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 firstname.lastname@example.org.