Quattrone Conviction Shows Why Effective Records Retention Policy Is A Must

On May 4, investment banker Frank Quattrone was convicted of obstructing a grand jury investigation, obstructing SEC investigators and witness tampering. The charges carry a maximum sentence of 20 years imprisonment and $500,000 in fines.

Quattrone’s crime? Forwarding an e-mail reminding subordinates of the company’s long-standing document retention policy with a note reading, "having been a key witness in a securities litigation case in south texas (miniscribe) i strongly advise you to follow these procedures."

That comes close to a year of potential imprisonment in a Federal penitentiary per word. Quattrone’s mistake? Forwarding the reminder after (according to the jury) he had knowledge of a pending SEC investigation.

So how do you establish and enforce an effective record retention policy? Borrowing the old punch line … carefully. Here are some points to consider.

Practice Tips

Decide what the company needs to preserve in the permanent file after a transaction closes to protect itself. The focus should be, "what documents do we need to retain?" not "what documents do we need to destroy?" Meet with your clients, and invest them in the process. And don’t create your policy during times of crisis. Do it when the ship is sailing on smooth waters. Then publish the policy…and keep publishing it on a periodic basis.

Create a separate section of the policy that covers what e-mail the company expects should be part of the permanent record. The rest should be deleted on a specified rolling basis, whether monthly, quarterly or upon completion of the project. There is no reason for any company to be storing millions of aging e-mails. It takes up expensive disk space, it lengthens the back-up process, and it is a treasure trove of discovery for aggressive counsel.

Roll out the policy with an explanation on how to apply it in each department. HR’s legal record retention obligations are different than the sales or finance organizations. And if a client asks for a copy of the policy down the road without explanation, follow up with a call to ask what prompted the interest, because it’s a safe bet that someone is troubled by something.

Make sure that employees understand that the policy applies, not just to what’s resident on system servers, but to their office laptops, PC hard drives and home office computers as well. Remind them that they might be obligated to produce documents from those machines at a later date.

Make sure that employees understand what the delete button does on their computer. It frees the disk space for overwriting as needed. It does NOT delete the document. Any good counsel now knows how to recover deleted files on a hard drive and how to design key word searches for archive tapes.

The message is this: Don’t write it if you don’t want to explain it in a courtroom down the road. That includes writing memos that purport to give the writer’s view of legal issues and exposures. If a client wants to address those topics, have him or her make an appointment with you.

Procedures Leader

One person from the legal department needs to take ownership of overseeing the actual process, and they should confirm to you that it is being observed on a periodic basis. That includes what steps they have taken to ensure compliance. Once a deal or development project completes, ask the compliance coordinator to meet with managers to oversee the creation of the permanent file.

To the extent possible, keep the permanent file in one location. Once collected, remind people that there is no reason for them to be maintaining a separate project file. If they want an exception, ask them to explain what the file consists of.

Speak with your information systems (IS) department to understand how e-mail and other user files are backed up, and the tape rotation schedule that is in place. Ask to be informed in advance of any changes to the process.

Immediately instruct clients to preserve any potentially relevant files (including e-mail) if it is reasonably likely that a claim may be made on a given transaction. Do it in writing, and follow up by asking key clients to confirm that they have received your message. That includes an instruction to the IS Department to preserve all relevant backup tapes. The alternative is a negative inference charge arising out of a spoliation claim, or, as in the Quattrone case, worse.

If your company is subpoenaed, make sure the deponent is well schooled in your network configuration and document retention policies. He or she should be able to answer questions about what exists and what doesn’t, and why.

Finally, make sure your retention policy conforms to Sarbanes-Oxley (particularly Sections 1102 and 802), the Tax Code, OSHA and for organizations with over 200 employees, read Chapter 8 of the federal Sentencing Guidelines concerning "effective" compliance plans to prevent and detect criminal conduct. When in doubt, ask your outside counsel for advice.

The goal of a good document retention policy is systemization. You want an in-house process that treats all of the company’s files the same way. That avoids the appearance that a particular project file has been culled other than in the ordinary course.

It is much easier to explain a systematic document retention program to a judge or a jury if it treats all company files the same way and at the same time relative to the conclusion of a given project.

Frank Quattrone’s mistake was speaking at the wrong time. By encouraging compliance with his company’s document retention program when he did, Quattrone opened himself up to an intent crime, i.e., what did Quattrone know about possible investigations when he uttered the words, and why did he utter them?

Your clients need to understand that timely and systematic adherence to a standardized document retention program is intended to protect them, not just the company.

Dan Lyne is a shareholder at Hanify & King. His practice includes commercial business disputes involving mergers and acquisitions, breaches of financial representations and warranties, professional malpractice, and general contract litigation. He also handles intellectual property disputes, including technology development, licensing, and patent royalty and software copyright disputes. He can be contacted at 617-226-3463 or [email protected]. For more information about Hanify & King, visit www.hanify.com.