Third Party Discovery of Foreign Bank Records Should First Proceed Under the Hague Convention

by Proskauer - Privacy & Data Security

Where U.S. litigation discovery obligations were argued to be in conflict with foreign civil and criminal privacy statutes, many recent opinions found that discovery should proceed under the Federal Rules over the protest of the foreign data custodians. See, e.g., Gucci Amer., Inc. v. Curveal Fashion, No. 09 Civ. 8458, 2010 WL 808639 (S.D.N.Y. Mar. 8, 2010) (compelling the third-party U.S. parent of a foreign bank to produce documents located at its subsidiary despite claims that such production was illegal under Malaysian law) discussed further in prior blog posts here and here. However, in SEC v. Stanford International Bank Ltd, the court departed from this pattern in finding that discovery should first proceed under the Hague convention “in the interest of comity.” Civil Action No. 3:09–CV–0298–N, 2011 WL 1378470 at *14 (N.D.Tex. April 6, 2011).

In this case, the court previously determined that R. Allen Stanford, his associates, and various entities under Stanford's control (collectively “Stanford”) operated “a massive Ponzi scheme that stole approximately $8 billion from an estimated 50,000 investors scattered over more than 100 countries,” and accordingly, the Court appointed a Receiver to identify and take control of Stanford’s assets. Id. at *1. As third-party Société Générale Private Banking (Suisse) S.A. (“SocGen”) was believed to hold accounts belonging to Stanford, the Receiver sought to discover account records under the Federal Rules of Civil Procedure (“FRCP”). Id. at *2. SocGen, opposing discovery under the FRCP, argued that as the sought-after documents were located in Switzerland, compliance with the FRCP discovery request would “subject it and its employees to criminal, civil, and administrative penalties under Swiss law.” Id. Instead, SocGen argued that the Receiver should first utilize the discovery procedures of the Hague Convention, of which Switzerland is a signatory.

To determine under which mechanism discovery should proceed, the court applied the balancing of factors set out in Société Nationale Industrielle Aérospatiale v. U.S. District Court, 482 U.S. 522, 538, 107 S.Ct. 2542, 96 L.Ed.2d 461 (1987) (“Aérospatiale”) and Minpeco, S.A. v. Conticommodity Serv., Inc., 116 F.R.D. 517, 523 (S.D.N.Y. 1987). These factors include: (1) the importance to the litigation of the documents or other information requested; (2) the degree of specificity of the request; (3) whether the information originated in the United States; (4) the availability of alternative means of securing the information, (5) the competing interests of the nations whose laws are in conflict; (6) the hardship of compliance on the party or witnesses from whom discovery is sought; and (7) the good faith of the party resisting discovery under the Federal Rules. See id. at *4.

The court’s application of these factors was initially fairly typical. Factors 1, 2, and 4 were found to favor the Receiver, as the documents were “vital” to the receivership proceedings and not available anywhere else. In particular, the court noted that as it considered the Receiver to essentially be SocGen’s customer, the discovery request “constitutes no more than a bank customer asking for a copy of its own records.” Id. at *5-6, 8, and 11. Counseling the opposite conclusion, factors 3, 6, and 7 were found to favor SocGen, as the documents were only located in Switzerland; this defense was not raised in bad faith; and “comity counsels deference” to SocGen’s “potentially well-founded fear” that compliance with the discovery request under the Federal Rules could lead to prosecution. Id. at *7-8, and 12-13.

Where the Court’s analysis deviates significantly from other opinions is its consideration of the fifth factor, which in this case involves the competing interests of the U.S. and Switzerland. Whereas other courts found that U.S. discovery interests trumped foreign privacy concerns, the Stanford court found this factor to be neutral, after noting that any such balancing of interests would be “political” and “especially inapposite in this case, where the legislative authorities of both nations essentially have spoken by adopting the Convention.” Id. at *9.  Compare id. (“the Convention inherently, and adequately, balances the competing sovereign interests here because its use will benefit U.S. interests by providing the needed evidence, and protect Swiss interests by avoiding intrusions upon Swiss sovereignty.”) with Gucci, 2010 WL at *7 (“[T]he Court concludes that the United States interest in fully and fairly adjudicating matters before its courts . . . outweighs Malaysia’s interest in protecting the confidentiality of its banking customers’ records.”).

On balance, the Stanford court found that the comity factors weighed in SocGen’s favor “at least in the first instance.” Id. at *13. Accordingly, the Receiver was to proceed with discovery under the Hague Convention, but was not precluded from renewing its request for discovery under the FRCP should its efforts be unsuccessful. Id. at *13-14. In so holding, the court acknowledged that others relied on the discretion provided by the Supreme Court in Aérospatiale as a “green light to generally ‘discard[ ] the treaty as an unnecessary hassle.’” Id. at *3 (citing In re Automotive Refinishing, 358 F.3d 288, 306 (3rd Cir. 2004)). However, this approach “ignores Aérospatiale's admonition to ‘exercise special vigilance’ in international discovery disputes . . . and exemplifies courts' intrinsic ‘proforum bias’ warned against by . . . the Aérospatiale minority.” Id.

While it is unclear the extent to which this approach will be followed by other courts in the future, this opinion illustrates that it is possible for litigants and third parties to successfully navigate cross border discovery conflicts even where privacy interests are at stake.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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