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A financial news company will have access to previously sealed deposition testimony in a case that challenges the New York Stock Exchange’s alleged tolerance of “front running” by floor brokers on the exchange. The 2nd U.S. Circuit Court of Appeals ruled Thursday in favor of access by the TheStreet.com, which intervened in a civil lawsuit brought by the Securities and Exchange Commission against several brokers accused of buying and selling stocks ahead of placing orders for clients. The 2nd Circuit’s ruling in New York Stock Exchange v. TheStreet.com, 01-6078, clarified the standards under which a federal district court may revisit and modify a protective order granted under Rule 26(c) of the Federal Rules of Civil Procedure. Broker John D’Alessio, sued by the Commission, had filed a third-party complaint against the stock exchange, alleging that, in practice, it tolerated and encouraged illegal trading activities by floor brokers. While Southern District of New York Judge Jed Rakoff ultimately dismissed the stock exchange from the case, D’Alessio continued to assert affirmative defenses. In October 2000, Rakoff entered a protective order granting the parties the right to designate, in good faith, “confidential information” that should not be filed with the court unless necessary. Late last year, D’Alessio deposed two top exchange officials, and the exchange opted to mark certain sections of those depositions confidential. And when the stock exchange learned that the press had obtained the partially confidential deposition of its chairman, Richard A. Grasso, which included references to the confidential testimony of the two other exchange officials, it asked Judge Rakoff to enforce his protective order. Rakoff, after closing the courtroom for a Jan. 4, 2001, hearing, ruled that the order had not been violated. But he went on to find that the confidential testimony contained sensitive information, and three weeks later, he issued a second protective order sealing the confidential testimony. TheStreet.com moved to intervene in March 2000, arguing that the public had a right to the testimony because it involved the relationship between two quasi-governmental agencies: the SEC and the stock exchange. Rakoff granted the motion, saying, “I think there is a new balance that must be drawn now and that warrants the unsealing of those portions of the depositions that this court previously sealed.” While Judge Rakoff said there might be “some needless reputational harm” flowing from the release of the confidential testimony, that harm was outweighed by the media’s interest in the “interaction” of the SEC and the New York Stock Exchange. JUDICIAL DOCUMENTS The exchange appealed, alleging that the confidential testimony was not a “judicial document” subject to a common-law right of public access, and even if it were, the privacy concerns outweighed the presumption of public access. Writing for the 2nd Circuit, Judge Jose A. Cabranes clarified the presumption in favor of access to judicial documents, and the presumption against public access where the parties reasonably relied on the protective order and judicial documents were not involved. Cabranes said that absent a showing the protective order was granted improvidently or a showing of some extraordinary circumstance or compelling need, a district court should not modify a protective order where the parties have reasonably relied on the order. “[I]f previously entered protective orders have no presumptive entitlement to remain in force, parties would resort less often to the judicial system for fear that such orders would be readily set aside in the future,” Judge Cabranes said. On the other hand, he said, “some protective orders may not merit a strong presumption against modification. For instance, protective orders that are on their face temporary or limited may not justify reliance by the parties.” Judge Cabranes noted that at least one district court in the circuit has “incorrectly concluded” that 2nd Circuit case law created a presumption that discovery materials should be publicly available absent a showing of good cause for shielding them from the public. In this case, Cabranes said, the exchange was correct in arguing that the deposition testimony did not involve judicial documents because they play no role in the performance of judicial functions under Article III of the U.S. Constitution. “[TheStreet.com] contends that the very exercise by the District Court of its power to enter a protective order and to seal the Confidential Testimony transformed the Confidential Testimony into a ‘judicial document’ presumptively open to the public,” he said. “This argument is without merit.” Second, under the circumstances and 2nd Circuit case law, he said, Judge Rakoff was correct not to apply a strong presumption against access when he issued his second order. “The January 2001 Order entered by the Court could not have provided the basis for reliance because the deponents had provided Confidential Testimony at least a month BEFORE the entry of that order,” he said. “Accordingly, the strong presumption against public disclosure of pretrial discovery materials placed under seal by a protective order of a court … never came into play here.” Judge Rakoff, the court concluded, was correct to find that TheStreet.com’s intervention called for the striking of a “new balance between privacy rights and the interest of the general public,” and he did not abuse his discretion. Debra M. Torres, Harvey L. Pitt, Daniel E. Loeb, Jay Majors and Laura Sulem, of New York’s Fried, Frank, Harris, Shriver & Jacobson, represented the New York Stock Exchange. Robert L. Raskopf of White & Case represented TheStreet.com. Richard L. Klein, Thomas H. Golden, and Charles J. Glasser Jr., of Willkie Farr & Gallagher, based in New York, represented amicus curiae Bloomberg LP.

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