The SEC and E-Discovery


The SEC and E-Discovery

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By Guest Authors,, Sponsored by Fios, Inc.

Recent years have seen dramatic shifts in the Securities and Exchange Commission’s approach to enforcement actions with respect to e-discovery. Beginning with its 2001 Seaboard Report, the SEC has heavily emphasized the importance of cooperation in investigations while simultaneously underscoring the perils of being perceived as uncooperative.

In 2004, Stephen Cutler, the SEC’s Director of Enforcement at the time, noted that the SEC “seeks to recognize, in its charging and sanctioning decisions (and in its decisions not to charge and not to sanction), efforts by companies to police themselves, report problems to the government and establish a solid culture of compliance.”[1] More recently, the SEC has begun utilizing cooperation credits and deferred prosecution agreements as incentives, both of which historically have been limited to criminal prosecutions. If these carrots aren’t sufficient, the SEC also wields a number of powerful sticks, including the threat of obstruction charges and the risk of SEC action against attorneys themselves.

A recent decision highlights the federal government’s interest in driving its own specifications for production. On February 3, 2011, in the case of National Day Laborer Organizing Network v. United States Immigration and Customs Enforcement Agency, Judge Shira A. Scheindlin entered an order resolving the parties’ dispute regarding the defendants’ form of production to the federal government. In particular, Judge Scheindlin required the defendants to reproduce previously produced spreadsheets in native format and previously produced text records in “static image file format together with their attachments.” Judge Scheindlin also required that all future productions be Bates-numbered and produced in TIFF format, with accompanying load files containing specified metadata fields and spreadsheets being produced in native format. These production standards track many of those used by the SEC.

Against the backdrop of this decision and the SEC’s own explicit push for greater cooperation , it stands to reason that counsel must be particularly careful when addressing e-discovery issues with the SEC, as mistakes can affect the regulators’ perception of whether one is cooperating, or, in a worst-case scenario, is actively trying to hinder an investigation. Thankfully, counsel need not act in a vacuum, as the SEC’s Enforcement Manual includes e-discovery standards. The SEC also has issued Data Delivery Standards that further outline its technical requirements for e-discovery. In recent matters before the SEC, it has been our experience that the agency’s default policy is to ask for complete compliance with the Data Delivery Standards. However, we have found the SEC’s personnel willing to engage in dialogue regarding alternative options and limitations on production capabilities. It’s also encouraging to realize that the SEC’s technical requirements are not particularly unusual, although they do contain some specific requirements that may vary from what one sees in traditional e-discovery.

The SEC’s more noteworthy requirements include the following:

Review Platform. The SEC staff uses Concordance 9.58 and Concordance Image 4.53 to review electronically stored information (ESI). Accordingly, all ESI productions must be compatible with these systems unless they fall into one of the alternative types as listed in the Data Delivery Standards: audio or video files, electronic trade and bank records, and electronic phone records.

Form of Production. ESI can be delivered in three formats: (1) scanned collections in Concordance, (2) e-mail or (3) native files. With the exception of spreadsheets, all of these files should be converted to TIFF files and include fully searchable text. As has become common in e-discovery, spreadsheets should be produced in the native format with a placeholder TIFF image. Emails and native file collections should include linked native files – in other words, the reviewer should be able to toggle back and forth between the TIFF and native file versions of electronic documents. SEC staff might not accept ESI produced in different formats. Email productions should be loaded into a central database and then converted into a searchable format that is compatible with Concordance. In particular, the SEC prefers that email productions be in delimited text with images and native attachments.

Scanned Collections. The SEC staff prefers to have all documents produced electronically, including paper or hard copy files. Each scanned file must include an image file, a delimited text file, optical character recognition text and an Opticon cross-reference file.

Metadata. The SEC expects producing parties to include a number of specified common metadata fields in a .DAT file. The Data Delivery Standards include 31 fields of metadata which should be provided in all productions.

Custodians. The SEC expects productions to be organized by custodian. Counsel should make sure everyone interprets this the same way. In particular, some agencies have interpreted similar requirements to mean that each custodian’s documents must be produced in their entirety before the next custodian’s documents can be produced. There are some common problems related to custodians that counsel should proactively discuss with the SEC, including how to handle documents with no custodian or documents that have multiple custodians. It has been our experience that the SEC generally requests only one copy of each document, which raises the question of which custodian that document should be produced under when a document has multiple custodians.

Preservation of ESI. The SEC will generally require the client to preserve all ESI pending the conclusion of the investigation, and sometimes the SEC staff will also collect copies of ESI for preservation. In some instances (e.g., when there is a risk that original media might be destroyed or when the producing party cannot be relied upon to produce all relevant data on a media source), they might obtain the original media source or a forensic copy of it. The Division of Enforcement’s IT staff has established specific procedures and guidelines for imaging data, which a producing party should follow.

Accounting Workpapers. The Enforcement Manual recognizes that accounting firms may raise concerns that producing workpapers and other forms of ESI in their proprietary software could raise intellectual property issues. In these situations, SEC staff may consider alternative approaches such as a web-based production or production on a dedicated laptop computer.

What does all this mean for an attorney responding to an SEC request for ESI? Aside from the usual admonitions about document production, an attorney would be well-served to take several measures to ensure the client’s compliance with the request/subpoena.

First, and most importantly, counsel should take immediate steps to preserve all potentially relevant electronic and paper files. There are many dedicated companies who specialize in the preservation of documents. Counsel should recommend a firm of good repute to their client.

Second, counsel should read the subpoena or voluntary document request carefully. Either the subpoena or request will include guidelines for ESI production or the SEC will provide the Data Delivery Standards that the production team will need to understand as it begins the process of responding.

Third, involve IT personnel from the beginning. While the universe of potential IT staff available to do the job will depend upon the circumstances, counsel may often need to involve the client’s IT department as well as an outside vendor. The Enforcement Manual and the Data Delivery Standards are sprinkled with references to consulting the Division of Enforcement’s IT staff. To avoid any misunderstandings, IT experts from both sides should try to work through any technical issues before the productions occur.

Fourth, discuss any open e-discovery issues with SEC staff as early as possible. Indeed, the Enforcement Manual contemplates that the producing party may try to “negotiate alternative delivery standards” for some types of evidence. For instance, the Enforcement Manual is silent on the subject of horizontal and vertical de-duplication. The Manual provides that “[i]f copies of a document differ in any way, they are to be treated as separate documents and the subpoenaed entity or individual must produce each copy.” Because this provision does not explicitly address ESI, counsel should consider discussing the various de-duplication alternatives early on with SEC staff and determine whether there should be a “custodian append file” to track which custodians have duplicates of produced documents. Similarly, the Manual is silent on the use of search terms to locate potentially responsive ESI. As with normal litigation, if counsel intends to use search terms to identify potentially relevant documents, they will have to negotiate the specifics of those terms and the other search parameters with the SEC staff. They should confirm any agreements arising from those discussions in writing so that there is no question later about what the client was supposed to do. In our experience, SEC personnel are willing to entertain a dialogue about the use of search terms, although they may request terms of greater breadth or custodians and date ranges where search terms are not appropriate.

Finally, read the certification of completeness of production that the SEC requires. Broadly speaking, this requires a person to certify under penalty of perjury that he or she has made a diligent search of all files in his or her possession, custody or control that are reasonably likely to contain responsive documents and that those documents have either been produced or identified in a privilege log. Producing entities have similar obligations. Counsel should develop a collection and production protocol that will meet these standards.

In short, while ESI production issues in SEC investigations may appear to involve many hidden land mines, careful and proactive counsel should be able to avoid them by paying careful attention to SEC-specific standards and protocols, and by working to resolve any potential issues surrounding forms of production as early as possible.

Guest Authors: Wallis Hampton, Counsel, Skadden, Arps, Slate, Meagher & Flom LLP & Affiliates; Elizabeth Russo, White Collar Crime Associate, Skadden, Arps; Canaan Himmelbaum, Account Executive, Fios Inc.

The views expressed in this article are those of the authors and do not necessarily reflect the views of Skadden, Arps, Slate, Meagher & Flom LLP & Affiliates, or of Fios, Inc.

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