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Judge Rules SEC Does Not Need to Restore Deleted Files in Federal Records Act Case

Discovery Digest – Q2 2013

The U.S. Securities and Exchange Commission adhered to federal records laws when it destroyed records related to initial inquiries into the Bernie Madoff case and other high-profile investigations, according to a recent ruling.

In January, U.S. District Judge James E. Boasberg dismissed a lawsuit brought by Citizens for Responsibility and Ethics in Washington (CREW). That suit alleged that the SEC violated the Federal Records Act with its failure to recover destroyed records related to the investigations. The judge found that the government is not required to seek records that have been destroyed, only those that have been removed from the SEC’s control. The judge also noted that even if the SEC was required to try to recover the records, it made sufficient efforts to do so.

“Because the plain meaning of the statute is clear that the mandatory enforcement duty in the second clause of [FRA] § 3106 refers only to removed records, the SEC was under no duty to undertake restoration efforts as to the [Matters Under Investigation] records that were destroyed in this case,” the judge wrote in his ruling in CREW v. SEC, 11-cv-01732, U.S. District Court, District of Columbia. “Even assuming that § 3106 can be read to impose a mandatory enforcement duty regarding destroyed records – and not just removed ones – the SEC is still entitled to summary judgment because it has sufficiently fulfilled those obligations.”

Failing to Comply with Duties?

In September 2011, CREW filed a Freedom of Information Act request seeking records about the SEC’s decision not to proceed with several preliminary investigations that had been closed. Those investigations included Ponzi schemes, credit default swaps in 2009; financial fraud and insider trading.

The FOIA request included the recovery of hard-copy documents that the agency might still have, as well as the recovery of deleted files. Before the SEC responded to the FOIA request, CREW filed the lawsuit, claiming the SEC was destroying records and failing to recover records that had been destroyed. The plaintiff claimed that the SEC’s alleged failure to comply with the FRA denied “present and future access to important documents that would shed light on the conduct of public officials and the actions and effectiveness of the SEC’s Enforcement Division.”

Agency’s Efforts not “Woefully Insufficient”

The lawsuit made several claims. One claim related to the SEC’s retention of information about closed preliminary investigations. Under the SEC’s policy in place at the time, the agency only kept basic facts regarding the preliminary investigations once it closed those matters, including the title of the matter, dates it was opened and closed, general subject matter and staff members involved. In an earlier opinion, the judge tossed the first part of the suit, since the SEC changed its policy about handling records in closed investigations.

That left the question of whether the SEC had an obligation to recover the destroyed documents. The SEC argued that the FRA refers to records have been physically removed from the agency’s custody, not records that have been destroyed. Judge Boasberg agreed.

Even if the SEC had obligations under the FRA, the judge found that the agency made a sufficient effort to find the deleted information. “Indeed, the administrative record filed in this case reveals efforts by the SEC that, while clearly not as extensive as CREW would have liked, were not so woefully insufficient as to render the SEC’s claims to have fulfilled its duties ‘so implausible that it could not be ascribed to a difference in view or the product of agency expertise,’” the judge noted in his ruling.

According to the court ruling, the SEC’s efforts included an “all-hands meeting” to discuss the destroyed documents, where senior Division staff identified information that still existed regarding the relevant documents. Agency officials also discussed with “reasonable particularity” which of the missing documents might qualify as “records under the FRA,” as well as what records might still be publicly available. Emails between senior staff also describe efforts to find information about at least six high profile matters in databases and services in the District of Columbia, Los Angeles and New York, along with searches in existing and legacy document-management systems within the agency. The ruling also noted that senior staff considered the costs of conducting in-depth searches of the agency’s available e mail archives to see what documents might still be recovered.

As the SEC stated in its motion for summary judgment, which Judge Boasberg granted: “In the wake of allegations that the Securities and Exchange Commission (SEC) destroyed certain records, Plaintiff now seeks to supervise and control the SEC’s response to that incident, specifically by demanding that the SEC initiate restoration efforts for the destroyed records. But this requested relief is inappropriate: when drafting and revising the FRA, Congress opted for an administrative enforcement scheme, rather than allowing private parties to oversee and control agencies’ actions.”

Back to Discovery Digest - Q2 2013

As used in this document, “Deloitte” means Deloitte LLP [and its subsidiaries]. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

While the information in this article may deal with legal issues, it does not constitute legal advice. If you have specific questions related to information discussed in this article, you are encouraged to consult an attorney who can investigate the particular circumstances of your situation.

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