Material Relevant to US Litigation Not Automatically Shielded by Arbitration Confidentiality: Veleron Holding, B.V. v. Morgan Stanley & Co. (SDNY, April 16, 2014) (02014 WL 1569610)

(July 10, 2014) - According to the United States District Court for the Southern District of New York in Veleron Holding, B.V. v. Morgan Stanley & Co., a private arbitration of  a dispute “does not cloak” documents and other evidence relevant to that dispute with a “shield of invisibility,” or immunize them from public disclosure in connection with related judicial proceedings or from publication in connection with those proceedings.

In Veleron, the District Judge had to decide, among other issues, whether to grant plaintiff, Veleron Corporation (Veleron) a motion to unseal portions of the record of its US-based securities fraud action against Morgan Stanley (MS). The records were part of a related arbitration proceeding in London under the auspices of the London Court of International Arbitration (LCIA) between Veleron’s parent, OJSC Russian Machines (RM), and BNP Paribas SA (BNP) and were covered by confidentiality.

The LCIA arbitral tribunal had recently issued an award on the guarantee issued by RM in connection with the acquisition by Veleron of certain shares on margin, with funds borrowed by BNP and on which Veleron defaulted. Veleron’s New York action charged MS, as disposal agent of BNP, with insider trading and market manipulation in connection with the sale of such stocks. When Veleron initiated suit against MS in New York the arbitration was still pending and the judge, upon Veleron’s request, agreed to seal the records out of deference to the LCIA, reserving his rights to dissolve the seal once the arbitration was concluded.

When Veleron ultimately moved to unseal some of the record after the arbitration, it was MS (not a party to the London arbitration) that argued that all matters and documents related to the completed arbitration proceeding remained covered by the confidentiality provisions of the LCIA Arbitration Rules. 

The Southern District rejected this argument and granted Veleron’s motion to unseal portions of the record. The court relied on First Amendment and common law rights of public access to judicial documents that are “relevant” to the performance of the judicial function and useful in the judicial process” (citations omitted), as well as the presumption that curt records are open to the public and should not be sealed unless “specific, on the record findings are made demonstrating that closure is essential to preserve higher values and is narrowly tailored to serve that interest” (citations omitted). Citing the recent Third Circuit decision in Delaware Coal. for Open Gov't, Inc. v. Strine, 733 F .3d 510, 521 (3d Cir.2013), cert. denied, Mar. 24, 2014), finding unconstitutional a Delaware program that enabled litigants to privately arbitrate certain business disputes before Court of Chancery judges, the district court recalled that the United States does not operate “secret commercial courts.” 

It further noted that “confidential information” in American litigation has historically been limited to “information that, if disclosed, could cause real and imminent damage to the parties’ interests–the prime examples being trade secrets and premature disclosure of market moving events. Documents that relate to but do not disclose such confidential matters have, however, never been similarly endowed with confidentiality.

Furthermore, the court found no principle of international comity requiring it to conduct a proceeding to enforce the securities laws of the United States in secret simply because a related proceeding was cloaked in confidentiality, and also noted that even the LCIA Arbitration Rules allow disclosure if a party is under legal duty to disclose materials and documents, or if disclosure is “reasonably necessary” so that a party can “protect or pursue a legal right” in some other forum.

While the Southern District’s reasoning appears correct with respect to the specific facts of this case (and it should be noted that certain materials remain sealed or redacted), the decision appears to attack with unnecessary vehemence the established notion of arbitral confidentiality. It describes the LCIA’s confidentiality provisions as “all but guaranteed to cloak any proceeding conducted there in the utmost secrecy,” and decries Morgan Stanley’s position as “part and parcel of a well-documented effort by private business parties to get around liberal American discovery rules by finding ways to shroud, not just dispute resolution proceedings, but evidence about disputed matters, with secrecy.”

  • Lia Iannetti, CPR Institute