United States District Court, District of Columbia
THADDEUS J. NORTH, et al., Plaintiffs,
SMARSH, INC., et al., Defendants.
ROSEMARY M. COLLYER United States District Judge.
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.
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
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.
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 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
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”).
FINRA 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).
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.
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
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 with records were designed to force
Plaintiffs into non-compliance and create inferences of
regulatory failures.” Id. ¶ 83.
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
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. ¶
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 owned or controlled by
Smarsh, where their original electronic communications were
tampered with, altered, lost, and destroyed by
Defendants' actions and arrangements.” Id.
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.
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 ...