The Rock and the Hard Place
Years after passage of the Sarbanes-Oxley Act of 2002,
many companies still believe the Act applies uniquely
to public companies. In fact, private companies that
ignore the Act’s obstruction-of-justice provisions do so
at their peril. Two increasingly important provisions of
Sarbanes-Oxley were set forth in §§ 802 and 1102 and
codified, respectively, at 18 U.S.C. § 1519 and 18 U.S.C.
§ 1512(c). These provisions impose substantial criminal
penalties on any individual or entity – public or private
– for destruction of evidence or obstruction of justice
regarding any actual or “contemplated” federal
investigation, matter or official proceeding. A company
therefore potentially could violate the law before an
actual official governmental interest arises.
Thus, it is critical for every entity to ensure that its
records-retention policy includes appropriate triggers
– called “litigation holds”–to suspend the routine
deletion of information for situations contemplated
by §§ 802 and 1102. There is, however, an elephant
in the room–a “compliance gap” challenge that is of
particular concern not only to quasi-governmental
organizations but also to companies in heavily
regulated industries facing routine government
scrutiny. Those companies could find that an overbroad
policy theoretically encompasses nearly all of their
day-to-day work. Accordingly, those companies, even
more than most, must balance the need for a practical
records-retention policy with the need to comply with
Sarbanes-Oxley’s mandates.
This compliance conundrum evokes Scylla and
Charybdis from Homer’s Odyssey. The late rocker
Warren Zevon channeled Homer in his song, “Lawyers,
Guns and Money”: “I’m the innocent bystander,
and somehow I got stuck between a rock and a hard
place, and I’m down on my luck.” The rock/hard
place challenge of Sarbanes-Oxley compliance is the
tension entailed in setting retention language that
is broad enough to include a reasonably anticipated
government interest, proceeding or regulatory inquiry
contemplated by Sarbanes-Oxley, but not so broad
that, when viewed in hindsight by a judge, even
routine governmental oversight is deemed to have
necessitated a litigation hold.
Neither the statutory language nor the scant case
law provides much guidance on when a company
must impose a litigation hold under §§ 802 and 1102.
However, several principles may help any company
devise a retention regime not only cognizant of
business realities but also compliant with the Act’s
obligations.
Lest We Forget Enron
Sections 802 and 1102 were enacted, in part, in
response to Arthur Andersen’s shredding of documents
during the government’s investigation into Enron
Corp. Arthur Andersen LLP v. U.S., 544 U.S. 696 (2005)
(“jury instructions... failed to convey the requisite
consciousness of wrongdoing”). Cf. U.S. v. Quattrone,
441 F.3d 153 (2d Cir. 2006) (jury not told of defendant’s
lack of knowledge of investigation’s specific focus).
In both Andersen and Quattrone, a conviction for
inciting destruction was overturned based on a jury
instruction’s omission of the appropriate mens rea.
Post-Sarbanes-Oxley, however, federal prosecutors
have more arrows in their obstruction/tampering
quivers. Mirroring the Act’s concerns, the Dec. 1, 2006,
amendments to the Federal Rules of Civil Procedure
focus on retention and production of electronically
stored information. In addition, courts, government
regulators, public auditors and the plaintiffs’ bar are
becoming increasingly sophisticated as to electronic
discovery issues such as metadata, keyword searching
and forensic imaging. In turn, the demands have
intensified for greater transparency in companies”
policies and practices.
A well-crafted policy–with which a company
substantially complies and enforces as uniformly as
possible–can protect against allegations of improper
spoliation. However, an overbroad and/or haphazardly
applied policy can have the opposite effect. For
example, a gap between the general protocol and the
specific actions taken can become grist for a litigation
adversary or prosecutor to undermine–or even obtain
judicial invalidation of–the preservation steps taken.
Policies must be sufficiently narrow so that companies
can, as a practical matter, comply, but broad enough to
satisfy the legal requirements of §§ 802 and 1102.
SOX Litigation-Hold Triggers – Public and Private
Companies Susceptible to Criminal Prosecution
for Obstruction of Justice
March 24, 2008
by robert d. brownstone,* catherine kevane** and j. carlos orellana***
www.fenwick.com
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