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Records Retention: The Need for a Good Corporate Policy

We've heard about records retention and the trouble that shredding documents can bring. But are you aware that the law penalizes document modification as well? Take the Arthur Andersen case as an example.

In August 2001, questions arose regarding Enron's accounting treatment of certain limited-partnership transactions. No subpoena had been issued, and litigation was not pending, when Andersen employees began destroying Enron documents in October. After receiving an SEC subpoena on November 9, Andersen employees stopped shredding documents.

Although Andersen's document-retention policy provided for destruction of documents of this nature, the policy was not routinely followed. In December, the SEC discovered that documents had been destroyed, and on January 4, 2002, Andersen executives called the SEC to explain and cooperate in the investigation. Andersen was indicted and found guilty of obstruction of justice.

Contrary to public perception, the guilty verdict was not because Andersen had shredded documents, but because an Andersen attorney had altered a document. Specifically, the attorney had instructed that a reference to herself and language indicating that Andersen disagreed with Enron on an accounting issue be deleted from an internal memorandum. These relatively minor changes resulted in an adverse verdict and caused Andersen's demise.

Increased Penalties for Records Tampering.

In response to the Enron debacle and other corporate scandals, Congress passed the Sarbanes-Oxley Act, which broadens the scope of documents that must be preserved to avoid an obstruction-of-justice claim. The law now provides that if a person has reason to believe that a document may be wanted by any federal agency at a later date even though no hearing or litigation is currently pending, yet destroys or alters that document, he or she can be found guilty of obstruction of justice and face fines and imprisonment up to 20 years.

In addition, the Sarbanes-Oxley Act extends the period of time in which a private lawsuit for a securities-fraud claim can be brought to the earlier of two years after the discovery of the facts constituting the violation or five years after the violation. The Act also directs the United States Sentencing Commission to review and amend federal sentencing guidelines to deter and punish violations involving obstruction of justice, destruction or alteration of records, fraud, and organizational criminal misconduct.

Attributes of an Effective Retention Policy.

An effective records-retention policy must ensure the integrity of the documents. As the Andersen case illustrates, the law requires not only that documents be retained, but also that the original content of the documents not be altered in anticipation of litigation or in response to a request to produce documents.

A good records-retention policy should also be designed to meet the particular regulatory requirements of the industry in which the company operates. For example, a records-retention policy for a brokerage firm must address retention, retrieval, and destruction of e-mails because e-mails are considered records and subject to the SEC's regulatory regime.

Why have a Records Retention Program?

Aside from the obvious benefit of avoiding an obstruction-of-justice claim, instituting a good records-retention policy has other advantages.

Reduced Litigation Costs.

In general, an effective records-retention policy will reduce the time and expense spent locating documents responsive to discovery requests. Cost savings can be particularly dramatic when the records to be produced are in electronic form. For example, in a wrongful-termination suit, a court ordered a Fortune 500 company to turn over all e-mail messages that mentioned a former employee's name. The company had no records-retention policy in place and was faced with having to search 20,000 backup tapes containing millions of messages, at a cost of $1,000 per tape. The cost of this $20 million search could have been reduced, perhaps dramatically, if the company had had an effective document-retention policy.

A second advantage related to reduced litigation costs is that a good records-retention policy can eliminate sanctions for delay in locating evidence or responding to discovery. For instance, in connection with an acquisition, the Hearst Corporation failed to provide documents fully responsive to the required Hart-Scott-Rodino notification requirement. The FTC instituted a challenge to the acquisition, and Hearst paid a $4 million fine and $19 million in disgorgement penalties, not to mention having to divest the acquired company. Hearst found the documents after the acquisition had been consummated.

Business Efficiency.

An effective document-retention policy will increase efficiency by allowing quick retrieval of documents. By periodically destroying documents with low information content, a company reduces the volume of documents required to be produced in response to a search of stored documents, and only those content-rich documents must be reviewed. As part of the records-retention policy, a procedure for distinguishing documents with low information content from those with high information content must be established.

Of course, the document-retention policy should never be used as a guise to reduce unprocessed paperwork as the Immigration and Naturalization Service data processing center in Laguna Niguel, California, did. In an effort to cut the backlog of documents, a manager at the Laguna Niguel center ordered 90,000 documents awaiting processing to be destroyed. Although the manager achieved her goal of eliminating the backlog, she now faces a federal indictment for conspiracy and five counts of willfully destroying documents.

Reduced Storage Costs and Volume.

A good records-retention policy minimizes a company's storage costs. By routinely destroying unneeded documents, the company lessens the volume of documents that must be stored. This concept applies to electronic data storage as well. By periodically destroying electronic data pursuant to a document-retention plan, a company frees up valuable network server space so that computer efficiency is preserved.

Prevention of a Spoliation Claim.

Spoliation is the willful destruction of evidence or the failure to preserve potential evidence for another's use in pending or future litigation. Spoliation can either be sanctionable or be the basis of an independent tort action or obstruction-of-justice charge. Documents can be legally destroyed pursuant to a reasonable and consistent records-retention policy if no litigation threat is pending and documents are not destroyed in contemplation of a government investigation.

The Smoking-Gun Argument.

An often cited reason for a records-retention policy is that it prevents smoking guns from remaining around too long and becoming subject to discovery. Avoiding smoking guns, however, should not be seen as a primary purpose or benefit of retention policies. For example, in a patent-infringement case, the court held that Rambus, Inc., had engaged in litigation misconduct after a Rambus executive testified that Rambus had implemented a records-retention policy, in part, to destroy documents that might be harmful in patent-infringement suits.


The penalties for illegal document destruction or alteration are severe, and the risk of destroying important documents is high if a company does not have or follow a well-reasoned document-retention plan. The examples in this article demonstrate companies' document-retention follies. A company adopting a document-retention policy must ensure that document destruction is appropriate, that retained documents are accurate, and that the policy is consistently followed.

*article courtesy of Kathryn Baltes of Miller Nash LLP,

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