United States District Court, N.D. Iowa, Eastern Division
RULING ON MOTIONS TO COMPEL
JON STUART SCOLES, Chief Magistrate Judge.
On the 23rd day of October 2014, this matter came on for hearing on the Motion to Compel (docket number 69) filed by Plaintiff United States Commodity Futures Trading Commission ("CFTC" or "the Commission") on August 18, 2014, and the Motion to Compel (docket number 70) filed by Defendant U.S. Bank, N.A. ("U.S. Bank" or "the Bank") on the same date. The Plaintiff was represented by its attorney, Susan J. Gradman. The Defendant was represented by its attorneys, Kristina L. Carlson and Megan Flynn.
II. CFTC's MOTION TO COMPEL
In its motion to compel, the CFTC asks the Court to compel U.S. Bank to respond to request numbers 2 and 4 of the CFTC's second set of requests for production of documents.
A. Request for Production Number 2
On June 12, 2014, the CFTC served U.S. Bank with its second set of requests for production of documents. In Request for Production No. 2, the CFTC asks U.S. Bank to produce "[a]ll policies and procedures of any Broker/Dealer Group relating to segregated or special accounts." "Broker/Dealer Group" is defined in the request as "any group or divisions within U.S. Bank with oversight or responsibility for U.S. Bank's broker, dealer and/or futures commission merchant clients."
In its response served on July 15, U.S. Bank first sets forth boilerplate "general objections." In response to Request for Production No. 2, the Bank repeats its general objection that the request is "overbroad, unduly burdensome, and not reasonably calculated to lead to the discovery of admissible evidence." U.S. Bank also claims that the meanings of "broker/dealer group" and "special account" are vague and ambiguous. Finally, the Bank objects to the request "to the extent the CFTC seeks documents that are already in its possession." Notwithstanding the objections, U.S. Bank states that "after a reasonable and diligent search, there were no such policies and procedures during the Relevant Period." In the "preliminary statement" found in U.S. Bank's response to the requests for production of documents, the Bank describes the "Relevant Period" as the "period prior to July 9, 2012."
According to the CFTC, multiple U.S. Bank employees have testified in their depositions that following the discovery of Wasendorf's fraud, the Bank implemented policies and procedures regarding the safeguarding of customer segregated accounts held by the Bank's futures commission merchants ("FCMs"). The CFTC argues that the adoption of such policies suggests that "it would have been feasible for U.S. Bank to implement those procedures prior to Peregrine's collapse." In response, the Bank argues that the feasibility of such procedures has never been an issue. U.S. Bank asserts that it "has never contended that having some customer segregated account policy or procedure would be too onerous." (italics in original) Accordingly, the Bank argues that "[b]ecause the CFTC cannot point to an actual controversy regarding the feasibility of any particular policy or procedure, there is no purpose for which U.S. Bank's subsequently enacted policies or procedures could be admitted at trial."
FEDERAL RULE OF EVIDENCE 407 provides generally that evidence of subsequent remedial measures is not admissible to prove an actor's wrongdoing. However, the evidence may be admitted for another purpose, if disputed, such as "the feasibility of precautionary measures." "Exceptions to the rule are to be narrowly read in order to preserve the important policy of encouraging subsequent remedial measures.'" Williams v. Security Nat. Bank, 358 F.Supp.2d 782, 794 (N.D. Iowa 2005). Here, the admissibility of evidence regarding U.S. Bank's adoption of new policies and procedures following discovery of Wasendorf's fraud is admissible under RULE 407 only if the feasibility of such procedures is disputed. As noted in the advisory committee notes for the 1972 proposed rules, "[t]he requirement that the other purpose be controverted calls for automatic exclusion unless a genuine issue be present and allows the opposing party to lay the groundwork for exclusion by making an admission." See FED. R. EVID. 407, Advisory Committee Note, 1972 Proposed Rule. It should be noted, however, that RULE 407 addresses the admissibility of evidence of subsequent remedial measures at trial. It is not a rule of discovery. "The discoverability of information is governed by whether it would be relevant, not by whether the information discovered would be admissible at trial." Mid Continent Cabinetry, Inc. v. George Koch Sons, Inc., 130 F.R.D. 149, 152 (D. Kan. 1990).
The familiar standard governing the scope of discovery generally is found in FEDERAL RULE OF CIVIL PROCEDURE 26(b)(1): "Parties may obtain discovery regarding any nonprivileged matter that is relevant to any party's claim or defense...." In the discovery context, relevancy "has been construed broadly to encompass any matter that bears on, or that reasonably could lead to other matter that could bear on, any issue that is or may be in the case." Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340, 351 (1978). See also Davis v. Union Pacific R.R. Co., 2008 WL 3992761 (E.D. Ark.) at *2 ("a request for discovery should be considered relevant if there is any possibility' that the information sought may be relevant to the claim or defense of any party"); Moses v. Halstead, 236 F.R.D. 667, 671 (D. Kan. 2006) (same).
I make no judgment regarding whether evidence of the Bank's adoption of new policies and procedures after Wasendorf's fraud was discovered will be admissible at the time of trial. That decision will be made by the trial court pursuant to FEDERAL RULE OF EVIDENCE 407. Under the broad discovery permitted by the FEDERAL RULES OF CIVIL PROCEDURE, however, the Court concludes that the information sought is discoverable. Accordingly, the motion to compel regarding Request for Production No. 2 will be granted.
B. Request for Production Number 4
Request for Production No. 4 in the second set of requests for production of documents seeks documents "regarding customer segregated funds held at U.S. Bank relating to any futures commission merchant customers of U.S. Bank...." In response, U.S. Bank objects (twice) that the request is "overbroad, unduly burdensome, and not reasonably calculated to lead to the discovery of admissible evidence."
The CFTC argues that U.S. Bank documents relating to other FCMs are relevant "to determine whether U.S. Bank's handling of Peregrine's customer segregated account was consistent with its handling of other future commission clients' customer segregated accounts." According to the CFTC, if the Bank's actions in dealing with Peregrine were inconsistent with its actions in dealing with other futures commission merchant clients, then "U.S. Bank's ability to argue consistency with industry custom and practice would weaken significantly, as it could not even argue consistency with internal custom and practice." In response, U.S. Bank asserts that internal inconsistencies, if any, are not evidence of noncompliance with standard banking practices.
[E]vidence as to how U.S. Bank treated other FCMs' customer segregated accounts - whether consistently or inconsistently with how it handled the 1845 Account - does not make it any more or less likely that the Bank's treatment of the 1845 Account was consistent with how other banks in the industry handle customer segregated accounts. U.S. ...