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The Volkswagen AG Case

Tuesday, February 14, 2017   (0 Comments)
Posted by: Mary Mack
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The Volkswagen AG case, with its $4.3 billion in civil and criminal fines outside of the $15 billion in settlement, shines a bright light on “anticipation of litigation or investigation” trigger and how to ruin a perfectly good legal hold.

We will begin our live webinar on how to ruin a perfectly good legal hold with a brief discussion of the Volkswagen AG case (register here). A more comprehensive discussion of the case and the plea agreement in contrast to the Arthur Andersen case and the civil sanctions available for spoliation in 2015's FRCP 37 (e) follow.

The case, USA v Volkswagen AG, No. 16-CR-20394 January 11, 2017 Plea agreement lays out the behavior and communications of an as of yet anonymous attorney (Attorney A) and various unnamed supervisors around the data and documents at issue.

Volkswagen AG faced a firing squad of DOJ sharpshooters:

  • Fraud Section, Criminal Division
  • Securities and Financial Fraud Unit
  • Environment and Natural Resources Division
  • White Collar Crime Unit
  • US Attorney, ED Michigan

Volkswagen AG was defended by the best and brightest

  • Steptoe and Johnson
  •  Freshfields
  • Sullivan and Cromwell

Chronology
The chronology of events and communications that resulted in document destruction includes:

  • Aug 27 Attorney A communicates that a hold is imminent, “Check documents.”
  • Aug 31 Meeting—Forthcoming hold, imminent hold, check documents
  • Sept 1 The actual Hold is issued.
  • Sept 1 VW AG calls Company A, asks for docs to be deleted
  • Sept 3 Supervisor D gives Supervisor A a hard drive, asked assistant to throw it awaySept 15 Attorney A asked what to do about new docs.  Attorney A advises to keep new documents on a USB (an external device) and only put the final documents on VW AG’s system, and then, only if “necessary’.  Documents on the system would be replicated, backed up and kept in the normal course of business.  A USB is portable, not backed up.

If this case were to come to trial, much would be made over the instruction to “check documents.”  Does that mean to check them for harm to the organization and then destroy them, or to check them and hold them in check?  As it is, the organization remediated by doing the following:

  • Self disclosure that data had been destroyed
  • Recover as much as possible of what has been lost. Using forensics, many deleted files were recovered
  • Demonstrating that the organization should not be penalized for employee conduct. Termination (6), Suspension (8), Disciplining (3)
  • The company agreed to huge fine ($2.8B)
  • The company agreed to no reimbursement, indemnity
  • The company agreed to comprehensive monitoring.

The Volkswagen case has some mitigating factors that many multinationals face:

  • Different legal systems (Germany v US)
  • Different languages (check documents)
  • Different discovery obligations
  • Different privilege (in house qualified German attorney)

However, there are factors where organizations can determine that an elevated process around preservation and legal hold should apply:

  • It was a bet the company case.  Volkswagen’s integrity, and brand were at risk, as was its revenue stream from being able to sell and market cars.
  • The charges would likely include personal criminal liability for managers, executives and engineers. Even without a bet the company case and potential criminal liability, issues can arise when there are different interpretations of words, when there are verbal and not written instructions and when there is time between an "informal notice" and a formal notice of a hold.
  • Elapsed time between verbal notice of hold and written hold
  • Verbal discussions

Obstruction of Justice v Terminating Sanctions
The VW case included both criminal and civil elements, and the criminal elements were a focus of the plea agreement regarding obstruction of justice.  We will focus on the potential impact of civil sanctions later.

Obstruction of Justice
The statute, amended after Andersen requires intent, and a guilty mind.  See the full statute here

  • The criminal statute focuses on acting with knowledge and acting corruptly with intent to impair the record....
  • Altered…or concealed a record or document or other object
  • Acted knowingly
  • Acted corruptly and
  • Acted with intent to impair the record, document or object’s integrity or availability for use in an official proceeding

Terminating Sanctions

On the other hand, for the most severe penalties under 2015 FRCP 37(e), many questions need to be answered in the affirmative before the inquiry about prejudice to the other party and intent are raised.

  • For example, there must be a loss of ESI. The ESI should have been preserved. [These two questions likely to be answered as Yes]
  • The lost ESI that should have been preserved cannot be recovered or replaced [in VW's remediation, forensics recovered a great deal of it, so the inquiry might stop here]
  • The Party failed to take reasonable steps to preserve it. [verbal warnings to check before an imminent hold might be deemed not reasonable]
  • Prejudice to other party [forensics recovered a lot, was the other side prejudiced?  If not, stop here]
  • Intent to deprive [the USB instruction would indicate an intent to sequester documents from the normal storage, perhaps to circumvent a preservation or collection.]

The 2015 amendment to FRCP 37(e) was designed to allow organizations some mistakes in their process, and curative measures rather than terminating sanctions.  After this analysis, it would seem the drafters met their goal.

Andersen Revisited
The obstruction of justice charge and conviction resulted in Arthur Andersen's demise as a company.  It would be helpful to look at the conduct the US Supreme Court spelled out as necessary to convict, even after Andersen was no longer a going concern and the damage was done.

As Enron Corporation’s financial difficulties became public in 2001, Arthur Andersen LLP, Enron’s auditor, instructed its employees to destroy documents pursuant to its document retention policy.  After a call discussing a potential investigation, Duncan, an Andersen official, met with other Andersen partners on the Enron engagement team and told them that they should ensure team members were complying with the document policy. Another meeting for all team members followed, during which Duncan distributed the policy and told everyone to comply. These, and other smaller meetings, were followed by substantial destruction of paper and electronic documents.  Document destruction continued.

On November 8, the SEC served Enron and Andersen with subpoenas for records. On November 9, Duncan’s secretary sent an e-mail that stated: “Per Dave—No more shredding…. We have been officially served for our documents.”

Andersen was charged under 18 U.S.C.§ 1512(b)(2)(A) and (B), which made it a crime to "knowingly ... corruptly persuad[e] another person ... with intent to ... cause" that person to "withhold" documents from, or "alter" documents for use in, an "official proceeding".  At issue were the jury instructions.

In the court's view, the instructions allowed the jury to convict Andersen without proving that the firm knew it had broken the law or that there had been a link to any official proceeding that prohibited the destruction of documents. The instructions were so vague that they "simply failed to convey the requisite consciousness of wrongdoing", Rehnquist wrote.  Arthur Andersen, LLP v. United States, 544 U.S. 696 (2005).

The court wanted to stick with the double intent standard—to knowingly and corruptly withhold documents.  The instructions given were to “subvert, undermine, or impede” the governmental fact-finding.  The court also was looking for a “nexus” between the obstructive act and the proceeding.

Andersen applied to VW

While a nexus can be drawn to an investigation, it might be more difficult to make the case that "check documents" because a hold was imminent was enough for knowing the documents would be destroyed, or corruptly withheld without more.  However, calling the third-party partner company and instructing them to delete documents after the official hold, and the instruction not to put newly created documents in the system of record, and keep them to the side on a USB could cut toward both knowledge and a guilty mind.


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