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Document Retention and Evidence Management Post-Arthur Andersen

By Mark D. Larsen
Lindquist & Vennum P.L.L.P.

On June 15, 2002, Arthur Andersen LLP was criminally convicted of obstructing the Securities and Exchange Commission after reminding its employees to comply with a previously unenforced document retention policy. The Supreme Court’s 9-0 decision reversing Arthur Andersen conviction almost three years later was a resounding defeat for the United States, but it came far too late to save Arthur Andersen. The government’s foundational premise—that one may be convicted of violating 18 U.S.C. § 1512(b) for the mere act of impeding a lawful investigation—blithely ignored that the charging statute required that one must “knowingly…corruptly persuade another person…with intent to…cause” that person to “withhold” or “alter” documents for use in an “official proceeding.”1 At the government’s urging, the jury was required to conclude only that Arthur Andersen intended to “subvert, undermine, or impede” the SEC’s inquiry.2 The jury was not required to find that Arthur Andersen had acted “corruptly”3 or even dishonestly, and on the contrary, was told that Arthur Andersen could be convicted “‘even if [it] honestly and sincerely believed that its conduct was lawful….’”4

The instructions additionally were defective for not requiring the jury to conclude that there was “any nexus between the ‘persuasion’ to destroy documents and any particular proceeding.”5 The Supreme Court held that one cannot knowingly be a corrupt persuader “when he does not have in contemplation any particular official proceeding in which those documents might be material.”6 The Court also noted that “it is not inherently malign” to withhold testimony or documents from government proceedings, and 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.”7 Just why the government insisted upon watering down the statute in so many ways to say something it didn’t is a mystery that will remain cloaked in secrecy. The government’s application of Section 1512, however, effectively put Arthur Andersen out of business, even though the firm ultimately was exonerated.

Notwithstanding the reversal of Arthur Andersen’s conviction, however, the Court’s opinion should provide little solace to anyone inclined to impede a government function or to destroy records in the face of impending litigation, even when the action at issue amounts to nothing more than complying with a previously published document retention policy. Indeed, Arthur Andersen was indicted for urging compliance with such a previously established policy.

A scant nine months after managers at Arthur Andersen urged the firm’s employees to abide by the firm’s document retention policy, including its provisions regarding destroying records, Congress passed an entirely new statute addressing efforts to withhold or destroy documents or other evidence. 18 U.S.C. § 1519 now provides that “whoever knowingly alters, destroys…[or] falsifies…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…the United States…or in contemplation of any such matter…” has committed the offense. Section 1519 contains no “corrupt” mental state, and applies on its face to a mere “investigation.” Moreover, the “in contemplation of” element requires only the weakest nexus between bad conduct and government proceedings. Section 1519 did not apply, and could not have applied to Arthur Andersen, because it was passed after the infamous Arthur Andersen email was sent urging its employees to destroy documents by beginning to comply with the firm’s long-standing but largely dormant document retention policies. If Section 1519 had been on the books at the time, the Supreme Court still would have reversed Arthur Andersen’s conviction, but it would have been a closer call.

Parsed more carefully, however, Section 1519 is no watershed event. The statute continues to require “knowing” conduct undertaken “to impede, obstruct or influence….” Certainly an over-aggressive prosecutor might attempt an Andersen-like Section 1519 prosecution; however, the Supreme Court already criticized seeking criminal convictions when the defendant “honestly and sincerely believed that its conduct was lawful” because such a white-wash reads the mens rea “knowingly” element out of whatever statute might apply.

Criminal convictions aside, causing evidence to become unavailable—often referred to as “spoliation”— also can result in an adverse inference drawn against the offending party in criminal, civil and private disputes that otherwise have nothing to do with obstructing justice. When warranted, “the spoliation inference is a logical deduction of guilt from the destruction of presumably incriminating evidence.”8 The court holds an “inherent power” to penalize spoliation, “molded to serve the prophylactic, punitive and remedial rationales underlying the spoliation doctrine.”9 Spoliation in most jurisdictions requires “an obligation to preserve [evidence] at the time it was destroyed,”10 but even negligent conduct falling well short of criminal intent may be sufficient.11 Although in the minority, some even suggest that spoliation is an independent tort giving rise to a claim for damages.12 The elements of negligence for destroying records are just as one might expect: (1) The existence of a duty to preserve the evidence, (2) breach of the duty, (3) causation and (4) damages.13

Is an adverse spoliation inference possible when a business merely complies with its own preexisting document retention policy by destroying records? Certainly. In Trigon Insurance Co. v. United States,14 the federal government was penalized when its expert witnesses destroyed records that they reviewed when preparing to testify, all pursuant to a preexisting document retention policy. The experts’ retention policies did “not trump the Federal Rule of Civil Procedure or requests by opposing counsel…,”15 thus leading the court to preclude the experts from participating in the development and presentation of expert testimony and the imposition of attorney’s fees.16 Similarly, lawyers who counsel their clients to destroy records, even if pursuant to a preexisting document retention policy, engage in conduct fundamentally inconsistent with observing the law and the administration of justice, and run the risk that their communications will not be protected by the attorney-client privilege.17 The net negative impact of any penalty for spoliation simply is not worth whatever upside one might seek from destroying or concealing evidence.

Common sense and good judgment will avoid spoliation complaints. First, document retention policies should expressly state why they are being created, for example, to facilitate keeping records for as long as they are needed and for the purpose of being able to retrieve documents when they are needed. Second, document retention policies never should be created for the purpose of purging customer complaints or avoiding liability.18 Third, when litigation is commenced, or even foreseeable, retention policies likely should be suspended in favor of retaining documents that, pursuant to the policies, otherwise would have been purged.19 Fourth, document retention policies must be enforced. Indeed, Arthur Andersen teaches that a sudden directive to comply with a previously unenforced policy might be construed to be obstructive behavior worthy of indictment and, at least, an adverse inference instruction to a jury. This potential downside counsels the careful preparation of a document retention policy that is sufficiently flexible to encourage compliance without creating new liabilities.

Although the Supreme Court reversed Arthur Anderson’s conviction, the prosecution and even the Court’s reversal focused new attention on document retention policies, obstruction of justice and spoliation. The publicity surrounding Arthur Andersen created a new awareness, and exacerbated liabilities, for failing to retain documents and follow record retention policies. Careful and proactive corporate management can and will avoid many of the lurking pitfalls.

Notes
1 18 U.S.C. § 1512(b) (2000). Congress since has amended Section 1512, but it continues to require “corrupt” actions when directed to persuading another to “withhold a record, document, or other object.” Thus, for present purposes, the Supreme Court’s analysis of the moral culpability required to violate Section 1512 applies to the law as written today.
2 Arthur Anderson v. United States, 125 S.Ct. 2129, 2136 (2005).
3 Id. at 2136.
4 Id. at 2136.
5 Id. at 2136-37 (emphasis in original).
6 Id. at 2137.
7 Id. at 2134-35.
8 Christopher Chase, To Shred or Not To Shred: Document Retention Policies and Federal Obstruction of Justice Statutes, 8 Ford. J. Corp. Fin. L. 721 (2003), quoting Jamie G. Gorelick et al., Destruction of Evidence 5 (1989).
9 West v. Goodyear Tire & Rubber Co., 167 F.3d 776, 779 (2d Cir. 1999).
10 Kronisch v. United States, 150 F.3d 112, 126030 (2d Cir. 1998).
11 See, e.g., Fada Industries, Inc. v. Falchi Building Co., Inc., 730 N.Y.S.2d 827 (N.Y. Sup. Ct. Queens Co. 2001).
12 See Terry R. Spencer, Do Not Fold or Mutilate; The Trend Towards Recognition of Spoliation as a Separate Tort, 30 Idaho L. Rev. 37 (1993); but see Silvestri v. General Motors Corp., 271 F.3d 583, 590 (4th Cir. 2001).
13 Fada, 730 N.Y.S.2d at 840.
14 204 F.R.D. 277 (E.D. Va. 2001).
15 Trigon, 204 F.R.D. at 289.
16 Trigon, 204 F.R.D. at 291.
17 Rambus, Inc., v. Infineon Technologies AG, 222 F.R.D. 280, 289-90 (E.D. Va 2004).
18 See Lewy v. Remington Arms Co., Inc., 836 F.2d 1104, 1112 (8th Cir. 1988).
19 See John P. Hutchins, Document Retention Basics, 828 PLI/Pat 795 (May-June 2005).

ABOUT THE AUTHOR

Mark D. Larsen has been a lead trial attorney and investigator in matters arising from securities, real estate, insurance, investment and bankruptcy frauds, pension and health benefit plan frauds and embezzlements and money laundering. He has considerable experience with federal and state regulatory and law enforcement agencies, including the Minnesota Department of Commerce, the Bureau of Criminal Apprehension, the Internal Revenue Service, the Department of Labor and the Federal Bureau of Investigation.

This article is only a general summary for informational purposes and does not constitute legal advice. Consult a qualified and experienced insurance advisor for your specific situation or particular questions.

riskVue | The webzine for risk management professionals
December 2005