In a recent decision, Delaware’s Court of Chancery, led by Chancellor Kathaleen St. Jude McCormick, has ordered sanctions against the “Buyers” in the case of *Legent Group, LLC, et al. v. Axos Financial, Inc., et al.* The ruling stems from the Buyers’ conduct during the discovery phase of the litigation, specifically concerning documents related to a FINRA arbitration. The court found that the Buyers misled the court regarding the confidentiality of certain documents, leading to unnecessary legal expenses for the “Sellers.”
The Background: A FINRA Arbitration and a Subpoena
The case has a complex history. The core issue revolves around a prior FINRA arbitration involving claims brought by Clearing against Reynolds in August 2019. During this arbitration, a protective order was put in place to safeguard certain documents. In the current litigation, Sellers issued a subpoena to obtain documents related to the FINRA arbitration, including transcripts, hearing records, and discovery responses.
Initial Motions and the Confidentiality Argument
When the Sellers sought these documents, the Buyers moved to quash the subpoena. Their primary argument was that the protective order from the FINRA arbitration prevented the disclosure of these documents. They also assured the court that their legal positions in the current litigation did not contradict those taken in the FINRA arbitration. Based largely on the Buyers’ assertion of confidentiality, the court initially granted the Buyers’ motion to quash. This was done without prejudice, meaning the Sellers could reassert their request if the documents proved to be more significant than initially apparent.
The Turning Point: Publicly Filed Testimony
The situation shifted dramatically just before the trial. The Sellers discovered that testimony from a key witness, Garrabrants, given during the FINRA arbitration, had been publicly filed as part of a separate case in a New York state court. This discovery prompted the Sellers to file an emergency motion to compel the production of the previously sought documents. Following the trial, and after the transcripts were produced, the Sellers then moved for sanctions against the Buyers.
The Court’s Findings: Misleading Representations
The court’s decision focuses on two key areas where it found the Buyers’ representations to be misleading.
Inconsistent Positions: First, the court found that the Buyers’ positions in the FINRA arbitration directly contradicted their arguments in the current litigation. In the FINRA arbitration, the Buyers maintained that Clearing could have closed Reynolds’s position on the day of the Reynolds Loss. In this litigation, the Buyers claimed Clearing was left with no way to shut down Reynolds’s trading. The court did not find this argument entirely misleading, but noted that Buyers were “walking a very fine line” with their arguments.
Confidentiality Misrepresentation: Second, and more significantly, the court found that the Buyers misrepresented the confidentiality of the FINRA arbitration documents. The Buyers had repeatedly argued that the documents were protected by a confidentiality agreement. However, the discovery that some of these documents had been publicly filed undermined this claim. The court noted that the Buyers had not distinguished between arbitration transcripts and documents produced during the FINRA arbitration. The court found that this created a misleading impression, leading the Sellers and the court to believe all documents were subject to the protective order.
The Legal Standard for Sanctions
The court cited the legal standard for imposing sanctions, stating that when a party engages in discovery abuses, the award of attorneys’ fees and expenses to the opposing party is mandatory, unless the wrongdoer can show their actions were justified or that other circumstances make the award unjust.
The Ruling: Fee-Shifting Sanctions Granted in Part
Based on the Buyers’ misleading representations regarding the confidentiality of the FINRA documents, the court granted the Sellers’ motion for fee-shifting sanctions, but only partially. The court determined that the Buyers’ lack of candor had caused unnecessary expenses. The court ordered the Buyers to pay the Sellers’ reasonable fees and costs associated with specific legal actions:
* Litigating the Sellers’ motion to enforce the subpoena
* Buyers’ motion to quash the subpoena
* Sellers’ exception to the discovery magistrate’s report
* Sellers’ emergency motion to compel
* Sellers’ post-trial motion for sanctions
The court emphasized that the purpose of the sanctions was to deter similar misconduct in the future.