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North v. Smarsh, Inc.

United States District Court, District of Columbia

August 22, 2017

THADDEUS J. NORTH, et al., Plaintiffs,
SMARSH, INC., et al., Defendants.


          ROSEMARY M. COLLYER United States District Judge.

         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.

         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 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”).

         FINRA[1] 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).

         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 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 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 ...

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