No. 00 C 2100
United States District Court, N.D. Illinois, Eastern Division
August 18, 2005
Patrick Vincent Dahlstrom, Pomerantz Haudek Block Grossman & Gross LLP, Dominic J. Rizzi, Marvin Alan Miller, Miller Faucher And Cafferty, LLP, Chicago, IL, Brian Schrador, Law Offices of Brian Schrador, Joseph Lipofsky, Robin F. Zwerling, Zwerling, Schachter & Zwerling, LLP, New York, NY, for Plaintiffs.
Robert Y. Sperling, Marie A. Lona, Rodger Lee Gardy, Ronald Steven Betman, Winston & Strawn LLP, Leonard A. Gail, United States Attorney's Office, James Wallace Ducayet, Walter C. Carlson, William F. Conlon, Ruchi Verma, Sidley Austin LLP, Theodore Thomas Eidukas, Joel Alan Blanchet, Theodore Robert Tetzlaff, Ungaretti & Harris LLP, Arthur Gollwitzer, III, Michael Best & Friedrich LLP, Brent Douglas Stratton, Office of the Attorney General, Jeffrey C. Torres, McGuirewoods LLP, Chicago, IL, for Defendants.
REPORT AND RECOMMENDATION
*1 This case comes before the Court on a report and recommendation to Judge Wayne R. Andersen on Plaintiffs' motion for sanctions due to spoliation of evidence. On October 2, 1998, Banc One Corporation (“Old Banc One”) merged with First Chicago NBD (“FCN”), forming Bank One Corporation (“Bank One”). Plaintiffs allege that the two companies made misrepresentations related to Old Banc One's credit card division, First USA Bank (“FUSA”), which artificially inflated the stock price at the time of the merger. Plaintiffs allege that these misrepresentations ultimately damaged shareholders of both parent companies. During discovery, Plaintiffs asked for documents to enable them to challenge the Bank's methodology and calculations regarding the financial impact of the payment processing problem. Bank One has not been able to produce many of these documents because the documents cannot be found. As a result, Plaintiffs bring this motion for sanctions against Bank One.
A. OLD BANC ONE AND FIRST CHICAGO MERGE
In preparation for a merger, Old Banc One and FCN filed a joint Registration Statement pursuant to Section 6 of the Securities Act, 15 U.S.C. § 77f. Evergreen,
at *1. In documents incorporated by reference, the banks noted “that the generation of new credit card business remained very strong,” increasing at an average rate of two million new credit card accounts per quarter. The Registration Statement also included financial statements, which reflected “enormous growth” in FUSA's credit card business for the most recent fiscal year (1997) and the first and second quarters of 1998. Plaintiffs alleged that the market viewed the FUSA credit card business as a major asset and strength of Old Banc One. Id.
On July 31, 1998, the Defendants also issued a Merger Proxy/Prospectus, documents typically presented to shareholders to inform them of the circumstances surrounding an intended merger, to solicit votes from current shareholders to approve the merger The prospectus referred to the Form 10-K for the year ending on December 31, 1997, and the Form 10-Q for the first quarter ending on March 31, 1998. In the prospectus, Defendants noted that “such financial statements, in the opinion of Banc One management, contain the adjustments, all of which are normal and recurring in nature, necessary to present fairly Banc One's consolidated financial position, results of operations, and change in cash flows.” Id.
B. PROBLEMS AT FUSA AND A DECLINE IN THE PRICE OF BANK ONE STOCK
In April of 1998, before the Merger became effective, FUSA card members filed consumer class action lawsuits alleging illegal credit practices against FUSA. See e.g., Richard Mangone v. First USA Bank, N.A., and
Bank One Corp., 206 F.R.D. 222 (S.D.Ill.2001) (“Mangone”
). According to Plaintiffs' version of events, in early 1998, Bank One conducted an internal investigation of the alleged problems in FUSA's payment processing system for which it retained an outside consultant, who confirmed FUSA's practices violated the Federal Reserve Board's Regulation Z (12 C.F.R. § 226.10(a)). P. Mot. 5. On July 6, 1999, the Officer of the Comptroller of the Currency (the “OCC”) examined FUSA's payment processing which had been outsourced to a third-party vendor, National City Processing Company (“NPC”). Id.
4-7. The lawsuits against FUSA, the internal inquiry, and the OCC's investigation were not disclosed in the Registration Statement and Merger Proxy/Prospectus. Evergreen,
at *1-2. In those documents, Defendants represented that neither Bank One nor its subsidiaries were a party to any pending threatened material legal actions. Id.
*2 Plaintiffs allege that the statements misrepresented or omitted material facts regarding the success of the business and operations of FUSA. Id.
First, Plaintiffs claim that Bank One failed to disclose that FUSA achieved its growth through practices that allegedly violated the federal Truth in Lending Act (“TILA”), including improper billing procedures and charging excessive late fees and interest to its credit card customers. Second, Plaintiffs allege that Defendants issued financial statements that did not comply with generally accepted accounting principles (“GAAP”). Id.
As a result of these alleged misstatements, shareholders approved the merger. Plaintiffs, who purchased their Bank One stock after August 5, 1998, acquired Bank One shares at an allegedly inflated price due to Bank One's misrepresentations. Id.
On August 24, 1999, Defendants began to disclose some inaccuracies in the Merger documents regarding FUSA's financial condition. PX 21. Id.
Bank One issued a press release announcing preliminary earnings for the third quarter and full year of 1999. In the release, Bank One reported that based on “revised outlooks” it anticipated earnings to be down 7-8% from previous market estimates. Bank One stated that the revised earnings outlook was solely the result of changes in growth for FUSA. Id.
During a conference call on August 25, 1999, Bank One reported that it would cease FUSA's practice of “accelerating” credit card late fees and would provide credit card customers “interest rate concessions” related to FUSA's past activities. Id.;
PX 22. These measures were expected to negatively impact earnings by at least $500 million. Plaintiffs allege that the market found the news material. On August 25, 1999, the price of Bank One common stock fell 22.3% per share from the previous day's closing price. The volume of trading was more than 15 times the daily average trading volume for the previous 52-week period. Evergreen,
Kiplinger's Personal Finance Magazine caught wind of the investigation into FUSA and reported on November 1, 1999 that government regulators were investigating thousands of complaints by FUSA credit card holders. Plaintiffs allege that the complaints concerned practices that existed before the merger. The article reported that the allegedly illegal practices had existed since 1997. Id.
On November 10, 1999, Bank One announced that earnings would be as much as 15% lower than the revised expectations. Plaintiffs allege that the shortfall was attributed to the performance of FUSA. As a result, the price of Bank One stock dropped 11.5% from its previous day's close and the New York Stock Exchange periodically halted trading on Bank One stock during the day. Id.
Things took another turn for the worse for the Bank in December of 1999. First, on December 14, 1999, the first shareholder lawsuit was filed against Bank One alleging federal securities violations by the practices of FUSA. See In re Bank One Shareholders Class Action,
No. 00 CV 880 (N.D.Ill.). Two days later, on December 16, 1999, the OCC issued a Notice of Deficiency (“Notice”) to Bank One requiring it to correct the operational deficiencies that caused the payment problems at FUSA and to remediate all improper charges incurred by card members as a result of those practices. P. Mot. 7. And finally, on December 31, 1999, Defendant John McCoy, Bank One's Chairman and Chief Executive Officer, resigned. Plaintiffs allege that McCoy resigned as a result of the disclosures of improprieties at FUSA. Evergreen,
*3 Unfortunately, December of 1999 was not the end of the bad news for Bank One or its shareholders. On January 11, 2000, Bank One announced that earnings for 1999 would be as much as 18% less than analysts had expected and the profits for 2000 would drop sharply. Id.
Plaintiffs allege that the earnings drop was attributable to the allegedly illegal credit card practices. Bank One also announced that it would take a $725 million charge in the fourth quarter of 1999, largely to restructure the credit-card division. Id.
C. BANK ONE REPAYS DISADVANTAGED CUSTOMERS
In response to the OCC's Notice, the Bank formed the Problem Resolution Team (“PRT”) to ensure all OCC demands were met. P. Mot. 9. One sub-group of the larger Team was the Oversight Committee, consisting of members of the Board of Directors of Bank One and FUSA. The Oversight Committee managed the resolution of open issues in the Notice and provided periodic reports to the OCC detailing Bank One's progress in responding to the Notice. Id.
Another sub-group of the PRT was the Disadvantaged Customer Team (the “DCT”), which calculated the remediation amounts for disadvantaged card members from various payment processing problems. Id.
10. The DCT created 36 “event numbers” referring to specific processing problems that had disadvantaged FUSA customers. See e.g.,
PX 30. According to the Plaintiffs, Events 35, 29 and 29B make up a vast majority of the total remediation amount due to FUSA customers (Event 35: $39.9m, of which $39.2m was estimated; Event 29 and 29B: $4.3m; total amount from all Events: $47.7m). See
P. Mot. 11 & n. 7; PX 16 39-42; PX 31. Event 35 (or the “NPC Event”) related to the payment processing problems from FUSA charging improper late fees and other penalties to timely received payments and consisted of approximately 164 million payments. P. Mot. 12-13; PX 24. Event 35 contained two sub-events, known as the “quality” and “cut-off” issues. P. Mot. 4, 12-13. Events 29 and 29B related to system limitations which prevented the backdating of the arrival of on-time payments more than 15 days. Id.
The DCT developed a computer program called the “Fix Engine” to calculate the remediation amounts for most Events, but did not do so for Event 35 because of alleged lack of data needed to identify the FUSA card members impacted by NPC's processing failures. P. Mot. 15; PX 1 at 37:7-10. That lack of data required the DCT to estimate the remediation amount owed to customers in this “Unknown Population” of approximately 164 million payments. P. Mot. 15; PX 16 9-14(cut-off), 15-18(quality). Bank One did have records from NPC concerning approximately one million “multipayments” and about 16,450 payments from periodic quality samples performed by FUSA at the NPC processing site. PX 16, 17-18. These payments are referred to by the parties as the “Known Population” for which Bank One has calculated specific amounts for each disadvantaged customer, totaling $701,009. PX 16, 38.
*4 To estimate the total amount due to the Unknown Population of customers disadvantaged by Event 35, the DCT eventually settled on a “Pool Approach” to create a pool of money approximately equal to the total remediation amount, which would then be available to customers disadvantaged by Event 35. P. Mot. 16; PX 24. The Pool Approach consisted of 600 sample payments, 300 from the “quality” issue group and 300 from the “cut-off” issue group, treated as if they arrived one day earlier than posted by FUSA. In actuality, the average delay in posting payments was 1.23 days. P. Mot. 16 & n. 11; PX 16 16. Whether limiting the average delay to one day or if the errors should have been calculated based on more than one day delay is a matter of dispute between the parties' experts. The average amount the DCT calculated that each customer was disadvantaged for the 600 payments was then applied to the entire Unknown Population of disadvantaged card members to arrive at the total remediation amount; the Bank claims this amount to be $39.2 million. PX 16 28 (cut-off), 34(quality).
D. PLAINTIFFS FILE A CLASS ACTION AGAINST BANK ONE
On April 6, 2000, Plaintiffs filed Larson v. Bank One Corp.
for violations of Sections 12 and 15 of the Securities Act of 1933, 15 U.S.C. §§ 77(l)(a) arising out of the merger discussed above. Evergreen,
at *4. This cause of actions requires the Plaintiffs, in summary, to prove that Bank One: filed 1) materially 2) misstated or untrue 3) financial disclosures that 4) induced them to purchase Bank One shares. 15 U.S.C. § 77(1)(a).
In response to that complaint the Defendants filed a motion to dismiss that was granted in part and denied in part. Evergreen,
In the Plaintiffs' discovery requests, they requested Bank One's document retention policies. Bank One initially objected to this request, but eventually produced what it contends is a valid document retention policy dated April 2000 (the “Iron Mountain Policy”). DX 4. Furthermore, Bank One alleges that an email dated January 7, 2001 contains the DCT Team document retention policy. DX 4. However, this document contains language that the emailed policy is subject to approval; Plaintiffs argue that it was never further disseminated. Plaintiffs further contend that Bank One has refused to produce any retention policies prior to the so-called Iron Mountain Policy dated in early 2000. See
P. Mot. 20; PX 42, at 6. However, in a supplemental briefing, Bank One asserts that it produced document retention policies from 1997 and that all the policies were disseminated to and followed by Bank One employees. See generally
Whitecotton Aff. 7.
At a discovery hearing, this Court denied Plaintiffs' motion to compel production of documents relating to the “First USA/Sidley Austin Project” which began in 1999 and covered FUSA's payment processing issues on grounds that it fell under attorney client work product protection for documents created in anticipation of litigation. See
April 17, 2002 Order, Docket No. 70. On July 31, 2002, this Court granted Plaintiffs' motion to compel production of documents relating to Bank One's compliance and communications regarding OCC directives provided they were relevant to the Plaintiffs' claim. In re Bank One Securities Litigation, First Chicago Shareholder Claims, 209 F.R.D. 418, 425-26 (N.D.Ill.2002). After several hearings before the Court regarding the Plaintiffs' third discovery request, the Plaintiffs limited their request to specific data samples and calculations they allege were not contained in the initial production. PX 48. Bank One claims that it has produced all responsive documents to those requests. PX 47, at 44:5-45:4.
*5 In April of 2004, the Defendants moved for summary judgment, which District Judge Andersen granted in part with respect to Old Banc One shareholders who had purchased the shares prior to August 5, 1998 when Bank One issued the faulty disclosures. In re Old Banc One Shareholders Securities Litigation, 2004 WL 1144043, *6 (N.D.Ill. April 30, 2004). However, summary judgment was not granted for Defendants with respect to the “late-purchasing” shareholders who obtained Old Banc One shares after the faulty disclosures. Id.
Those shareholders make up the current class of Plaintiffs.
E. PLAINTIFFS CLAIM BANK ONE SPOILED DOCUMENTS
Plaintiffs argue that Bank One has destroyed documents that the Plaintiffs have requested, and that this failure precludes Plaintiffs from adequately challenging the Bank's methodology and calculations regarding the financial impact of the payment processing problems. P. Mot. 3; see generally
Hitzig Aff. Plaintiffs allege that Bank One's retention policy permitted documents and data wholly essential to their claims to be deleted or destroyed. P. Mot. 2. The data that the Bank has failed to preserve include detailed calculations, underlying data and documentation of the DCT's work. Id.
In their motion for sanctions due to spoliation of evidence, Plaintiffs allege that without the underlying data, calculations and documents detailed below, they are seriously prejudiced in their attempt to prove that Bank One materially misrepresented FUSA's financial well-being. See
15 U.S.C § 77(1)(a); P. Mot. 30. Dr. Hitzig, Plaintiffs' financial expert, claims that he cannot properly challenge the remediation methods or amounts for FUSA card members disadvantaged by Event 35 and Events 29 and 29B. See
Hitzig Aff. at 8-13. In their complaint, Plaintiffs claim that, because disclosures relating to FUSA's profitability at the time of the merger understated the remediation amount due to FUSA credit card members, the July 31, 1998 Merger Proxy/Prospectus contained material misrepresentations that induced them to purchase Bank One stock. See generally,
Comp. (filed 4/6/2000).
In order to remedy the situation caused by this alleged spoilation of evidence, Plaintiffs argue that the appropriate remedy is a default judgment in their favor. See
Tr. 6/14/05 hearing at 120, 9-12. In the alternative, Plaintiffs request a negative inference jury instruction which instructs the jury that it can draw a negative inference against Bank One that the financial statements were materially overstated. See id.
at 120, 19-24.
In general, Bank One raises the defenses that: 1) it has met its obligation to preserve documents relating to this litigation; 2) it had no duty to retain every “scrap of paper” relating to the DCT's work; 3) it has produced enough information for the Plaintiffs to adequately challenge DCT's remediation estimates and methodology; and 4) the information the Plaintiffs seek is unnecessary or irrelevant to their case. See generally
D. Resp. 5-19. Bank One acknowledges that many of those categories of documents have not been produced despite their best efforts to locate them, however, the Bank sees no harm to the Plaintiffs.
At a June 14, 2005 hearing on this motion, counsel for Bank One told the Court:
*6 Quite frankly I think the only thing-the testimony that Plaintiffs themselves have submitted with their motion just establishes that information such as the 540 is missing. And I can't sit here and say why it is missing. I certainly don't believe that there is any proof that it has been destroyed. I don't think there was any willful-I know there wasn't any willful destruction of this information. But, yes, I have not located it. I have not produced it. Dr. Barnett is not using it. Obviously Mr. Hitzig cannot use it. And it is missing.
Tr. 6/14/05 Hearing at 88.
1. Event 35
Relating to Event 35, Plaintiffs allege that four data sets have been wrongfully destroyed. See
P. Mot. 36-42. Plaintiffs allege this data is essential to their claim because without it, Dr. Hitzig lacks enough data to explain, replicate or offer alternative calculations or estimates of Bank One's remediation total for Event 35. Hitzig Aff. at 9-13. First, Plaintiffs allege that the underlying data and calculations relating to the 540 payments used for the final remediation estimate for Event 35 were wrongfully destroyed. P. Mot. 3, 36. Second, the Plaintiffs allege the underlying data relating to the 16,450 payments sampled by Bank One's auditing team while monitoring NPC, as well as the calculations relating to a subset of those payments, were wrongfully destroyed. Id.
at 3, 36-38. Third, the Plaintiffs allege that the underlying data and calculations relating to one million “multipayments” which Bank One assumed to have been improperly processed were wrongly destroyed. Id.
at 3. Fourth, the Plaintiffs allege that the underlying data and calculations relating to interim remediation estimates for Event 35 were wrongfully destroyed. Id.
In response to the Plaintiffs' first contention, Bank One argues that their production of 60 of the random payments used to calculate the remediation estimate is enough to enable the Plaintiffs to challenge that estimate. See
Barnett Aff. at 6-16. To Plaintiffs' second and third contentions, Bank One argues that it has produced all responsive data with respect to those data sets (together the “Known Population”). D. Resp. 10-11. Furthermore, Bank One claims that any additional Known Population data would not provide the Plaintiffs with legitimate information with which to challenge the remediation estimate for Event 35, because the 60 produced payment calculations constituted 97 percent of the dollar remediation within the sample of 600. Barnett Aff. at 17-21. Additionally, Bank One argues that the 16,450 payments from their internal audit of NPC's processing flaws were not drawn from a random sample; that, in fact, they were drawn from the payments with the greatest possibility of error, and therefore cannot be used to invalidate the final remediation estimate. Id.
at 10. To the Plaintiffs' third claim, Bank One alleges it has produced all responsive documents available regarding interim remediation methodologies and estimates. D. Resp. 12. Furthermore, Bank One argues that the sampling methodology of the adopted Pool Approach is not comparable to assumptions used in other interim estimates. As a result, other estimates are not relevant to the Plaintiffs' claims. See
Barnett Aff. at 8-16.
2. The Fix Engine
*7 Regarding the Fix Engine, the Plaintiffs allege that the test results, underlying data, and calculations used to test the program have been wrongfully destroyed and that without that information, Dr. Hitzig has no viable means to explain, replicate, or offer alternative calculations or estimates of Bank One's remediation total amount for all Events. P. Mot. 43-56; Hitzig Aff. 9.
Bank One argues that it has produced all responsive information on the Fix Engine. D. Resp. 12. Also, Bank One claims that additional information regarding the Fix Engine would not further Plaintiffs' attempts to discredit Bank One's remediation estimate. Id.
3. Events 29 & 29B
For Events 29 and 29B, Plaintiffs allege that the underlying data and calculations relating to the remediation of Events 29 and 29B have only been sporadically produced; this information relates to approximately 84,000 card members effected by Event 29 and 43,000 card members effected by Event 29B. P. Mot. 54-55. Without this information, the Plaintiffs feel they cannot verify or challenge the Fix Engine's remediation calculations for Events 29 and 29B. P. Mot. 56.
Bank One claims that Dr. Hitzig did not make mention of Events 29 and 29B in his report as to how this information would be useful. Bank One also argues that Plaintiffs have not made any showing as to how this information would be relevant to their challenging the remediation estimate of Event 35. D. Mot. 18.
4. Bank One's Litigation Reserve
Regarding Bank One's litigation reserve, the Plaintiffs allege that calculations and supporting documents relating to the litigation reserve recorded in 1999 and 2000 for FUSA's payment processing problems have been wrongfully destroyed. P. Mot. 57-61. Documents produced by Defendants show that Bank One's reserve increased from $25 million in the fourth quarter of 1999, to $50 million in the first quarter of 2000, and then to $100 million in the second quarter of 2000. PX 3 at 239-40. The Plaintiffs further allege that the underlying reserve calculations bear directly on their claim that the actual remediation to card members significantly exceeded what Bank One claimed to be the total remediation amount. See
Hitzig Aff. at 4.
Bank One answered an interrogatory in lieu of producing further documentation on its litigation reserve; it argues that the Plaintiffs are not entitled to any further documentation as a result. See
DX 2 at 13-14 (6/9/04 Tr. Proceedings). This Court agrees and will not discuss the litigation reserve further.
5. Miscellaneous Documents
The Plaintiffs finally allege that certain miscellaneous documents were wrongfully destroyed as well; more specifically, that “non-final” documents, or ones that did not support Bank One's final remediation estimate, were not retained in accordance with an appropriate document retention policy. P. Mot. 62-67.
Bank One alleges that it has produced thousands of non-final documents and calculations that “demonstrate and/or relate” to earlier remediation estimates, calculations and the iterative process of the DCT from January 2000 through April 2001. Thus, the Plaintiffs' claim that this documentation has been wrongfully destroyed is invalid. D. Resp. 13-14.
A. THE COURT HAS THE ABILITY TO SANCTION PARTIES UNDER ITS INHERENT AUTHORITY OR RULE 37 FOR SPOLIATION OF EVIDENCE
*8 The Court's authority to sanction a party for spoliation of evidence stems from both statutory creation as well as the Court's inherent authority for failure to preserve or produce documents. See
Chambers v. Nasco, 501 U.S. 32, 50-51, 111 S.Ct. 2123, 115 L.Ed.2d 27 (1991) (stating that federal courts may sanction bad faith under either its inherent authority or under the Federal Rules of Civil Procedure); Barnhill v. U.S., 11 F.3d 1360, 1368 n. 8 (7th Cir.1993) (stating the same). However, under either Rule 37 or under the Court's inherent authority, the analysis for imposing sanctions is essentially the same. Webb v. Dist. of Columbia, 146 F.3d 964, 971 (C.A.D.C.1998); Danis v. USN Communications, 2000 WL 1694325, *30 (N.D.Ill. Oct.20, 2000) (quoting Cobell v. Babbitt, 37 F.Supp.2d 6, 18 (D.D.C.1999)).
A motion for sanctions stemming from discovery misconduct “depends exclusively on Rule 37, which addresses itself with particularity to the consequences of a failure to make discovery” and authorizes “any order which is just.” Societe Internationale Pour Participations Industrielles et Commerciales, S. v. Rogers, 357 U.S. 197, 207, 78 S.Ct. 1087, 2 L.Ed.2d 1255 (1958). In other words, the Court may sanction a party pursuant to Rule 37 for discovery violations; however, these sanctions are limited to circumstances in which a party violates a court order or discovery ruling. Brandt v. Vulcan, Inc., 30 F.3d 752, 756 n. 7 (7th Cir.1994) (noting however that courts have broadly interpreted “court order” for the purposes of sanctions). The Court's inherent authority, on the other hand, is based on the Court's power to manage and ensure the expeditious resolution of cases on their dockets and is not limited to discovery violations. Barnhill, 11 F.3d at 1367 (citing Link v. Wabash R.R. Co., 370 U.S. 626, 630-31, 82 S.Ct. 1386, 8 L.Ed.2d 734 (1962)). Rather, the Court's inherent powers are those “ ‘which a judge must have and exercise in protecting the due and orderly administration of justice and in maintaining the authority and dignity of the court....” ’ Roadway Express, Inc. v. Piper, 447 U.S. 752, 764, 100 S.Ct. 2455, 65 L.Ed.2d 488 (1980) (quoting Cooke v. U.S., 267 U.S. 517, 539, 45 S.Ct. 390, 69 L.Ed. 767 (1925)).
The underlying policy for sanctions are to: 1) eliminate the prejudice to an innocent party; 2) punish the offending party; and 3) to deter future misconduct. See
Nat'l Hockey League v. Metro. Hockey Club, Inc., 427 U.S. 639, 643, 96 S.Ct. 2778, 49 L.Ed.2d 747 (1976) (noting the punitive and deterrent purposes of sanctions); Marracco v. General Motors Corp., 966 F.2d 220, 224 (7th Cir.1992) (noting a compensatory purpose). To further those policies, under Federal Rule 37, the Court may impose fines, jury instructions adverse to the offending side, or the severe measure of dismissal with prejudice (or default judgment) if the circumstances so warrant. See
Roadway Express, 447 U.S. at 765; Marracco,
966 F.2d at 225. However, the Seventh Circuit recognizes that, with regard to the Court's inherent authority, “[t]he rules do not state the limits of judicial power ... [j]udges retain authority, long predating the Rules of Civil Procedure.” Langley v. Union Elec. Co., 107 F.3d 510, 514n.4 (7th Cir.1997).
*9 Thus, when weighing sanctions in response to a party's misconduct, the Court has broad discretion to fashion an appropriate sanction. See
Nat'l Hockey League, 427 U.S. at 642-43; Barnhill, 11 F.3d at 1367. However, the Seventh Circuit has mandated that sanctions be proportionate with the circumstances surrounding the failure to comply with discovery orders. Barnhill, 11 F.3d at 1367. Also, when selecting the powerful option of terminating the underlying action in favor of one party, the court must use a certain measure of restraint, though a court is not required to “fire a warning shot” before imposing stiff sanctions. Hall Commodity Cycles Mgmt. Co. v. Kirsch, 825 F.2d 1136, 1139 (7th Cir.1987); Barnhill, 11 F.3d at 1367. Because dismissal is “considered ‘draconian’ [the Court] must be ‘vigilant’ in [its] review.” Maynard v. Nygren, 332 F.3d 462, 467 (7th Cir.2003) (quoting Marrocco, 966 F.2d at 223-24). The Seventh Circuit has held that a Court can impose the severe sanction of default judgment or dismissal with prejudice only if the offending party's conduct evinces willfulness, bad faith, or fault. Marrocco, 966 F.2d at 224.
However, a party need not suffer actual prejudice as the result of another party's misconduct to merit a default judgment; some types of misconduct evince such flagrant contempt that to allow the offending party's use of the judicial system for its benefit would challenge the system's integrity. See e.g.
Pyramid Energy, Ltd. v. Heyl & Patterson, Inc., 869 F.2d 1058, 1062 (7th Cir.1989) (holding that a trial court is entitled to say “enough is enough” and dismiss a claim absent actual prejudice to the non-offending party). Though, when weighing whether to level severe sanctions on a party, a court nevertheless must weigh “what effect-if any-the challenged conduct has had on the course of the litigation.” Barnhill, 11 F.3d at 1368.
The quantum of proof required for specific sanctions varies depending on the severity of the sanction. For the most-severe sanction, default judgment or dismissal with prejudice, and for punitive monetary sanctions, the Seventh Circuit has required “clear and convincing” evidence. See
Maynard v. Nygren, 332 F.3d 462, 468-69 (7th Cir.2003) (analyzing different legal standards with regard to sanctions under the Federal Rules or the Court's inherent authority in upholding monetary sanctions against an offending party); Shepherd,
62 F.3d at 1478 (noting that monetary sanctions, while neither terminating a case or preventing prejudiced proceedings, require the higher “clear and convincing” standard in other circuits because they are “fundamentally penal”). However, an “issue-related” sanction, which reduces prejudice to the non-offending party, requires only a “preponderance of the evidence.” Danis, 2000 WL 1694325 at *34n.22 (discussing Shepherd v. Am. Broad. Companies, Inc., 62 F.3d 1469, 1472, 1477 (D.D.C.1995)). The higher threshold for default judgment or dismissal with prejudice stems from the underlying policy that cases be decided on the merits, not on procedural or discovery violations. Id.
“Issue-related” sanctions, on the other hand, promote the hearing of cases on the merits free from any prejudice resulting from pretrial conduct. Barnhill, 11 F.3d at 1367.
B. SANCTIONS FOR SPOLIATION OF EVIDENCE
*10 The Court's decision to impose sanctions from failure to produce or preserve documents is guided by whether: 1) Bank One had a duty to preserve the specific documents and when that duty arose; 2) Bank One breached that duty or obligation to preserve or produce documents; 3) the culpability for any breach rises to the level of willfulness, bad faith or fault on the part of Bank One; 4) the Plaintiffs' underlying complaint suffered prejudice as a result of Bank One's breach, and; 5) an appropriate sanction can ameliorate the prejudice from the breach. See
Danis v. USN Comm., Inc., 2000 WL 1694325 at *35 (N.D.Ill. Oct.23, 2000). For the reasons stated below, the Court finds by a preponderance of the evidence:
that Bank One had a duty to preserve several categories of documents the Plaintiffs have justifiably requested and that duty arose at least as early as April 6, 2000.
that Bank One breached that duty to preserve.
that the breach was not the result of willful document destruction or bad faith, but rather ineffective preservation policies, which rise to the level of fault.
that the Plaintiffs will suffer prejudice as a result of the Bank One's breach of their discovery/preservation duties.
that the prejudice suffered by Plaintiffs can be remedied without imposing the “draconian” sanction of a default judgment. Marrocco, 966 F.2d at 223. The Plaintiffs' prejudice can be remedied by disallowing Bank One from cross-examining Dr. Hitzig's estimate of the correct remediation amount stemming from FUSA's billing problems and by instructing the jury regarding this sanction.
1. Bank One Had A Duty To Preserve Documents Starting on April 6, 2000
A party's duty to preserve specific types of documents does not arise unless the party controlling the documents has notice of those documents' relevance. Cohn v. Taco Bell Corp., 1995 WL 519968 at *5 (N.D.Ill. August 30, 1995) (citing Turner v. Hudson Transit Lines, Inc., 142 F.R.D. 68, 72-73 (S.D.N.Y.1991)). Notice of the specific documents' relevance most often stems from a discovery request or a party's complaint. Id.
at *5; see also
Danis, 2000 WL 1694325 at *29. In Danis,
the court held that a party had notice from a complaint that underlying sales data, which the non-offending party later requested in discovery but did not implicate in the initial complaint, was materially relevant to the case and should not have been destroyed. Id.
Even prior to a complaint, however, a party may have a duty to preserve documents when it has notice of pending litigation or that litigation is likely to commence. Id.
Corporations subject to lawsuits stemming from securities infractions have a duty to preserve documents pursuant to both the Federal Rules as well as the Public Securities Litigation Reform Act (“PSLRA”). Under PSLRA, this duty is to preserve a number of the categories of documents that Plaintiffs claim have been destroyed in this case. See
15 U.S.C. § 78u-4(b)(3)(C).
Under the Federal Rules, parties to any litigation have the duty to preserve documents commensurate with the scope of discovery allowed under Fed . R.Civ.P. 26.
*11 The duty to preserve potentially discoverable information does not require a party to keep every scrap of paper. Danis, 2000 WL 1694325, at *32 (citing JAMES WM. MOORE, ET AL.,
MOORE'S FED. PRAC. S 37.120 (3d ed.1999)). Rather, a party is obligated to retain “any relevant evidence over which the nonpreserving entity had control and reasonably knew or could reasonably foresee was material to a potential legal action.” China Ocean, 1999 WL 966443 at *3. Furthermore, a corporation's duty to preserve documents in the face of pending litigation is not a passive obligation. See
Marrocco, 966 F.2d at 224-25; In re Prudential Ins. Co. of Am. Sales Practices Litig., 169 F.R.D. 598, 615 (D.N.J.1997).
In the instant case, the DCT started its calculations in December of 1999, thus creating the data and records Plaintiffs now seek. Bank One could have reasonably foreseen these documents' relevance as a result of the FUSA card member lawsuits on May 28, 1999 and the OCC's Notice on December 16, 1999. Thus, Bank One, at the very least, had a duty to preserve these documents after the filing of the Larson complaint on April 6, 2000. That complaint specifically alleged FUSA's violations of Regulation Z and the GAAP, challenged the veracity of Bank One's public merger disclosures, and alleged that those disclosures materially misrepresented FUSA's financial well-being. All of the DCT Team's underlying data and calculations are specifically relevant and therefore discoverable.
The Court finds that Bank One was on notice and had a duty to preserve the following documents: 1) the missing underlying data and calculations for the 540 of the Unknown Population estimate under the Pool Approach; 2) the unmitigated underlying data for the 16,450 samples of NPC from internal audits; 3) the complete underlying data for the one million “multipayments” 4) documents related to the Fix Engine, Events 29 and 29B, and 5) other miscellaneous drafts of relevant documents.
2. Bank One Breached Its Duty to Preserve Documents
As a large corporation, Bank One can only discharge its duty by: 1) creating a “comprehensive” document retention policy that will ensure that relevant documents are retained, In re Prudential, 169 F.R.D. at 615; and 2) disseminating that policy to its employees. Id.; See
Marrocco, 966 F.2d at 224-25 (holding that the defendants' failure to instruct their employees about the special care needed to preserve material evidence warranted a default judgment against them); Danis, 2000 WL 1694325 at *36. In Danis,
the court held that a party had breached its duty to preserve data because there was neither “specific criteria regarding what should be saved and what should not be saved related to the lawsuit” nor a “general dissemination in writing.” Danis, 2000 WL 1694325 at *37.
In addition, the document policy must contain enough specificity to the litigation, or scope, to ensure that relevant documents are preserved. See
Wiginton v. Ellis, 2003 WL 22439865 *5 (N.D.Ill. Oct.27, 2003). In Wiginton,
the offending party continued normal electronic document retention and destruction policies after the onset of litigation and warned employees not to destroy any documents relating directly to the plaintiff. Id.
However, the defendant did not warn its employees to retain emails that might be “relevant” to the case. Id.
The court held that the defendant breached its duty to preserve documents because its retention policy lacked the appropriate scope for not instructing employees to retain “relevant” emails. Id.
Lastly, it is clear that “[a] party cannot destroy documents based solely on its own version of the proper scope” of its document retention responsibilities. Diersen v. Walker, 2003 WL 21317276 at *5 (N.D.Ill. June 6, 2003). Rather, a party can only narrow the scope of its document retention policies pursuant to court approval. Id.
*12 Bank One had notice that the categories of documents listed above were relevant; therefore, it had a duty to retain them. Bank One has not been able to produce these documents and the Court finds by a preponderance of the evidence that it has breached its duty to retain or preserve relevant documents for several reasons:
Bank One did not have a “comprehensive” document retention policy in place during the Larson litigation. In re Prudential, 169 F.R.D. at 615. The document retention policies produced by Bank One (1997, early 2000 and the one mentioned in the DCT Team email in January of 2001) do not meet the level of a “comprehensive” policy. The ostensibly non-final and incomplete version of the Iron Mountain policy and the non-final status of the policy referred to in the DCT Team email suggest that they were not fully adopted or disseminated. Bank One's supplemental affidavits contain a complete and final document retention policy that Bank One claims existed throughout this time period. Mola Aff. 5,6; Whitecotton Aff., App. A. However, even if that policy was in place, it has several flaws: 1) numerous pages are dated “5/01/2000” which is clearly after the filing of the Larson
complaint; 2) numerous pages are labeled “proposed”; and 3) the policy does not provide any specific guidance for the DCT or any other department regarding the Larson
litigation. Furthermore, that it took ten months, from April 6, 2000 when Plaintiffs filed the Larson
complaint until January 7, 2001, for Bank One to tailor a policy for the Larson
litigation strongly suggests that the DCT and other teams followed no comprehensive policy for the first year of this litigation.
Bank One argues that: 1) the data it has produced is sufficient for the Plaintiffs to make out their case; and 2) further information on any of the above-listed categories of documents will not help Plaintiffs prosecute their case. However, both arguments ignore the fact that Bank One had no right to limit the scope of its document retention policies at will. See
Diersen, 2003 WL 21317276, at *5.
the record contains scant evidence that any of the above policies were properly disseminated to Bank One employees. Several Bank One employees testified that they did not know the missing categories of documents should be retained; for example, in the deposition of Mark Torkos, he testified that the DCT Team preserved documents related to the OCC's Notice of Deficiency, but “not with regard to any pending litigation.” PX 12 9/30/03 at 204:20-23. Bank One's supplemental affidavits affirm that the policy was not disseminated to each employee. Mola Aff. 6. Rather, the policy was kept in electronic form and members of Bank One's Records Review Committee “were asked to inform the employees in their line of business as to the new policy and its location.” Id.
Thus, Bank One's upper management made “no general dissemination in writing to all employees of the need to preserve documents” relating to this litigation. See
Danis, 2000 WL 1694325 at *36. Nor did Bank One take any steps to ensure that employees read the electronic version of the policy or that they followed it. Id.
*13 Thus, the Court concludes that Bank One breached its duty to preserve documents by failing to establish a comprehensive document retention policy with the appropriate scope and to by failing to properly disseminate the policy to its employees.
3. Bank One's Breach Rises to the Level of Fault, But Not Willfulness or Bad Faith
As stated above, the Court can only impose severe sanctions (such as a default judgment or dismissal with prejudice) in the event that the offending party's conduct evinced willfulness, bad faith, or fault. See
Nat'l Hockey League, 427 U.S. at 640. The court in Marrocco
examined the difference between willfulness, bad faith and fault:
These three measures of culpability are each wholly distinct from one another. “Bad faith,” for instance, is characterized by conduct which is either intentional or in reckless disregard of a party's obligations to comply with a court order. “Fault,” by contrast, doesn't speak to the non-complying party's disposition at all, but rather only describes the reasonableness of the conduct-or lack thereof-which eventually culminated in the violation.
966 F.2d at 224. Under this reasoning, a court can impose severe sanctions depending on the offending party's subjective state of mind (for willfulness or bad faith) or how the objective “reasonable person” would view their conduct (fault). See e.g.
Long v. Steepro, 213 F.3d 983, 987 (7th Cir.2000). In Morrocco,
the court held that the defendant's conduct, failing to preserve key evidence by packaging it poorly, fell under the “fault” category because it “reflected extraordinarily poor judgment” and “gross negligence.” Marrocco, 966 F.2d at 224. Additionally, the court gave particular weight to the offending party standing idly by for months before it attempted to investigate the lost evidence, and waited longer still before informing their opponents that key evidence was missing. Id.
Here, Bank One's conduct evinces fault, but not willful destruction of documents or bad faith. The destruction or loss of several categories of documents reflects “extraordinarily poor judgment” and the failure to create and disseminate an ample document retention policy evinces “gross negligence” of Bank One's duties to preserve documents in the face of the Larson litigation. Id.
However, there is no evidence that Bank One willfully destroyed any documents.
4. The Plaintiffs Will Suffer Substantive Prejudice by Bank One's Breach
The Court is not required to examine the prejudice to the Plaintiffs' claim, but the Seventh Circuit has implied that, though prejudice is not an element to imposing sanctions, the Court should consider the prejudice to the non-offending party's claim. See, e.g.
Marrocco, 966 F.2d at 225; Barnhill, 11 F.3d at 1368.
To suffer substantive prejudice due to spoliation of evidence, the lost evidence must prevent the aggrieved party the use of an essential or “crucial” piece of evidence to their underlying claim. Langley by Langley v. Union Elec. Co., 107 F.3d 510, 515 (7th Cir.1997) (“That the sanction resulted in summary judgment for the defense is the natural consequence of plaintiff's first blunder, losing a potentially crucial piece of evidence, and second stumble, failing to contain the damage through expert testimony.”). In several cases involving spoliation of evidence as a result of fault, courts have used prejudice as a “balancing tool” to tip the scales in favor of or away from severe sanctions. Danis, 2000 WL 1694325 at *34. For example, in China Ocean,
the court dismissed the plaintiff's case because it failed to preserve physical evidence crucial to the defendants' defenses. 1999 WL 966443 at *4. In contrast, in Danis
the court declined to enter a default judgment because some underlying data had been destroyed in its “best” form, but a lot of documents had been produced and some of the evidence was ultimately available in other forms. 2000 WL 1694325 at *42-43.
*14 A party has the right to prosecute its case in the way it deems fit based on all available relevant evidence. See
Hickman v. Taylor, 329 U.S. 495, 507, 67 S.Ct. 385, 91 L.Ed. 451 (1947) (stating “[m]utual knowledge of all the relevant facts ... is essential to proper litigation.”); see also
Fed.R.Civ.P 26 Advisory Notes of 1983 Am. (stating that parties should have all “discovery that is reasonably necessary to afford a fair opportunity to develop and prepare the case”). With those principles in mind, destroying or blindly allowing lower employees to destroy evidence that is crucial to one side's chosen theory, but not to the other side's theory, is rife with material prejudice.
In this case, the Court views any prejudice to the Plaintiffs as it relates to the elements of their underlying claim.
Plaintiffs' expert Dr. Hitzig claims that without the underlying data and calculations (for the several categories of the documents above) he cannot precisely estimate how much Old Bane One/FCN overstated the financial condition of FUSA in its merger proxy/prospectus. Hitzig Aff. 9-13. Without an appropriate estimate by Dr. Hitzig, the Plaintiffs' case is substantively prejudiced with regard to the determination whether Bank One materially misstated FUSA's financial well-being. Armed with the underlying data and calculations and other missing documents, Plaintiffs' chosen theory of the case would suffer no prejudice. Unfortunately, those documents are inexplicably gone forever and the Plaintiffs must conduct their case without that “crucial” data. Langley, 107 F.3d at 515.
Bank One's expert, Dr. Barnett, argues that Plaintiffs, in fact, have ample data to conduct their own accurate analysis and challenge the materiality of Bank One's financial statements. Barnett Aff. at 17-21. The Court finds this argument unpersuasive because parties must be allowed to prosecute a case based on their chosen theory in light of all relevant evidence. See
Hickman, 329 U.S. at 507. Thus, the Court findsthat Plaintiffs' case has been substantively prejudiced.
5. Prejudice Suffered by the Plaintiffs can be Remedied Without Default Judgment. As a Result, Bank One is Prevented From Challenging Plaintiffs' Expert Hitzig's Remediation Estimates at Trial
The Court concludes that lesser sanctions can level the playing field by ameliorating any prejudice Plaintiffs would suffer, thus complying with the requirement that a sanction be proportionate to the discovery violation. Langley, 107 F.3d at 515. In the Seventh Circuit, courts must consider lesser sanctions before imposing the “draconian” sanction of a default judgment. Marrocco, 966 F.2d at 223-24 (“A dismissal with prejudice is a harsh sanction which should usually be employed only in extreme situations, where there is a clear record of delay or contumacious conduct,
or when other less drastic sanctions have proven unavailable.”). Default judgment also prevents a case from being decided on the merits, which goes against a policy to which the Court adheres. Thus, this Court finds that entering a default judgment is not warranted in this case.
*15 However, in order to remedy the prejudice Plaintiffs have suffered, the Court will use its broad discretion to choose an appropriate sanction given the unique factual circumstances of this dispute. See
Roadway Express, 447 U.S. at 764-65. To that end, this Court recommends that Bank One be prevented from challenging Dr. Hitzig's remediation amount estimates during cross-examination and from claiming that Dr. Hitzig's analysis is based upon incomplete information. The jury shall be instructed as to this limitation and the reason for its existence. Such an instruction will both remedy prejudice to Plaintiffs and allow the case to be decided on the merits.
Additionally, under Rule 37(b), the Court may force a party that engages in discovery misconduct to pay the non-offending side's attorney's fees unless the Court finds the offending party's actions “substantively justified or that other circumstances make an award of expenses unjust.” Fed.R.Civ.P. 37(b).
To award Plaintiffs with attorney's fees, the sanction must meet three policy considerations: 1) prevent prejudice, 2) punish the offending party, and 3) deter future violations. See
Marrocco, 966 F.2d at 224; Nat'l Hockey League, 427 U.S. at 643. Here, Plaintiffs have established that Bank One breached its duty to preserve documents by not: 1) installing a comprehensive document retention policy; and 2)disseminating any specific retention policy to its employees regarding the Larson
In re Prudential, 169 F.R.D. at 615. Moreover, they have established that their case was substantively prejudiced as a result of Bank One's failure to preserve documents. Nevertheless, the Plaintiffs have not established that Bank One is guilty of willful misconduct or that Bank One acted in bad faith.
Under these circumstances, the Court sees no benefit to delaying this litigation any further in order to address the issue of attorney's fees at this time. Thus, the Court recommends that Plaintiffs' request for attorney's fees be denied without prejudice to being renewed at the end of the case. At that time, the parties and the Court will be in a better position to evaluate the impact of Bank One's failure to preserve the documents at issue.
For the foregoing reasons, the Court respectfully recommends that Plaintiffs' motion for sanctions be granted as follows:
1. The Court finds that Bank One has wrongfully spoiled documents, therefore prejudicing the Plaintiffs' claim.
2. To ameliorate that prejudice, the Court recommends that Bank One be precluded at trial from cross-examining Plaintiffs' financial expert, Dr. Hitzig, regarding his remediation estimates.
3. Further, the Court recommends that the jury be instructed as to this limitation and the reason for its existence.
4. The Court recommends that Plaintiffs' request for attorney's fees and costs be denied without prejudice to being raised at the conclusion of the case.
The background facts are taken primarily from previous decisions issued by District Court Judge Wayne R. Andersen in this and a related case. In his Memorandum Opinion and Order issued on November 6, 2000, Judge Andersen partially granted and partially denied Defendants' motion to dismiss. See
Evergreen Fund, Ltd. v. McCoy, 2000 WL 1693963 (N.D.Ill. Nov.6, 2000) (“Evergreen”
); see also
In re Old Banc One Shareholders, 2004 WL 1144043, (N.D.Ill. Apr 30, 2004) (partially granting and partially denying Defendants' motion for summary judgment).
Other supplemental background facts are also taken from the Plaintiffs' Motion for Sanctions Due to Spoilation of Evidence (“P. Mot __”), from exhibits attached to the Affidavit of Robin F. Zwerling in Support of Plaintiffs' Motion for Sanctions Due to Spoilation of Evidence (“PX __”), from the Defendant's Response to Plaintiffs' Motion for Sanctions Due to Spoilation of Evidence (“D.Resp.__”), and from exhibits attached in the appendix to the response (“DX __”).
15 U.S.C. § 77(1)(a) reads:
(1) offers or sells a security in violation of section 77e of this title, or
(2) offers or sells a security (whether or not exempted by the provisions of section 77c of this title, other than paragraphs (2) and (14) of subsection (a) of said section), by the use of any means or instruments of transportation or communication in interstate commerce or of the mails, by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading (the purchaser not knowing of such untruth or omission), and who shall not sustain the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of such untruth or omission, shall be liable, subject to subsection (b) of this section, to the person purchasing such security from him, who may sue either at law or in equity in any court of competent jurisdiction, to recover the consideration paid for such security with interest thereon, less the amount of any income received thereon, upon the tender of such security, or for damages if he no longer owns the security.
In an action described in subsection (a)(2) of this section, if the person who offered or sold such security proves that any portion or all of the amount recoverable under subsection (a)(2) of this section represents other than the depreciation in value of the subject security resulting from such part of the prospectus or oral communication, with respect to which the liability of that person is asserted, not being true or omitting to state a material fact required to be stated therein or necessary to make the statement not misleading, then such portion or amount, as the case may be, shall not be recoverable.
At a hearing held on June 14, 2005, this Court allowed Bank One to submit additional affidavits in order to clarify what retention policies were in effect at what times. Bank One subsequently submitted affidavits from Brian Bailey, Donna Barrett, John McLeod, Frank Mola, and Theresa Whitecotton. In a motion filed on July 1, 2005, Plaintiffs objected to these supplemental affidavits on three grounds: 1) lack of personal knowledge, 2) hearsay, and 3) irrelevancy. This motion is denied; the Court has given these four affidavits the weight that it deems appropriate.
Bank One supplemented its initial brief with several affidavits relating to its document retention policies, one of which claims that Iron Mountain inadvertently destroyed approximately 1400 boxes of Bank One documents after Plaintiffs filed their complaint. McLeod Aff. at 6,7. However, none of the DCT documents could have been in those 1400 boxes based on another of the supplemental affidavits stating that none of the DCT records were kept at the locations where those boxes were destroyed. Baily Aff. at 2.
Rule 37(b)(2) states:
If a party ... fails to obey an order to provide ... discovery. ., the court in which the action is pending may make such orders in regard to the failure as are just, and among others the following: (A) An order that the matters ... or other designated facts shall be taken to be established for the purposes of the action in accordance with the claim of the party obtaining the order; (B) An order refusing to allow the disobedient party to support or oppose designated claims or defenses, or prohibiting the party from introducing designated matters in evidence; (C) ... rendering a judgment by default against the disobedient party....
The PSLRA requires that: “During the pendency of any stay of discovery pursuant to this paragraph, unless otherwise ordered by the court, any party to the action ... shall treat all documents, data compilations (including electronically recorded or stored data) ... as if they were the subject of a continuing request for production of documents from an opposing party.”
Rule 26(b) 1 states that: “Parties may obtain discovery regarding any matter, not privileged, that is relevant to the claim or defense of any party,” and that “[r]elevant information need not be admissible at trial if the discovery appears reasonably calculated to lead to the discovery of admissible evidence.”
The In re Prudential
Court held that “[i]t was incumbent on senior management to advise its employees on the pending ... litigation” and to go so far as “to provide them with a copy of the Court's [discovery] order, and to acquaint its employees with the potential sanctions” for violating that order. 169 F.R.D. at 615. The Court further stated that “[w]hen senior management fails to establish and distribute a comprehensive document retention policy, it cannot shield itself from responsibility because of [its underlying employees] actions. The obligation to preserve documents that are potentially discoverable materials is an affirmative one that rests squarely on the shoulders of senior corporate officers.” Id.
Plaintiffs' claim stems from 15 U.S.C. § 771, which reads: “Any person who ... offers or sells a security by ... any means ... of transportation or communication in interstate commerce or of the mails, by means of a prospectus, which includes an untrue statement of a material
fact or omits to state a material fact necessary in order to make the statements ... shall be liable, subject to [a loss causation analysis], to the person purchasing such security from him.” 15 U.S.C. S 771 (emphasis added).
Rule 37(b) allows the to court to “require the party failing to obey the order or the attorney advising the party or both to pay the reasonable expenses including attorney's fees, caused by the failure, unless the court finds that the failure was substantially justified or that other circumstances make an award of expenses unjust.”
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