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GT Alert

Lessons Learned (and Yet-To-Be-Learned) from the Arthur Andersen Document Destruction Case

June 2005

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The unanimous U.S. Supreme Court recently overturned Arthur Andersen’s 2002 criminal conviction for destroying documents in the wake of the Enron accounting scandal. Arthur Andersen LLP v. United States, 544 U.S. ___, 2005 WL 1262915 (May 31, 2005). In the process, the Court validated the common use of “valid” corporate document retention policies in ordinary circumstances. Nonetheless, contrary to what a lay person may have thought of this decision, it did not absolve Andersen for its, at best, ill-timed document destruction in the middle of one of the biggest corporate scandals. Rather, the Court simply held that improper jury instructions were used at trial and as such the conviction could not stand. Moreover, the Court certainly did not hold or intimate that a company is free to destroy its documents until the moment it receives a subpoena or a complaint. Although it was initially deadlocked at trial even under the improper jury instructions, there is no telling how the Andersen jury might have decided had they been properly instructed at trial. Moreover, a number of important issues with serious practical ramifications remain unanswered. Therefore, it would be prudent to examine exactly what the decision held and, perhaps more importantly, what it did not decide. In so doing, companies and corporate counselors may become better prepared to handle increasingly complex and contentious document retention/destruction and related electronic discovery issues.

"The Supreme Court’s Andersen decision still leaves unanswered a number of important questions that have serious practical ramifications."

The Supreme Court’s Andersen Decision

In reversing the obstruction of justice conviction for Andersen’s destroying documents before it was notified of a formal SEC investigation, the Court found the jury instructions lacking on two grounds. First, the Court stated that the jury instructions failed to require the requisite “consciousness of wrongdoing” when the relevant statute criminalized “knowingly . . . corruptly persuad[ing]” others to destroy documents. Second, the Court found that the jury instructions did not require “any nexus between the ‘persua[sion]’ to destroy documents and any particular proceeding.” In other words, in the Court’s opinion, “a ‘knowingly . . . corrup[t] persuade[r]’ cannot be someone who persuades others to shred documents under a document retention policy when he does not have in contemplation any particular official proceedings in which those documents might be material.” Accordingly, the Court remanded the case for further proceedings consistent with its opinion.

Unresolved Questions Abound

The Supreme Court’s Andersen decision still leaves unanswered a number of important questions that have serious practical ramifications. These questions have no easy or simple answer either in the abstract or in practice. Moreover, these questions need to be examined in conjunction with the latest developments in electronic discovery law and the ongoing efforts to amend the Federal Rules of Civil Procedure to reflect the realties of today’s electronic information economy.

Distinction between “Informal” and “Formal” Governmental Investigation

"...the Court’s holding could be understood to mean that a corporation could be found guilty for shredding documents even when a governmental investigation was an “informal” inquiry as long as the company had the requisite “consciousness of wrongdoing” and had concrete knowledge as to what particular governmental investigation might call for those shredded documents."

The Court expressly left open the question as to whether the distinction between an “informal” governmental investigation and a “formal” governmental investigation makes a critical difference as that issue was not properly preserved before the Court. Arthur Andersen was aware that the SEC’s “informal” inquiry into Enron’s accounting practices was well under way when it reminded its employees to comply with the document retention policy. Even just a few months before the Enron-related document destruction incident, Arthur Andersen was embroiled in the SEC’s accounting practice probes in connection with its work for two other large public companies. Only upon receiving notice of “formal” investigation from the SEC regarding the Enron accounting practices, did Arthur Andersen suspend its document retention policy.

On the one hand, the Court’s holding could be understood to mean that a corporation could be found guilty for shredding documents even when a governmental investigation was an “informal” inquiry as long as the company had the requisite “consciousness of wrongdoing” and had concrete knowledge as to what particular governmental investigation might call for those shredded documents. On the other hand, if the term “official governmental proceedings” should include only “formal” investigations (perhaps accompanying compulsory process) but not “informal” investigations (i.e., no compulsory process), then is a company free to shred its documents under an existing document retention policy until the moment it receives a subpoena?

Deviation from One’s Own Document Retention Policy

The Court did not address whether a company’s deviation from its own document retention policy could perhaps show an intent or knowledge that the company knew that it was destroying (or failing to preserve) information that is likely to be relevant to an imminent governmental investigation, and further show “consciousness of wrongdoing.” An argument could be made that Arthur Andersen’s own document retention policy triggered a duty to suspend its document destruction when a legal proceeding (defined to include governmental investigations) was commenced, threatened, or “judged likely.” A further good-faith argument could be made that Arthur Andersen, perhaps unwittingly, imposed upon itself a duty to suspend its document retention policy as soon as it had determined that “some sort of SEC investigation [was] highly probable.” Shortly after this determination or observation was made in writing by Andersen’s in-house counsel, Enron sent a copy of a letter from the SEC that at least Enron was “informally” being investigated by the SEC. In addition, the fact that Arthur Andersen did not routinely or periodically purge unwanted documents but waited until the last minute, after the Enron scandal broke and fully knowing that at least an “informal” SEC investigation of Enron was already underway, may create an appearance of foul play in the minds of the public and adversaries, regardless of its legality. Perhaps a truly periodic and consistently observed document retention policy would have a much better chance of withstanding a legal challenge.

Valid Document Retention Policies and Ordinary Circumstances?

The Court noted that “‘document retention policies,’ which are created in part to keep certain information from getting into the hands of others, including the Government, are common in business.” It further observed that: “It is, of course, not wrongful for a manager to instruct his employees to comply with a valid document retention policy under ordinary circumstances.” May a particular document retention policy ever be invalid, either in design or in implementation? When and how might “extraordinary circumstances” arise? Would something like the Enron accounting scandal qualify as extraordinary circumstances? Should a reasonable person have known, even if there were no separate internal determination to assess the likelihood of a legal proceeding, that its documents would likely be subpoenaed by the government?

As discussed above, it is not clear whether the knowledge of an “informal” governmental investigation (perhaps not of the company itself, but of its major client) sufficiently puts a company on notice that it should have suspended its otherwise legitimate document retention policy. Similarly, it is not clear whether the government can turn its “informal” investigation into a “formal” investigation solely for purposes of placing the inquiry recipient on notice by adding a statement to an informal inquiry notice letter that “Recipient shall suspend its document retention/destruction policies and preserve all potentially relevant information in its entirety.” An argument could be made that both “informal” and “formal” investigations are “official” proceedings while counter arguments may also be made. It could be further argued that, regardless of the distinction, both informal and formal investigations provide inquiry recipients with sufficient notice as soon as the existence of an investigation has been notified to the recipients.

Differences from Other Privileges to Withhold Information

"...arguably, the cost of over-allowing the use of a document retention policy would be greater in that there is no document for a judge even to examine in camera."

In explaining that enforcing a document retention policy is not in and of itself wrongful, the Court analogized that it certainly would not be illegal for an attorney to advise or persuade his client to withhold a document under the attorney-client privilege, or a mother to persuade her son to invoke the 5th Amendment right against self-incrimination. Thus, some may be tempted to liken the right or privilege to have a document retention program and periodically destroy unwanted or unnecessary documents to those of the attorney-client communication or attorney work product privileges. However, at least one crucial distinction remains. The latter are limited privileges to withhold certain information from adversaries, but they do not give a blanket permission not to preserve those documents in the first place. However, a valid document retention policy would render certain documents and information no longer available. Thus, arguably, the cost of over-allowing the use of a document retention policy would be greater in that there is no document for a judge even to examine in camera.

Incidentally, some practitioners have observed that a litigant’s claim of an attorney work product privilege during discovery shows, by definition, that the document at issue was prepared in anticipation of a litigation/government investigation matter. The argument goes that it further proves that a duty to preserve arose at the time the privileged document was created and other documents on the same subject should have been preserved as well. It is not clear whether a company could continue to periodically destroy unwanted documents under its general document retention policy while selectively preserving attorney-client privileged or attorney work product privileged documents, perhaps by clearly delineating in its document retention policy what types of documents are to be discarded at what intervals but what types of documents and information should be kept, and further adding that by selectively preserving certain categories of documents it is not creating or acknowledging a duty to preserve other documents on the same subject. These issues are probably more important in civil litigation where a failure to suspend a document retention policy and resulting spoliation of evidence could produce sanctions, including an adverse inference or even an outright dismissal of a complaint.

Effects of the Sarbanes-Oxley Act

In the wake of the Enron debacle and other corporate scandals, Congress enacted the Sarbanes-Oxley Act of 2002. At that time, Congress also created two new criminal obstruction of justice offenses. Whereas the pre-existing 18 U.S.C. §§1512(b)(2)(A) and (B), under which Andersen was prosecuted, criminalized “knowingly . . . corruptly” causing others to destroy potential evidence, the two new sections prohibit the direct act of destroying potential evidence. Specifically, 18 U.S.C. §1512(c) now provides that:

“Whoever corruptly –

(1) alters, destroys, mutilates, or conceals a record, document, or other object, or attempts to do so, with the intent to impair the object’s integrity or availability for use in an official proceeding; or

(2) otherwise obstructs, influences, or impedes any official proceeding, or attempts to do so, shall be fined under this title or imprisoned not more than 20 years, or both.”

For good measure, Congress also added 18 U.S.C. §1519, which provides:

“Whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States or any case filed under title 11, or in relation to or contemplation of any such matter or case, shall be fined under this title, imprisoned not more than 20 years, or both.”

In the Andersen case, the Supreme Court held that the word “knowingly” qualifies the word “corruptly,” and further held that the combined phrase “knowingly . . . corruptly persuade” requires “consciousness of wrongdoing.” The new Section 1512(c) simply employs the term “corruptly” but does not use the term “knowingly.” In contrast, the new Section 1519 contains the word “knowingly” but does not include the word “corruptly.” It remains to be seen how the Court would interpret these two new sections, especially given the emphasis it placed on the term “knowingly” in the Andersen case.

At a minimum, the following issues may be relevant. The Court in Andersen noted that the jury instructions there also diluted the meaning of the word “corruptly,” which the Court associated with “wrongful, immoral, depraved, or evil,” such that even an innocent act of lawfully persuading others to withhold documents would have been covered. Thus, in construing the new Section 1512(c), the Court might still require some degree of “wrongfulness” in connection with the act of destroying potential evidence. On the other hand, the Court might not require that the person who is destroying documents be also aware or conscious of the wrongfulness of his conduct. Regarding the new Section 1519, the Court might simply require that the document destructor be simply aware of his “intentional” or “knowing” destruction of such documents as opposed to “negligent but unintentional” destruction. When the three related sections employ arguably different standards, one has to be even more vigilant and conservative not to cross the lowest common threshold.

Time to Revisit and Update One’s Document Retention Policy AND Consistently Comply

"...a valid corporate document retention policy is a lawful device in ordinary circumstances, perhaps even in the face of a grave corporate scandal and an ensuing governmental investigation."

Perhaps the most practical significance of the Supreme Court’s Andersen decision is its express acknowledgement that a valid corporate document retention policy is a lawful device in ordinary circumstances, perhaps even in the face of a grave corporate scandal and an ensuing governmental investigation. However, like most other legal concepts, the devil is in the details and the Court’s general accommodation of the concept could prove to be a false sense of security to the unwary.

Therefore, it would be prudent for companies to revisit their existing document retention policies, assess how they have been complied with and enforced in practice, and consider ways to improve both the policy and actual implementation. More specifically, it would help to have a clearer explanation of what is to be discarded at what intervals and how the program is monitored and kept up-to-date. Perhaps more importantly, companies would be well served to clearly explain when and how the document retention program is suspended.

These issues need to be examined along with the electronic document retention and discovery issues that are becoming even more complex and contentious. For example, some companies do not have a formal policy or consistent practice regarding their server back-up tape retention. It is not unheard of that some companies have accumulated literally hundreds of back-up tapes stored in some remote off-site storage facilities only to see them surface during litigation, or even after the close of heated discovery. Back-up tapes, by definition, are created for recovery in case of a disaster, such as a server breakdown and a resulting loss of information. Thus, for disaster recovery purposes, only a few recent back-up tapes would suffice. Once created, it may not be simple to discard even truly old back-up tapes, especially in today increasingly litigious environment. Some companies have an automatic electronic document deletion function after a certain number of days. Then they (intentionally or negligently) neglect to turn the function off even after receiving a subpoena or discovery demand.

"...the penalty for intentional and negligent destruction of potential evidence is larger than ever both in civil and criminal contexts."

In the days of paper documents, it really would have taken some effort to destroy those paper documents. However, in today’s electronic information economy, it has become a matter of performing a few key strokes to destroy a large volume of documents. While technology is catching up to make it possible to recover and revive some “deleted” documents to avoid document destruction/spoliation charges, the penalty for intentional and negligent destruction of potential evidence is larger than ever both in civil and criminal contexts. Regardless of what ultimately happens to Andersen’s now vacated criminal conviction, companies and counselors must become more vigilant than ever before in avoiding document retention/destruction traps.

 

The proliferation of information technology has made it difficult for a company to know what information is within its control and how to manage that information to reduce litigation risk and comply with various laws. To address this complex and rapidly evolving need, Greenberg Traurig provides an interdisciplinary team comprised of Trial lawyers, Corporate and Securities lawyers, Intellectual Property lawyers, Labor and Employment lawyers and in-house technology specialists with the experience needed to counsel companies throughout the world about how to manage information cost-efficiently and legally. With 24 locations in the United States, and 5 key commercial centers in Europe and Asia, Greenberg Traurig is uniquely positioned to assist companies from prevention to defense.

This Alert was written by Cecil S. Chung in the Washington, D.C. office and David K. Isom in the Denver Office. Please contact Mr. Chung at 202.331.3157, Mr. Isom at 303.685.7404 or your Greenberg Traurig liaison if you have any questions regarding the subject matter of this Alert.

© 2005 Greenberg Traurig


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This GT ALERT is issued for informational purposes only and is not intended to be construed or used as general legal advice. Greenberg Traurig attorneys provide practical, result-oriented strategies and solutions tailored to meet our clients’ individual legal needs.