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No Sanctions for SEC Despite Case Doc Blunder

SAN FRANCISCO (CN) - A U.S. magistrate judge has denied Hewlett-Packard subsidiary Mercury Interactive LLC sanctions against the Securities and Exchange Commission, following the mishandling and disappearance of more than 5 million pages of documents.

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The documents were to be used as evidence in a case that alleges Mercury directors and officers participated in the backdating of stock options grants. The SEC's formal investigation, dating back to August 2005, compelled production of relevant information pertaining to the allegations, which Mercury supplied. Mercury claims, however, that the SEC "mistakenly" deleted the enormous compilation of evidence, spurring a tedious and drawn-out effort by both the SEC and Mercury to locate the files. All but 270,000 pages were ultimately located.

Mercury made a motion for sanctions against the SEC, initially seeking outright dismissal of the case for spoliation of evidence, but in the alternative, "adverse inference instruction, or one of two evidentiary restrictions."

The SEC argued the difficulty with evidence was rooted in Mercury's initial claim that a third party, hired by their attorney Davis Polk, to produce the original documents failed to "properly execute privilege searches and failed to set the correct relevant cut-off date." This led to privileged and "non-responsive" materials being sent to the SEC, causing the ensuing confusion regarding the correct files, which ones had been located and which ones the SEC had in its possession.

"The SEC explained that omission in its productions were due to complications in document production in this case, 'through no fault of the Commission, by erroneous and corrective productions, withdrawals of productions and re-productions of materials received . . . from third parties,'" wrote U.S. Magistrate Judge Jacqueline Scott Corley in her order. "While the SEC admits to deleting documents, it claims that any erasure was made pursuant to requests from Mercury/Davis Polk and that all responsive, non-privileged materials from the investigation were retained and provided to defendants."

Corley said it would have been reasonable for the SEC to expect Mercury to have another copy of the materials it handed over and that its document production to the SEC was "complicated and problematic."

Despite those facts and although she says the SEC "never accurately confirmed that Davis Polk had, in fact, reproduced what the SEC believed it would reproduce," Mercury hasn't shown justification for a full dismissal or any other sanctions.

"Defendants have not demonstrated sufficient prejudice to justify the harsh sanction of dismissal," Corley said in her ruling. "Defendants have pointed to no specific missing document without which their defense is hampered."

She added, however, that a 90-day continuance of all case deadlines was justified in order to allow Mercury to review the recovered documents.

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