The SEC continues to display strong
interest in timely and complete document production. Increasingly, important documents reside on computers, e-mail servers and portable drives.
As a result, it is crucial for businesses to
be aware of what constitutes electronic
document production in this era of rapidly
changing innovations to traditional modes
of communication.
“Companies need to have an understanding of what type of electronic information
exists, which will include essentially anything with an on/off switch such as computers, laptops, backup servers and PDAs,”
says Kevin Martin, a partner in Alschuler
Grossman Stein & Kahan LLP’s Business
Litigation Department. “Anything that
would be backed up on a server is a potential source for information.”
Smart Business spoke with Martin about
how the SEC is now responding to companies that fail to provide complete document production, how CEOs can be pro-active in identifying and managing electronically stored information and how a
company should proceed if it receives a
subpoena.
How is the SEC now reacting to incomplete
production?
The SEC has become very heavy-handed
in response to incomplete document production by corporate citizens. It has levied
stiff financial penalties against companies
for failing to fully and adequately respond
to government subpoenas. For example,
the SEC commenced actions against
Morgan Stanley, Bank of America and
Deutsche Bank Securities for failing to produce all of its electronic documents in a
timely manner in response to SEC subpoenas. As part of Deutsche Bank’s settlement
with the SEC, it agreed to pay $7.5 million
to the government.
What are the possible ramifications for a
company that fails to adequately provide
complete documentation?
With respect to the SEC, enforcement
proceedings may be brought and stiff
penalties levied. In the context of civil actions, one of the major ramifications is
that a court could impose spoliation sanctions against the party that has failed to
produce all of its documents. With this type
of sanction, a court instructs the jury that
destroyed documents are presumed to be
damaging to the party responsible for the
destruction. This severe sanction was
recently imposed on Morgan Stanley in
2005.
How can CEOs be pro-active in regard to document production?
The company and CEO should be prepared to demonstrate that they acted with
good faith diligence. To this end, CEOs
should confirm with company employees
that the universe of electronically stored
information has been identified.
In addition, CEOs should determine what
to retain in accordance with their statutory
obligations and company retention policies.
Finally, CEOs should create an infrastructure to manage electronically stored
information and train employees on the
proper use and storage of electronically
stored information.
If companies take a pro-active approach
to their discovery obligations, they will be
in a position to certify with confidence that they have completed their document
production and feel confident that they
will not face problems down the road that
could have and should have been avoided.
For example, one of the major problems
that Deutsche Bank faced with the SEC is
that it had representated to the government that it had completed its e-mail document production, when in fact it had
failed to produce 277,000 e-mails.
Obviously, when Deutsche Bank disclosed this fact to the SEC, the SEC was
not pleased, and Deutsche Bank lost credibility with the government investigators.
The loss of credibility with government
regulators can have far-reaching ramifications to companies that are the subject of
investigations.
How should a company proceed if it receives
a subpoena from government regulators?
Following receipt of a subpoena, written
instructions must be sent to employees
directing them to preserve documents and
not to destroy or delete any data on computers.
Before responding in any manner to the
subpoena, it is critical that the company
first make an internal assessment of: (1)
the potential universe of responsive documents; (2) the difficulty of culling the
responsive documents together; and (3)
the length of time needed to review the
documents prior to production. The company should also assume that it may be
called upon to demonstrate good-faith due
diligence in responding to document production demands.
Only after these determinations are made
will a company be in a position to make
representations to the government as to
what types of documents will be produced
and when. Obviously, companies must not
make promises to the government that
they cannot keep and must avoid inexcusable document production pitfalls.
KEVIN MARTIN is a partner in Alschuler Grossman Stein &
Kahan LLP’s Business Litigation Department. Reach him at (310)
255-9055 or [email protected].