In DOUBLELINE CAPITAL v. ODEBRECHT FINANCE, No. 17-CV-4576 (S.D.N.Y. Mar. 30, 2021), a securities fraud lawsuit, Plaintiffs sought sanctions against Defendants, specifically, a mandatory adverse inference instruction at trial, as remedy for Defendants’ intentional destruction of encryption keys needed to access a “shadow” accounting system used by Defendants to track illicit bribery payments to government officials in Brazil and other countries.
In this case, there was no dispute between the parties that Defendants destroyed the encryption keys needed to access the shadow accounting system in or about January 2016 after investigations by US and Swiss authorities were known to Defendants. Thus, the only issues before the Court under Rule 37 were whether a duty of preservation attached before January 2016, whether Plaintiffs were prejudicated by the loss of the information, whether the lost ESI could not be restored or replaced through additional discovery, and whether Defendants acted with intent to deprive Plaintiffs of the information’s use in this litigation.
On the issue of when the duty to preserve first arose, while Defendants did not yet have specific notice that the information stored in the shadow accounting system would be relevant to the instant litigation, the Court found, among others, that by January 2016 Defendants knew that their international bribery scheme was the subject of many investigations including those by the United States. Defendants also knew that one of the individual defendants was arrested months earlier related to charges of bribing Brazilian officials. Noting that large scale criminal bribery schemes fall into the types of incidents that tend to trigger litigation, particularly when the scheme involves issuance of equity or debt instruments, the Court concluded that by the time of the destruction of the keys, Defendants were already on notice that litigation was likely and that the information would be relevant.
Next, on the issue of prejudice to Plaintiffs, Plaintiffs argued that the precise information contained in the shadow accounting program, which was no longer available to due Defendants’ destruction, was relevant to, among others, “the materiality of the false statements and omissions; Defendants' scienter; reliance upon the misrepresentations; and loss causation.” While the Court acknowledged that because this was a securities fraud action which revolves around the disclosures regarding the scheme, rather than the scheme itself, the Court nevertheless found that the information would be helpful to Plaintiffs in their securities fraud lawsuit, the spoliation of which prejudices the Plaintiffs.
Regarding whether the destroyed ESI could be restored or replaced through additional discovery, despite Defendants’ argument that it might be possible that individual employees at the company might have emailed the secret bribery information to each other unencrypted, or that even another copy of the shadow accounting program might exist and be accessible without the destroyed encryption keys, the Court still had reason to believe that the information at issue was permanently lost.
However, as to the issue of whether Defendants destroyed the evidence to deprive Plaintiffs of its use in this litigation, the Court noted it’s the movant’s burden to demonstrate that the spoliating party acted with the intent to deprive, not merely the intent to destroy. And, in this case, Plaintiffs did not show, and could not show, that the Defendants destroyed the encryption keys with the intent of depriving Plaintiffs in this specific litigation.
Accordingly, while the Court determined that the more severe adverse inference instruction sanction was not warranted, Plaintiffs’ motion was granted in part, permitting Plaintiffs to present evidence and argument to the jury of Defendants’ intentional destruction and the potential relevance of the destroyed ESI, as well as to later seek a jury instruction to be approved by the trial judge.
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