Magistrate Recommends Adverse Inference Instruction and Monetary Sanctions for Failure to Preserve Hard Drives, Audio Recordings and Email

E*Trade Securities LLC v. Deutsche Bank AG, et al., Civil No. 02-3711 RHK/AJB and Civil No. 02-3682 RHK/AJB (D. Minn. Feb. 17, 2005)

United States Magistrate Judge Arthur J. Boylan filed a Report and Recommendation regarding several electronic discovery disputes arising in a case where plaintiffs claim that defendants engaged in a fraudulent securities lending scheme. Two plaintiffs moved for sanctions based on certain defendants’ alleged spoliation of evidence and failure to conduct a reasonable inquiry in response to discovery requests; defendants opposed the sanctions motion and moved for an award of attorneys’ fees and costs. The judge recommended that the plaintiffs’ motions for sanctions be granted and that defendants’ motion be denied.

The judge concluded that the defendants had wrongfully destroyed three categories of evidence after they “clearly knew about the potential for litigation”:

Computer Hard Drives: One of the defendants, Nomura Canada (“NC”), permanently erased all the company’s hard drives in mid-2002, approximately six months after its duty to preserve was triggered. NC argued that its president ordered the wiping clean of the hard drives because the company was shutting down business, and because the computers were being given to the employees, he did not want confidential business information to remain on the computers. Thus, NC argued that the destruction of documents was the result of valid business reasons. Additionally, NC argued that prior to the cleaning of the hard drives, all relevant information had been removed from the employee’s hard drives and therefore, no relevant information was lost and the plaintiffs suffered no prejudice.

Noting that NC chose to retain certain documents prior to the destruction of the hard drives, the judge concluded that NC’s acts with respect to its destruction of the hard drives were sanctionable.

Telephone Recordings: NC recorded and preserved its traders calls on recordable DVDs through the use of a two-DVD system. As soon as one DVD was full, it automatically switched to a second. When the second DVD filled with recorded calls, the system would automatically switch back to the first DVD and record over the previously saved telephone calls. NC admittedly made no changes in the taping system until approximately nine months after its duty to preserve first arose. Finding that the communications of NC’s traders regarding the alleged lending scheme would have been highly relevant, the judge concluded that defendant’s failure to retain the audio recordings was spoliation, and thus, sanctionable.

Email: A 30(b)(6) witness designated by defendant Nomura Securities International (“NSI”) stated in her deposition that a litigation hold had been put into effect in 2001. She explained that no litigation hold had been instigated for the retention of email messages because all email would be preserved on backup tapes, which she inferred would not be destroyed. According to NSI’s retention policy, however, backup tapes for email messages were only retained for three years.

The judge concluded that, because NSI relied on its backup tapes to preserve evidence that was not preserved through a litigation hold, NSI should have retained a copy of relevant backup tapes because it was the sole source of relevant evidence. He further found that, because NSI had not placed an adequate litigation hold on email boxes, and made no changes to its three year retention policy, unique information relevant to the time period of the stock transactions was irretrievable destroyed.

The judge found that “[t]he substantial and complete nature of the destruction of the evidence contained in the recorded telephone conversations and hard drives destroyed by Nomura Canada, justifies a finding of prejudice.” Further, the judge found that the failure to preserve email “has prejudiced the plaintiffs in presenting their case about NSI’s involvement in and knowledge of the transactions in question.” Accordingly, the judge recommended that the district court instruct the jury that it may infer that the information that NC and NSI failed to preserve would have been advantageous to plaintiffs and disadvantageous to the defendants

In addition, the judge recommended that NSI be sanctioned $5,000 for failing to conduct a reasonable inquiry into plaintiffs’ discovery requests prior to responding. Plaintiff presented evidence that, on several occasions, the defendants denied the existence of certain documents only to have witnesses during depositions define and verbally locate the requested document.

Further, the judge recommended that NC be sanctioned $5,000 for failing to conduct a reasonable inquiry into requested audio recordings and for certifying that all calls during a particular time period were inaudible (when they were not).

Finally, although the judge noted that the defendants’ activities with respect to the failure to preserve evidence gave rise to an inference of bad faith, he found insufficient evidence to indicate that the defendants “deliberately misrepresented facts to this court or opposing counsel or engaged in ‘deliberate fabrications.'”

Full text of the Report and Recommendation can be found here.