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| Wall Street Journal – “Document Shredding Shows Importance of Having a Policy on What Is Preserved.” |
| By Michael Orey, staff reporter of The Wall Street Journal |
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| The revelations by Arthur Andersen LLP last week that it had destroyed documents relating to its work for Enron Corp. highlight a critical question for companies: just what must you keep, and for how long? Clearly businesses can’t keep everything; space limitations and storage costs make that prohibitive. What’s key, say lawyers who advise businesses on such matters, is to have a defined policy on what is preserved and what gets purged. “Not having a policy is an invitation to creating problems,” says George Terwilliger III, a white-collar defense attorney at White & Case in Washington, D.C. “Without a policy, you’re open to an allegation that there was some nefarious purpose for destruction of documents.” If a corrupt motive for the destruction is proved during a government investigation, it can lead to obstruction-of-justice charges. In civil suits, courts can order sanctions, ranging from a default judgment to instructions that jurors can infer that the destroyed material contained damaging information. When the destruction occurs is key. To be a federal offense, it must happen while a judicial proceeding or congressional or regulatory investigation is pending. A number of state laws, however, are stricter, making it a crime to destroy or conceal evidence if a proceeding is imminent or likely. Lawyers generally advise clients to stop routine document destruction once any proceeding begins. Last week, Andersen said it suspended its records-management policy after the Enron revelations, but didn't say what its policy had been. Lawyers say no single document policy suits all companies. The right approach varies with the needs of the business, as well as the regulatory and litigation environment it operates in. For example, regulators require insurance companies and banks to hang on to certain kinds of information for specific time periods. And federal law governing employee-benefit plans requires retention of records for six years. It is precisely because situations vary so greatly that the American Institute of Certified Public Accountants doesn't set document retention standards for its accounting-firm members, says chuck Landes, an AICPA Official. It is, he says, a "management issue" that an accounting firm must resolve in consultation with legal counsel and others." Even when such policies are in place, it’s not uncommon for courts to grapple with allegations that documents or electronic data have been improperly destroyed. For example, in a malpractice suit now pending against accounting firm Grant Thornton LLP in Circuit Court for Baltimore City, Carnegie International Corp. alleged that J.W. Michael Starr, a Grant partner, intentionally deleted e-mails and notes relating to Carnegie from his computer. Carnegie, a small internet and telecommunications concern, asked for entry of a default judgment. In October, Judge Kaye Allison refused to resort to that extreme sanction but ruled that Mr. Starr “had knowledge that a lawsuit against Grant was imminent when he deleted his computer files” and was “in violation” of court rules. Tom Rafter, Grant’s general counsel, wouldn’t comment on the judge’s order. But he says the case involved “a routine deletion of e-mails” and that the e-mails were ultimately obtained from the recipients and turned over to Carnegie. “There was no intent here to destroy any documents that were relevant,” he says, adding that Grant has “a very, very, firm policy against any kind of destruction of evidence.” In 1997, Federal District Judge Alfred Wolin slapped Prudential Insurance Co. of America with a $1 million fine and other sanctions after concluding it had engaged in widespread document destruction during litigation over its sales practices. At the time, Prudential blamed the destruction on managers who didn’t follow company directives but agreed to pay the fine. Deborah Rhode, a legal-ethics expert at Stanford University law school, says the prospect of sanctions often isn't enough to deter destruction. "There are a lot of lawyers who think that, whatever penalties would attach to the destruction of documents, it would be less severe than if the documents themselves surfaced," she says. That, she says, produces "a great incentive to remove smoking-gun documents." But Mr. Terwilliger, a former deputy attorney general, says that impulse often backfires. "More criminal cases are born of attempts to cover up through document destruction ... during an administrative proceeding or investigation than any other single cause," he says. Judah Best, another Washington attorney, points out that in this age of electronic document creation and duplication, "it's impossible to destroy all copies of documents. They inevitably show up. |