Critical considerations for the production of e-discovery in SEC investigations: what’s new in 2009

By By Virginia P. Henschel, Applied Discovery's Vice President of E-Discovery Affairs

The year 2009 will bring a cascade of government investigations arising from the financial crisis of 2008. A demand for transparency from the financial community by government agencies, congressional committees and the public will dictate the climate of these investigations. Electronic discovery of data from financial services companies will be a central element of these anticipated investigations. In October 2008, the Division of Enforcement for one of the main investigating agencies, the Securities and Exchange Commission (“SEC”), updated its internal Enforcement Manual with specific regard to the production of electronic data and documents (a copy of the manual is available for download at www.AppliedDiscovery.com). In order to be in the best possible position to respond to either a voluntary or subpoena request for data from the SEC, corporations must be proactive in taking time to understand the new guidelines set forth by the agency and develop best practices in anticipation of an investigation.

2008 Updates to the SEC Enforcement Manual
The recent amendments reflect the upgraded ability of the SEC to retain, review and expertly search electronic data that is produced to the SEC. The SEC is looking to eliminate paper production to decrease costs and increase their ability to rapidly search terms, tag, and review data and documents.

Overall, the update is similar in focus to the December 2006 amendments to the Federal Rules of Civil Procedure (“FRCP”). The responding party is required to be prepared to:

1) Rapidly identify and produce all relevant electronically stored information, and
2) Knowledgeably negotiate the scope and form of production at the inception of a subpoena or voluntary request.

Generally, the financial services industry is ahead of the curve in terms of “readiness” to respond to government investigations due to the myriad of rules that govern the preservation of its business and transactional records, including electronic records. Regulated entities, such as broker-dealers, must provide information to the SEC without a subpoena. However, subpoenas are required when providing information protected under the Electronic Communications Privacy Act; as well as for phone company records and financial institutions documents that are subject to the Right to Financial Privacy Act of 1978 (“RFPA”).

The SEC staff can be expected to initiate investigations with an informal inquiry, seeking voluntary compliance with document requests. This is the agency’s principal means of gathering documents, data, and other information. As stated in the Enforcement Manual in Section 3.2.3: “[o]ften the fruits of these requests will help the staff assess the merits of an investigation at its earliest stages before the staff opens an informal investigation or requests that the Commission issue a formal order of investigation.”

New Mandate: Certification of Completeness
Under the amended enforcement guidelines, the SEC is now mandating a certification of “completeness” when submitting electronic data and documents in response to a subpoena or pursuant to a voluntary request for production. A certification should only be provided subject to the usual caveats regarding preserving the right to continuing production as further relevant documents are located. The SEC guidelines are clear on directing enforcement agents to seek opportunities to impose sanctions on the responding party arising from deficient certifications. The certification of completeness is a seemingly onerous requirement considering the petabytes of data that may be potentially relevant and the innate limitations of “perfect” production of the total universe of relevant documents. However, the reasonableness standard for electronic document production that has prevailed in the case law applying the amended FRCP should also apply to compliance with SEC voluntary and subpoena document requests.

Standards of Reasonableness
Standards of reasonableness are predicated on the responding party’s preservation and collection efforts. It is essential to immediately impose a comprehensive litigation hold, suspending the deletion or destruction of potentially relevant data and documents. Destruction of relevant documents can have a severe impact on the responding party, including adverse inference regarding the content of the deleted data or documents, the imposition of monetary sanctions, and, in the worst case, criminal prosecution for obstruction of justice. There is also a benefit to the responding party in instituting a comprehensive litigation hold and preserving a comprehensive set of data and documents; the essential documents to defend your company’s action under investigation and any ensuing civil litigations will also be properly preserved.

Privilege Logs
Many attorneys regularly practicing before the SEC voluntarily turn over data/documents to government agencies without a full privilege review and the creation of a privilege log. This long standing practice needs to be reconsidered in this new highly scrutinized environment. Section 3.2.6.2.4 of the Enforcement Manual sets forth the requirements for detailed privilege logs to be submitted to the SEC at the time of the data and document production, as follows: “[i]f any requested document is withheld, please submit a list of all such documents that provides: (a) the identity and position of the creator(s); (b) the creation date;(c) the present or last known custodian; (d) a brief description, including the subject matter; (e) the identity and position of all persons or entities known to have been furnished the document or a copy of the document, or informed of its substance; (f) the reason the document is not being produced and; (g) the specific request in the subpoena [or request] to which the document relates.”

The failure to provide sufficient information to support a claim of privilege can result in a waiver of the privilege asserted (inadvertent waiver of privilege). At this time, there is not clear guidance from the courts on how an inadvertent waiver of privilege before the SEC may give rise to a continuing waiver of privilege for those documents in any ensuing civil litigation pursuant to Federal Rules of Evidence 502. It is for this reason that corporations should consider providing the privilege log as requested to the SEC; the completeness and defensibility of the privilege log is within the corporation’s control as the responding party. When a company has the opportunity to control the protection of any legal privilege for an investigation, future criminal prosecution, or civil litigation, the company should seize the opportunity, whether or not it has been the past practice of their legal counsel to provide a privilege log at the time of production.

Sections 4.2, 4.2.1 and 4.3 of the revised Enforcement Manual set forth the agency’s perspective on inadvertent waiver and privilege logs. As stated in the guidelines, “[w]aiver of a privilege is not a pre-requisite to obtaining credit for cooperation. A party’s decision to assert a legitimate privilege will not negatively affect their claim to credit for cooperation. The appropriate inquiry in this regard is whether, notwithstanding a legitimate claim of privilege, the party has disclosed all relevant underlying facts within its knowledge.”

Web-Based Production
The SEC advises its investigators to focus on financial data in electronic business documents as a “rich source of metadata and [easy] to navigate”, acknowledging, however, that many companies/financial institutions are reluctant to permit the wholesale production of proprietary programs. The SEC does permit Web-based production or production on a dedicated hard drive. As a best practice, consider selecting the Web-based production option when providing data and documents voluntarily to a government agency. Giving the SEC access to the online review tool is definitely more preferable than producing directly to the agency in terms of both cost and ease-of-use for both parties. Most of the top-tier e-discovery providers can set specific access rights to allow the agency to access only the data needed for their review. However, it is recommended that the corporation negotiate up front to preserve the right to defer formal production until such time that the form of production is agreed upon with the SEC and the responding party has had the opportunity to fully vet a comprehensive privilege log.

Top 4 Best Practices
Applied Discovery recommends the following for best practices for respondents complying with the SEC enforcement guidelines:

1) Negotiate. Vigorously negotiate up front on a voluntary production to limit the scope of the collection and consider offering a web based online review prior to production that preserves the company’s right to fully vet a privilege log.
2) Leverage Experience. Use an experienced electronic discovery provider to ensure a forensically sound and comprehensive collection, prior to determining the relevant data and documents for production.
3) Conduct a Diligent Review. Be diligent in your pre-production review for relevance to liability issues, and use an electronic discovery provider that can document every search that is run in culling the data for relevant production to support your certification requirements
4) Create a Privilege Log. Use a facile online review tool to create a comprehensive, detailed privilege log throughout the duration of the review which will satisfy all the elements set forth in the SEC enforcement manual.

Conclusion
On the upside, the SEC enforcement manual changes provide a new window of transparency that reveals SEC expectations and how enforcement issues will be handled. It also provides organizations with a clear road map for being prepared, in advance, for any potential involvement in an enforcement case. However, it is also apparent that corporations and their legal advisors can’t go it alone. With the SEC’s increased emphasis on electronic documentation, the best prepared organizations will be those that strategically and proactively collaborate with their IT teams and a knowledgeable e-discovery solution provider.

Opportunities to collaborate are identified throughout the SEC Enforcement Manual. Therefore, the most important advice is this: Proactively prepare by establishing sound e-discovery and document management practices based on the advice of your best legal counsel.

About Applied Discovery

Applied Discovery (www.AppliedDiscovery.com) is a leading provider of comprehensive electronic discovery services to the legal industry. Its award-winning review platform is used by the nation’s top corporations and law firms for complex e-discovery matters. Applied Discovery is based in Seattle, with East Coast headquarters in New York City and regional offices in Washington, D.C., Chicago, Dallas, Houston, San Francisco, and Los Angeles.

About the Author

As the leader of Applied Discovery’s Financial Crisis Response Team, Ms. Henschel blends her specialized knowledge gained while managing complex corporate litigation as former E-Discovery Counsel at a Fortune 100 corporation with her law firm experience to help financial institutions maneuver through the intricacies of federal investigations.

Contact details:
Virginia Henschel, Esq., Vice President, e-Discovery Affairs
T: 508.353.6634, E: virginia.henschel@AppliedDiscovery.com, W: www.AppliedDiscovery.com