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Landmark Ruling Brings SEC under the Microscope; Establishes Government is not immune from the FRCP

On January 13th, 2009, a ruling in the S.E.C. v. Collins & Aikman Corp was handed down in what is sure to become a landmark ruling. What makes this an important ruling?  Judge Shira A. Scheindlin ruled that the SEC had to abide by the Federal Rules of Civil Procedure (FRCP) just “like any other litigant.” This could have ramifications across government entities as the FRCP increasingly touches federal, state and local governments. It is already a well documented fact that the FRCP is changing how private industry manages its data but this ruling sets out numerous areas in which the SEC failed in its internal eDiscovery processes and rightly was held accountable.

The case originated from a claim of securities fraud by the SEC and called into question the SEC’s obligations in producing documents, and how the SEC failed to perform sufficient searches for the requested information.  The defendant’s made document requests in 54 separate categories, and the SEC produced 10.6 million pages.  The defendant objected and stated “the SEC failed to identify documents…supporting particular factual allegations and instead preferred to dump a huge volume of documents.” 

During the court proceedings the SEC contended they had fulfilled their discovery obligations by producing the millions of pages of documents as maintained in the usual course of business.  The court explained that when records do not result from “routine and repetitive” activity there is no incentive to organize them into a predictable system and stated the purpose of Rule 34 is to “facilitate production in a useful manner…thus it is reasonable to require litigants who do not create and/or maintain records in a routine and repetitive manner to organize the records in a usable fashion prior to producing them.”  The SEC had to produce 175 file folders that very well might affect their case strategy due to their original unorganized document dump.

Another very interesting part of this case is the SEC initially did not produce any email or attachments generated or received by the SEC.  This was due to the SEC’s failure to do an appropriate search.  The SEC argued that nearly all responsive emails would be privileged or subject to court’s non-disclosure order and that the search would be a costly and time consuming effort.  The court rejected the SEC’s blanket refusal to produce email without an attempt to negotiate search terms to eliminate privileged or irrelevant emails.  The parties were ordered to meet and attempt to negotiate search terms. 

The government learned is what private companies have known for some time: the FRCP is time consuming, expensive and the failure to properly manage the process can be devastating to a case. But, automating email eDiscovery process through products such as Estorian’s LookingGlass can eliminate problems such as what the SEC is facing.  As this case showed it is not acceptable to claim the process is too expensive or too time consuming.  Automating the process of producing only relevant email needed in an eDiscovery request through the use of LookingGlass can lower both the time and cost, as well as avoid negative inference from inadvertent or malicious destruction of vital documents.  

All too often government writes laws or regulation that increase cost and time burdens upon companies without thought as to how it will affect those who are not government.  But, the explosion of electronically stored information (ESI) crosses all boundaries whether it is a private company or government.  Now this ruling declares that the government must act like any ordinary litigant and comply with FRCP but it appears the government is woefully unprepared to respond to litigation requests originating from the FRCP. 

Now whether the agency is Federal, State, or Local Government, this ruling has showed they must be prepared to comply with eDiscovery standards or possibly face the same problems currently encountered by the SEC.  Government can learn much from the private sectors struggles with the FRCP but it appears of these hard lessons will be learned in the court and at taxpayer’s expense.



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