Judge Sanctions Investors for Mismanaging Records

(CN) - Six years after ruling that the failure to preserve backup documents could be considered "gross negligence," a federal judge in Manhattan imposed sanctions on 13 investors who deleted emails and destroyed other records in their lawsuit over the collapse of two hedge funds.

U.S. District Judge Shira A. Scheindlin did not take the decision lightly, calling the process of issuing sanctions "very, very time consuming, distracting and expensive for the parties and the court."

In other cases, Scheindlin has acknowledged that preserving backups for all documents would "cripple" large corporations, but has ruled that backups for information created by or for "key players" of the litigation must be preserved.

She said the documents at issue in the present case fell into this category.

In 2004, investors filed an action to try to recoup $550 million from the liquidation of two British Virgin Islands-based hedge funds, Lancer Offshore and OmniFund. They lobbed claims for securities violations against the funds' former directors, administrators, auditor, and the prime broker and custodian. Citco Fund Services had been hired as administrator, but eventually resigned.

During the discovery phase, Citco and its officers claimed that substantial gaps were found in the documents produced by investors. They requested the most extreme sanction: dismissal.

"A terminating sanction is justified in only the most egregious cases, such as where a party has engaged in perjury, tampering with evidence, or intentionally destroying evidence by burning, shredding, or wiping out computer hard drives," Scheindlin wrote. "There is no evidence of such misconduct in this case."

Instead, investors failed to preserve relevant electronic documents, she said. The 13 shareholders "continued to delete electronic documents after the duty to preserve arose, did not request documents for key players, delegated such efforts without any supervision from management, destroyed backup data potentially containing responsive documents of key players, and submitted misleading or inaccurate declarations," according to the ruling.

Judge Scheindlin said the defendants "carried their limited burden" of showing that the missing documents were relevant to the litigation.

"The documents that no longer exist were created during the critical time period," she wrote. "Key players must have engaged in correspondence regarding the relevant transactions. There can be no serious question that the missing material would have been relevant."

The judge instructed the jury to presume that all missing evidence was favorable to the Citco defendants. She also imposed monetary sanctions, including attorney fees, against the investors.

Scheindlin offered the following notes to courts facing similar decisions:

"I stress that at the end of the day the judgment call of whether to award sanctions is inherently subjective. A court has a 'gut reaction' based on years of experience as to whether a litigant has complied with its discovery obligations and how hard it worked to comply."

"I note the risk that sanctions motions, which are very, very time consuming, distracting, and expensive for the parties and the court, will be increasingly sought by litigants," she wrote. "This would not be a good thing."

Scheindlin added that "careful consideration" should be given to the question of whether a party complied with discovery obligations.

"Likewise, parties need to anticipate and undertake document preservation with the most serious and thorough care, if for no other reason than to avoid the detour of sanctions."

Subscribe to Closing Arguments

Sign up for new weekly newsletter Closing Arguments to get the latest about ongoing trials, major litigation and hot cases and rulings in courthouses around the U.S. and the world.

Email *

Submit