronic communications were intercepted in
real time and directed over wired and wireless media to IP addresses associated with a private
collaborative network where the electronic communication files were converted, lost, destroyed,
altered, tampered with, and reconstructed by the Defendants’ design and actions.” Id. ¶ 95
(emphasis omitted).
Count III alleges that Defendants conspired to intercept, and did unlawfully
intercept, electronic communications in violation of the Electronic Communications Privacy Act,
18 U.S.C. §§ 2510-2521 (ECPA); the Connecticut Wiretapping and Electronic Surveillance Act,
Conn. Gen. Stat. §§ 54-41a–54-41u (2002); and the Massachusetts Interception of Wire and Oral
Communications Act, Mass. Gen. Laws ch. 272, § 99 (1998) (recognized as unconstitutional in
Project Veritas Action Fund v. Conley, No. 16-10462, 2017 WL 1100423 (D. Mass. March 23,
2017)). Due to instructions from Smarsh, Defendants were allegedly able to achieve “an
unlawful, intentional, voluntary contemporaneous interception of Plaintiffs’ electronic
communications without Plaintiffs’ consent” and without a sworn warrant. Compl. ¶ 101.
Count IV alleges that Defendants conspired to commit, and did commit, the
conversion of electronic data. That is, “Defendants conspired to and intentionally interfered with
[Plaintiffs’] right to own and possess their electronic data, without Plaintiffs’ knowledge or
consent, by intercepting and directing the files in real time to a private collaborative network not
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owned or controlled by Smarsh, where their original electronic communications were tampered
with, altered, lost, and destroyed by Defendants’ actions and arrangements.” Id. ¶ 108.
Finally, Count V alleges a common law breach of contract. Messrs. North and
Pompeo assert that each was an intended third party beneficiary of the contracts between
Southridge/Ocean Cross and Smarsh for handling and archiving their electronic communications.
Id. at 115. Further, they allege that Smarsh gave them instructions that were contrary to
necessary practices for regulatory compliance archiving and that Smarch witnesses provided
“deceptive statements and testimony at the request of FINRA Enforcement staff in order to
fraudulently conceal Defendants’ conspiracy.” Id. ¶¶ 116-17.
Both Defendants moved to dismiss all counts. See FINRA MTD [Dkt. 12];
Smarsh MTD [Dkt. 11]. Plaintiffs filed a consolidated opposition, see Opp’n [Dkt. 15], and both
Defendants replied. See FINRA Reply [Dkt. 17]; Smarsh Reply [Dkt. 16]. The motion is ripe
for review.
II. LEGAL STANDARD
A. Motion to Dismiss Under Rule 12(b)(2)
Pursuant to Federal Rule of Civil Procedure 12(b)(2), “the plaintiff bears the
burden of establishing a factual basis for the court’s exercise of personal jurisdiction over the
defendant[s].” Capital Bank Int’l Ltd. v. Citigroup, Inc., 276 F. Supp. 2d 72, 74 (D.D.C. 2003)
(citing Crane v. N.Y. Zoological Soc’y, 894 F.2d 454, 456 (D.C. Cir. 1990)). In other words, “a
plaintiff must make a prima facie showing of the pertinent jurisdictional facts.” First Chicago
Int’l v. United Exchange Co., 836 F.2d 1375, 1378 (D.C. Cir. 1988). Specifically, the plaintiff
“must allege specific acts connecting the defendant with the forum, and . . . the bare allegation of
conspiracy or agency is insufficient to establish personal jurisdiction.” Id. at 1378-79 (internal
quotation marks and citations omitted); see also Second Amendment Found. v. U.S. Conference
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of Mayors, 274 F.3d 521, 524 (D.C. Cir. 2001). Bare allegations and conclusory statements are
insufficient. Atlantigas Corp. v. Nisource, Inc., 290 F. Supp. 2d 34, 42 (D.D.C. 2003).
In determining whether a factual basis for personal jurisdiction exists, a court
should resolve all factual discrepancies in the record in favor of the plaintiff. Crane, 894 F.2d at
456. However, the court need not treat all of the plaintiff’s allegations as true. United States v.
Philip Morris Inc., 116 F. Supp. 2d 116, 120 n.4 (D.D.C. 2000). Instead, a court “may receive
and weigh affidavits and any other relevant matter to assist it in determining the jurisdictional
facts.” Id. (quotation marks omitted).
B. Motion to Dismiss Under Rule 12(b)(6)
A motion to dismiss for failure to state a claim pursuant to Federal Rule of Civil
Procedure 12(b)(6) challenges the adequacy of a complaint on its face. Fed. R. Civ. P. 12(b)(6).
A complaint must be sufficient “to give the defendant fair notice of what the . . . claim is and the
grounds upon which it rests.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (quotation
marks omitted). Although a complaint does not need detailed factual allegations, a plaintiff’s
obligation to provide the grounds of his entitlement to relief “requires more than labels and
conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Id. A
court must treat the complaint’s factual allegations as true, “even if doubtful in fact,” id., but a
court need not accept as true legal conclusions set forth in a complaint. See Ashcroft v. Iqbal,
556 U.S. 662, 678 (2009). To survive a motion to dismiss, a complaint must contain sufficient
factual matter, accepted as true, to state a claim for relief that is “plausible on its face.”
Twombly, 550 U.S. at 570. A complaint must allege sufficient facts that would allow the court
“to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Iqbal,
556 U.S. at 678-79. In deciding a motion under Rule 12(b)(6), a court may consider the facts
alleged in the complaint, documents attached to the complaint as exhibits or incorporated by
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reference, and matters about which the court may take judicial notice. Abhe & Svoboda, Inc. v.
Chao, 508 F.3d 1052, 1059 (D.C. Cir. 2007).
III. ANALYSIS
The legal issues presented by the motions to dismiss by FINRA and Smarsh will
be addressed separately.
A. Smarsh’s Motion to Dismiss
Mr. North and Mr. Pompeo recognize, as noted by Smarsh, that this Court
dismissed all claims against Smarsh in North v. Smarsh I for lack of general and specific
jurisdiction and that Plaintiffs filed no appeal. See Smarsh MTD at 2-3. Smarsh argues now that
Plaintiffs have presented no new facts on which to base jurisdiction and this Court should,
therefore, follow its decision in North v. Smarsh I and dismiss all claims against Smarsh. Id. at
3. Plaintiffs contend that they have named Smarsh as a co-conspirator to FINRA and those
allegations bring Smarsh within the jurisdiction of this Court under the long-arm statute of the
District of Columbia. See Opp’n at 20-24. Plaintiffs argue that FINRA acted in D.C. and
therefore co-conspirator Smarsh is liable in D.C. even though Smarsh is not a resident or active
business here. See Jung v. Assoc. of Amer. Medical Colleges, 300 F. Supp. 2d 119, 141 (D.D.C.
2004).
It is Plaintiffs’ burden to establish personal jurisdiction over Defendants and to
meet that burden they “must allege specific facts on which personal jurisdiction can be based;
they cannot rely on conclusory allegations.” FC Inv. Group LC v. IFX Markets, LTD, 479 F.
Supp. 2d 30, 35 (D.D.C. 2007). The “conspiracy jurisdiction” doctrine allows “acts undertaken
within the forum by one co-conspirator in furtherance of an alleged conspiracy [to] subject a
non-resident co-conspirator to personal jurisdiction under the long-arm statute.” Jung, 300 F.
Supp. 2d at 140. Plaintiffs must allege “(1) the existence of a conspiracy; (2) the nonresident’s
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participation in or agreement to join the conspiracy; and (3) an overt act taken in furtherance of
the conspiracy within the forum’s boundaries.” Id. at 141 (citing Edmond v. United States Postal
Service General Counsel, 949 F.2d 415, 425 (D.C. Cir. 1991)).
Both the existence of the conspiracy and the overt action taken within the forum
must be plead with particularity. Jungquist v. Sheikh Sultan Bin Khalifa Al Nahyan, 115 F.3d
1020, 1031 (D.C. Cir. 1997) (“[B]ald speculation or a conclusory statement that individuals are
co-conspirators is insufficient to establish personal jurisdiction under a conspiracy theory.”); see
also Edmond, 949 F.2d at 428 (Silberman, J, concurring) (“[W]e cannot allow plaintiffs to
subvert the important constitutional principles of sovereignty and due process that underlie
personal jurisdiction limitations with mere unspecified and unsubstantiated claims that
multifarious defendants were part of a broad conspiracy and that one of them committed some
[act] in the plaintiffs’ desired forum.”). This requirement to plead with particularity is “strictly
enforced, and courts in this Circuit have applied the . . . theory ‘warily’ in light of concerns that
plaintiffs will use the doctrine to circumvent the constitutional boundaries of the long-arm
statute.” Jung, 300 F. Supp. 2d at 141.
Plaintiffs fail to plead the alleged conspiracy with the necessary particularity.
Plaintiffs offer no facts to identify when the conspiracy began, instead providing a range of
almost 4 years when they believe the conspiracy must have begun. Compl. ¶ 75 (“The evidence
shows that Defendants commenced their conspiracy . . . as early as December 23, 2005 but
before July 1, 2009.”). They identify only one actual encounter between a Smarsh representative
and a FINRA representative.2 However, the Complaint contains no more facts and the
2
The April 27, 2015 FINRA Hearing Transcript includes testimony from James McKennedy, of
FINRA, regarding an encounter with Jimmy Douglas, a Smarsh employee. See Ex. 9, Opp’n,
April Hrg. Transcript [Dkt. 15-10]. Mr. McKennedy testified that he met Jimmy Douglas when
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allegations that that single encounter is evidence of a conspiracy are raised only in arguments in
Plaintiffs’ Opposition. Compare Opp’n at 23 (citing Ex. 9, April Hearing Excerpts) with Compl.
¶¶ 55-57 (referencing Mr. McKennedy and Mr. Douglas, but not indicating that they met or
communicated with one another). All allegations in the Complaint regarding the conspiracy are
mere speculation or barren conclusions, without factual support. See, e.g., Compl. ¶¶ 77-79, 84,
108. Even with Mr. McKennedy’s sole conversation with Mr. Douglas, the allegations would be
insufficient to show an agreement between the parties to conspire to divert electronically stored
information, alter its content, and prosecute false claims against Plaintiffs.
The expert declarations submitted by Plaintiffs provide no assistance in
supporting their theory of conspiracy. The declarations focus on Plaintiffs’ various technical
allegations but do not provide any factual support to demonstrate communications between the
alleged conspirators or facts to show a conspiracy. The Declaration of Jon Berryhill dated March
2, 2015 stated, in part, that based on the evidence he had examined “FINRA has been massively
misled by Smarsh.” Ex. 4, Compl., March 2, 2015 Declaration of Jon Berryhill [Dkt. 1-4] ¶ 5
(Berryhill March 2015 Decl.). Mr. Berryhill contradicts the present allegations of a
Smarsh/FINRA conspiracy but is consistent with Plaintiffs’ initial allegations directed only
against Smarsh. The Declaration of Frank Huber dated December 22, 2015 concludes, without
he gave a presentation at a FINRA office. Id. at 38. Mr. Douglas presented on “what Smarsh’s
platforms do . . . to give . . . the staff [at FINRA] a better understanding of the system.” Id. at 39.
Mr. McKennedy attended the presentation and spoke with Mr. Douglas afterwards about Smarsh.
Specifically, Mr. McKennedy asked about “an 8210 Request asking for all evidence of email
review” and the types of information Smarsh could provide consistent with that request. Id. Mr.
Douglas explained that Smarsh had the ability to run more reports than the company, Ocean
Cross, originally conducted. Id. Following the conversation with Mr. Douglas, Mr. McKennedy
decided it “would be a good opportunity to reach out and see if [FINRA] could obtain those
reports from Smarsh. As a third-party vendor, [Smarsh] ha[s] an agreement with FINRA that
basically states that they will provide [FINRA] this information if . . . ask[ed] for it.” Id. at 40.
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factual support, that FINRA and Smarsh acted “in a coordinated way”; however, Mr. Huber
ultimately blames FINRA alone, and not Smarsh, for alterations to emails. Ex. 5, Compl.,
December 22, 2015 Declaration of Frank Huber [Dkt. 1-5] ¶ 5 (Huber Dec. 2015 Decl.)
(“FINRA and only FINRA was responsible for the alteration and spoliation of emails . . . [;]
Smarsh facilitated FINRA’s role.”); ¶ 7 (“FINRA and only FINRA was responsible for
spoliating the emails at issue and . . . Smarsh’s role was to facilitate delivering the email to
FINRA.”); ¶ 9 (“I conclude that FINRA and only FINRA was responsible for spoliating and
altering the Southridge and Ocean Cross emails and Smarsh willingly facilitated FINRA’s
role.”); ¶ 12 (“FINRA and only FINRA was responsible for the spoliation and alteration of
emails at issue and Smarsh helped facilitate FINRA’s role.”). Despite Mr. Huber’s repeated
conclusion that Smarsh facilitated FINRA’s actions, his declaration and Plaintiffs’ Complaint
provide no facts from which the Court could infer the existence of an agreement between FINRA
and Smarsh, which is necessary to plead conspiracy.
Plaintiffs also fail to allege “an overt act taken in furtherance of the conspiracy
within the forum’s boundaries.” Jung, 300 F. Supp. 2d at 141. Neither Plaintiffs nor their
experts identify any overt acts taken in furtherance of the alleged conspiracy by FINRA or
Smarsh in the District of Columbia. To the contrary, the investigations into Mr. North’s conduct
were conducted by FINRA offices in Boston and New Orleans. See Compl. ¶ 43. Notably,
Smarsh is a New York corporation headquartered in Portland, Oregon, and has no office,
personnel, or servers in the District of Columbia. See North v. Smarsh I, 160 F. Supp. 3d at 71.
Plaintiffs cannot rely on FINRA’s office in the District of Columbia to justify jurisdiction
without overt acts in furtherance of the alleged conspiracy here, Compl. ¶ 2, and merely alleging
that FINRA tampered with emails does not place that activity in the District of Columbia.
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Because Plaintiffs have failed to allege both the existence of a conspiracy and acts
taken in furtherance of the conspiracy within the District of Columbia, the Court does not have
personal jurisdiction over Smarsh under either D.C. Code § 13-423(a)(1) or (a)(3). The Court
will grant Smarsh’s Motion to Dismiss.
B. FINRA’s Motion to Dismiss
In North v. Smarsh I, this Court determined that “FINRA is absolutely immune
for its regulatory and prosecutorial acts and, thus, [the Court] . . . dismiss[ed] Plaintiffs’ claim for
monetary relief against FINRA with prejudice.” 160 F. Supp. 3d at 88. Nonetheless, Plaintiffs
now seek $4,000,000 in damages from FINRA. Plaintiffs respond that the North v. Smarsh I
ruling was limited to “damages claims arising from spoliation and other occurring failures in the
context of a regulatory proceeding,” Opp’n at 17, and does not apply here. FINRA argues that
the opinion was necessarily broader than the confines of a specific proceeding, given its role in
the investigation, prosecution and enforcement of SEC rules and regulations.
The Court begins with a summary of Plaintiffs’ current allegations against
FINRA. Plaintiffs contend that their new Complaint concerns “the interception and redirection
of Plaintiffs’ Email[, by Smarsh to FINRA,] to Plaintiffs’ subsequent loss . . . [b]ecause [Smarsh]
server(s) . . . are not [now] accessible (due to ‘decommissioning’).” Opp’n at 11.
Fundamentally, Plaintiffs allege that “[e]mail was not archived” by Smarsh as promised, id., but
was immediately transferred to FINRA by way of a collaborative network shared between the
two, long before any enforcement action might have immunized FINRA. In blunt English, this
means that Plaintiffs allege that Smarsh contracted with their employers (Southridge and Ocean
Cross), with the blessing of FINRA, to provide electronically stored information archiving in
compliance with SEC rules and regulations but that Smarsh did not preserve their emails as
required and instead forwarded them to a joint network to which Smarsh and FINRA had
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immediate access and from which FINRA removed and altered their emails to construct a false
claim of securities violations. Plaintiffs offer no reason for FINRA’s alleged mendacity.
FINRA moves to dismiss because (1) Plaintiffs’ claims are barred by res judicata,
collateral estoppel, and the law of the case, FINRA MTD at 9-14; (2) FINRA has absolute
immunity for its regulatory actions, id. at 14-16; (3) no private right of action exists against
FINRA under the Exchange Act, id. at 16-19; and (4) Plaintiffs’ common law and statutory
claims fail to state a claim upon which relief may be granted. Id. at 20-25.
FINRA relies on three legal principles as old as English common law: claim
preclusion, issue preclusion, and the law of the case. “The doctrine of res judicata prevents
repetitious litigation involving the same causes of action or the same issues.” I.A.M. Nat’l
Pension Fund v. Indus. Gear Mfg. Co., 723 F.2d 944, 946 (D.C. Cir. 1983). Res judicata has two
distinct aspects—claim preclusion and issue preclusion—that apply in different circumstances
and with different consequences to the litigants. See NextWave Pers. Commc’ns Inc. v. FCC,
254 F.3d 130, 142 (D.C. Cir. 2001); Novak v. World Bank, 703 F.2d 1305, 1309 (D.C. Cir.
1983). Its purpose is to “conserve judicial resources, avoid inconsistent results, engender respect
for judgments of predictable and certain effect, and . . . prevent serial forum-shopping and
piecemeal litigation.” Hardison v. Alexander, 655 F.2d 1281, 1288 (D.C. Cir. 1981); see also
Allen v. McCurry, 449 U.S. 90, 94 (1980).
Under claim preclusion, “‘a final judgment on the merits of an action precludes
the parties or their privies from relitigating issues that were or could have been raised in that
action.’” Drake v. Fed. Aviation Admin., 291 F.3d 59, 66 (D.C. Cir. 2002) (quoting Allen, 449
U.S. at 94). If claims “share the same ‘nucleus of facts’” they are considered the same cause of
action. Drake, 291 F.3d at 66 (quoting Page v. United States, 729 F.2d 818, 820 (D.C. Cir.
13
1984)). To determine if claims share the same nucleus of facts courts should consider “whether
the facts are related in time, space, origin, or motivation, whether they form a convenient trial
unit, and whether their treatment as a unit conforms to the parties’ expectations or business
understanding or usage.” Stanton v. Dist. of Columbia Court of Appeals, 127 F.3d 72, 78 (D.C.
Cir. 1997).
Under issue preclusion, “‘once a court has decided an issue of fact or law
necessary to its judgment, that decision may preclude relitigation of the issue in a suit on a
different cause of action involving a party to the first case.’” Yamaha Corp. of Am. v. United
States, 961 F.2d 245, 254 (D.C. Cir. 1992) (quoting Allen, 449 U.S. at 94). Issue preclusion
applies if three criteria are met: (1) the issue was “actually litigated, that is, contested by the
parties and submitted for determination by the court”; (2) the prior litigation was “actually and
necessarily determined by a court of competent jurisdiction”; and (3) “preclusion in the second
trial [does] not work an unfairness” to the party bound by the first determination. Otherson v.
DOJ, 711 F.2d 267, 273 (D.C. Cir. 1983) (citations omitted).
Under the law of the case doctrine, an unchallenged legal decision made at one
stage of litigation becomes the law of the case for future stages of the same litigation. See
Williamsburg Wax Museum, Inc. v. Historic Figures, Inc., 810 F.2d 243, 250 (D.C. Cir. 1987).
When an earlier decision goes unchallenged, the parties are found to have waived any right to
challenge that same decision at a later time. Laffey v. Northwest Airlines, Inc., 740 F.2d 1071,
1089-93, 1102-03 (D.C. Cir. 1984).
The doctrine of claim preclusion does not permit plaintiffs to attempt to re-plead
the same set of facts, or essentially the same set of facts, but with a different legal theory.
Plaintiffs argue that claim preclusion is inapplicable because “this case is not about spoliation
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and Plaintiffs are not seeking remedies for regulatory conduct, but rather for illegal actions that
commenced towards Plaintiffs coincidental to their employments with Southridge and outside of
any regulatory proceeding.” Opp’n at 14. Rather than focus on the original nucleus of facts,
Plaintiffs argue this case enlarges the facts at issue. See id. FINRA directly compares Plaintiffs’
arguments in Opposition in this matter and those raised in Opposition and Surresponse in North
v. Smarsh I and contends that there are no viable differences to demonstrate that the instant
Complaint is based on new information. FINRA Reply at 2-4.
The Court first compares the Complaint in North v. Smarsh I to the immediate
Complaint and determines that the same nucleus of facts is involved in both claims. Compare
North v. Smarsh I, No. 15-cv-494, North v. Smarsh I Compl. [Dkt. 1] with Compl. Both
complaints focus on the process used by Smarsh to archive the electronic records of Southridge
and Ocean Cross during FINRA’s investigations into Southridge and Ocean Cross. See North v.
Smarsh I Compl. ¶¶ 21-25, 34; Compl. ¶¶ 19, 31-33, 41. In both complaints, Plaintiffs allege
that electronic records were altered, incorrect, missing, and destroyed, which led to an
incomplete and inaccurate set of records being provided to FINRA.3 See North v. Smarsh I
Compl. ¶¶ 43-44, 55-57; Compl. ¶¶ 21, 51, 61. The only differences in the complaints are
Plaintiffs’ allegations regarding the relationship between Smarsh and FINRA and the intent
behind the alteration and destruction of electronic records. In Plaintiffs’ first lawsuit, they
claimed that Smarsh misled FINRA and spoliated the records through negligence, while in the
current lawsuit Plaintiffs claim Smarsh and FINRA conspired together to alter the records. See
3
Additionally, as evidenced by the chart in FINRA’s Reply in this case, see FINRA Reply at 2-
4, the statements made in Opposition here and in the Opposition in North v. Smarsh I clearly rest
upon the same alleged facts and are extremely similar, merely substituting spoliation for
conspiracy.
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North v. Smarsh I Compl. ¶¶ 63, 69, 73-80; Compl. ¶¶ 23, 75-79. The only new “facts”
presented in the Complaint in this case are those related to the technical analysis done by
Plaintiffs’ experts. After the first suit was dismissed, Plaintiffs sought a new technical expert
and that expert reevaluated the electronic records and wrote a report that opines that Smarsh and
FINRA worked together to alter the records purposefully. See Compl. ¶ 64. These new “facts”
are not facts, but instead are new allegations and new theories of the case that spring from the
same nucleus of facts as North v. Smarsh I.
Plaintiffs cite Stanton v. Dist. of Columbia Court of Appeals, 127 F.3d 72 (D.C.
Cir. 1997) to support the Complaint and, indeed, the D.C. Circuit ruled that “post-judgment
events give rise to new claims, so that claim preclusion is no bar.” Id. at 78 (emphasis omitted).
Plaintiffs stress their diligent investigations and advice of experts after North v. Smarsh I to
extend Stanton to this case. Plaintiffs misread Stanton. Stanton specifically listed examples of
post-judgment events that give rise to new claims, such as repeated instances of restraints of
trade and successive enforcement of a statute. See id. The Stanton court found that
[l]itigation of the validity of one past course of conduct is not the
same “claim” as either (1) litigation over the validity of similar
conduct occurring after the acts covered by the initial litigation . . .
or (2) litigation challenging a rule in anticipation of its possible
application to similar events occurring or expected to occur after the
earlier lawsuit.
Id. at 79 (citations omitted). Plaintiffs here satisfy neither of those two exceptions to claim
preclusion. Plaintiffs’ new expert reports and legal theories do not constitute post-judgment
events that overcome claim preclusion. Plaintiffs do not allege subsequent wrongful acts. To the
contrary, they merely conducted subsequent expert research, which they allege supports a new
theory of liability regarding the same facts. A “new claim” within its rubric is not a new legal
theory applied to a set of facts; rather, it requires different and new facts that give rise to a new
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cause of action. Because these claims could have been brought in the initial litigation and were
not, they are now waived.
The Court’s prior opinion was final and was not appealed by Plaintiffs.4 Claim
preclusion applies to its findings and legal conclusions and warrants dismissal of the claims here.
Because the Court finds dismissal of all counts is necessary due to claim preclusion, it will not
address FINRA’s other arguments in support of its motion to dismiss.
IV. CONCLUSION
For the foregoing reasons, the Court will grant Smarsh’s Motion to Dismiss, Dkt.
11, and grant FINRA’s Motion to Dismiss, Dkt. 12. A memorializing Order accompanies this
Opinion.
Date: August 22, 2017 /s/
ROSEMARY M. COLLYER
United States District Judge
4
Plaintiffs did file an untimely motion to amend the complaint, which was denied by the Court,
and in which the Court noted that had the motion been timely it likely would not have resolved
the fatal issues present in the original complaint. See North v. Smarsh I, No. 15-494, Order on
Mot. to Amend [Dkt. 34].
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