Court: District Court, D. Minnesota; April 18, 2005; Federal District Court
Sanctions are recommended against Nomura Securities International, Inc. and Nomura Canada, Inc. for discovery misconduct, including evidence spoliation and false certifications, as outlined in Magistrate Judge Arthur J. Boylan's February 17, 2005 Report and Recommendation. After a de novo review, the Court found Judge Boylan's findings well-supported and legally sound. The Court overruled the Defendants' objections, adopted the Report and Recommendation, and granted E*TRADE Securities LLC's motion for sanctions. Additionally, Ferris, Baker Watts Inc.'s motion for joinder in E*TRADE’s sanctions motion was granted, while the Nomura Defendants’ motions for attorney fees and costs were denied. Specific orders were issued, including requirements for Nomura Canada to produce business records and recorded calls, and for Nomura Securities International to provide supervisory reports from 2001. The phrase “if any” was ordered to be removed from their discovery responses, and the jury will be instructed to draw adverse inferences regarding unpreserved information. All discovery is to be completed by May 10, 2005, and both Nomura entities are to pay E*TRADE $5,000 for incurred costs. A hearing was held on January 11, 2005, with representation for all parties.
E*TRADE Securities, LLC has filed a complaint in the U.S. District Court for the District of Minnesota against the Nomura Defendants and others, alleging involvement in a fraudulent securities lending scheme that led to the collapse of a broker/lender and significant financial losses for other entities, including E*TRADE. The scheme involved the manipulation of securities—GenesisIntermedia (GENI), Imperial Credit Industries (ICII), and Holiday RY Superstores (RVEE)—through a series of transactions that allowed the perpetrators to extract large sums of money while causing losses to intermediate lenders like E*TRADE. E*TRADE claims that Nomura Securities International, Inc. and Nomura Canada, Inc. knowingly participated in this scheme, supported by evidence from conversations among key employees discussing the lending scheme.
Currently, E*TRADE and Ferris, Baker Watts, Inc. (FBW) allege discovery misconduct by the Nomura Defendants, prompting E*TRADE to file a Motion for Sanctions for spoliation of evidence and false certifications, in violation of Federal Rule of Civil Procedure 26(g). FBW, sharing similar interests and damages, seeks to join E*TRADE's Motion for Sanctions but limits its involvement to aspects that do not include allegations of intentional misconduct against the Nomura Defendants. FBW argues that sanctions are warranted without needing to establish intent. The court recognizes the procedural and factual similarities between FBW and E*TRADE's situations, noting that any misconduct by the Nomura Defendants would adversely affect both parties. The Nomura Defendants do not oppose FBW's motion to join but argue against the appropriateness of sanctions. Consequently, the court recommends granting FBW's Motion for Joinder, allowing their arguments for sanctions to be included in the discussion on E*TRADE's Motion for Sanctions.
The court possesses the authority to impose sanctions for discovery misconduct based on the Federal Rules of Civil Procedure and its inherent authority to manage judicial proceedings. Sanctions can be applied when a party fails to respond to discovery requests, violates court orders, or submits false certifications. Potential sanctions include attorney fees, adverse inference instructions to the jury, factual findings, or default judgments against the offending party.
E*TRADE alleges that Nomura has engaged in misconduct, including the destruction of crucial evidence, suppression of discoverable materials, inadequate document searches, failure to provide a compliant witness, and violation of a bankruptcy court order. E*TRADE claims that NSI and Nomura Canada did not conduct reasonable inquiries and provided unreasonable responses, warranting sanctions to deter such behavior. They seek a judgment in their favor or, alternatively, adverse inference instructions, along with costs for bringing the motion.
In response, NSI asserts compliance with discovery requests, arguing that E*TRADE's motion is an attempt to mask its lack of evidence against them. NSI claims that any failures to produce documents are isolated incidents rather than misconduct and that no relevant evidence has been destroyed. The Nomura Defendants have also filed motions for fees and costs related to opposing E*TRADE's sanctions motion.
E*TRADE's allegations of spoliation define it as the intentional destruction or significant alteration of evidence, which allows for inferences that the destroyed evidence would have been unfavorable to the responsible party.
The court's initial task is to determine when NSI's duty to preserve evidence began, with E*TRADE arguing it was triggered by October 22, 2001. By this date, NSI had engaged with SEC inquiries regarding its trading positions and filed a breach of contract complaint against E*TRADE. E*TRADE maintains that NSI's counsel should have recognized the need to retain documents related to the transactions based on the "extra-contractual facts" surrounding GENI stock and related securities. E*TRADE further argues that NSI should have been aware of its preservation duties by December 2001/January 2002, following a notice from Minnesota bankruptcy proceedings investigating a purported fraudulent scheme involving securities lending.
E*TRADE asserts that NSI had control over relevant documentation at Nomura Canada, citing a precedent that defines control as the right or ability to obtain documents from a non-party. Evidence presented shows NSI's in-house counsel previously accessed documents from Nomura Canada for the SEC investigation. E*TRADE claims Nomura Canada also had a duty to preserve evidence once notified of litigation in January 2002.
NSI does not contest E*TRADE's claims regarding control over Nomura Canada or its duty to preserve records. Conversely, Nomura Canada argues it was not involved in litigation until 2002 and therefore had no obligation to preserve evidence prior to that date, asserting that the bankruptcy order did not impose such a duty but that it retained relevant documents as a precaution. The obligation to preserve evidence arises when a party knows or should know that evidence is relevant to ongoing or future litigation. For sanctions due to destruction of evidence prior to litigation, bad faith must be demonstrated, which can be implied through selective preservation or previous advantageous use of similar evidence.
Sanctions for document destruction due to a company's retention policy before litigation require the court to evaluate: (1) the reasonableness of the retention policy in light of the circumstances, (2) the frequency of lawsuits concerning the records in question, and (3) whether the policy was implemented in bad faith. If evidence is destroyed after litigation is imminent or ongoing, bad faith is not necessary to prove. The Nomura Defendants were notified of potential litigation regarding security lending by a trustee's motion served on December 13, 2001, and were aware of potential fraud claims after receiving a bankruptcy court order on January 3, 2002. Although E*TRADE and others may not have initially known about Nomura Canada’s and Reed's involvement in the lending of GENI stock, NSI was aware of their roles. Communications indicated Nomura Canada had foreseen legal scrutiny. Consequently, by January 3, 2002, both Nomura Canada and NSI had a duty to preserve all relevant documentation related to the securities transactions.
In mid-2002, Nomura Canada permanently erased its hard drives, which E*TRADE argues should have been preserved due to the anticipated litigation. Nomura Canada claims it was unaware of potential litigation and that the destruction was not intentional but rather a necessary step taken because the company was shutting down. Thomas Wu, the president of Nomura Canada, stated the hard drives were wiped to protect confidential information before distributing the computers to employees. Nomura contends that E*TRADE has not demonstrated any intent to destroy relevant documents, thereby failing to establish spoliation. However, because the destruction occurred after Nomura Defendants recognized the potential for litigation, E*TRADE is not required to prove bad faith or intent.
Nomura Canada’s actions regarding evidence destruction indicate bad faith, satisfying the heightened standard for pre-litigation evidence spoliation. The retention of certain documents prior to hard drive destruction implies this bad faith. Intent in such cases is often inferred from circumstantial evidence, allowing the court to determine that Nomura Canada’s destruction of hard drives warrants sanctions.
Additionally, Nomura Canada’s destruction of telephone recordings, which were preserved on a two-DVD system intended to assist in resolving trade disputes, is also deemed sanctionable. The recordings were relevant to investigations of potential fraudulent trading schemes, yet Nomura did not modify its recording system until September 2002, despite a duty to preserve evidence stemming from bankruptcy court notices in late 2001. Evidence suggests that relevant information was likely lost due to this failure to preserve recordings.
Regarding document destruction, E*TRADE claims that Nomura’s failure to implement a litigation hold resulted in the destruction of relevant documents. Testimony from two 30(b)(6) witnesses indicates widespread destruction of documents, although NSI asserts that all relevant documents were preserved and that a litigation hold was in effect for relevant personnel’s emails throughout 2001. However, one witness acknowledged inadvertent destruction of documents, suggesting that potentially relevant materials were indeed lost, supporting E*TRADE's claims of discovery misconduct.
NSI asserts that all relevant documents from 2001 have been preserved, citing Chessler’s directive for collection at Nomura Canada in September 2001. NSI argues that it was not required to halt its document retention policies firm-wide, as it had already retained relevant documents. E*TRADE has not identified any destroyed documents pertinent to the case, aside from emails. Without proof of destroyed relevant documents or false claims by NSI regarding preservation, spoliation cannot be established. Thomas Wu, former president of Nomura Canada, testified that no relevant documents were destroyed and that significant documents were stored post-liquidation. Although Nomura Canada did not implement a litigation hold for documents, no evidence suggests that paper documents were destroyed.
Regarding email, NSI’s witness indicated a litigation hold was in place for 2001 but did not apply to emails, which were thought to be preserved on backup tapes. However, these tapes were only retained for three years. NSI contends that E*TRADE misinterpreted Chessler's testimony regarding "deleted" emails on backup, as it was implied that once backed up, they could not be deleted. E*TRADE claims NSI currently continues to delete potentially relevant emails and has requested a litigation hold on email destruction.
Discovery of electronic data has complexities not present with paper documents. A firm-wide halt on document destruction could overwhelm large corporations, yet parties to litigation must preserve unique, relevant evidence. NSI initially communicated that all emails were secured on backup tapes, but failed to maintain a litigation hold on email boxes, leading to the destruction of relevant data.
For sanctions to be imposed, the affected party must show prejudice from the spoliation. NSI has irretrievably lost hard drive data and recorded phone conversations due to inadequate retention practices.
Reed's involvement in the borrowing and lending of GENI, ICII, and RVEE securities is substantiated by evidence showing Nomura Canada’s awareness of his activities. Internal documents on employee hard drives, particularly those of Reed’s supervisor, could have clarified Nomura Canada's knowledge and acceptance of Reed’s actions. The loss of evidence from these hard drives and recorded phone conversations has significantly prejudiced the plaintiffs' case against the Nomura Defendants. The court concludes that the destruction of this evidence warrants a finding of prejudice, as relevant emails were also deleted due to NSI's failure to implement a litigation hold or preserve backup tapes.
E*TRADE has requested a default judgment against the Nomura Defendants, but such a judgment can only be issued following a discovery misconduct order. The court is not limited to the least severe sanctions and can select the most suitable one based on circumstances. The Nomura Defendants were obligated to preserve evidence prior to its destruction, and the court acknowledges the severity of an adverse inference instruction. Given the plaintiffs' prejudice, along with evidence of the Nomura Defendants' selective retention of information, the court recommends instructing the jury to infer that the unpreserved information would have favored the plaintiffs and harmed the Nomura Defendants.
Additionally, the Nomura Defendants are accused of violating Fed. R. Civ. P. 26(G) by failing to properly certify responses to E*TRADE's discovery requests, as they did not conduct a reasonable inquiry. The court is prepared to impose sanctions for this violation.
Plaintiffs allege that the Nomura Defendants did not perform a reasonable inquiry regarding the search for specific documents and audio recordings. E*TRADE asserts that NSI inadequately searched for relevant documents, citing instances where the Nomura Defendants denied the existence of documents that were later referenced by witnesses during depositions. Specifically, when E*TRADE requested “Monthly Compliance Reports,” NSI claimed no such documents existed. E*TRADE expanded its request to include similar documents, but NSI again denied their existence, despite depositions indicating the existence of periodic compliance reports or checklists. Consequently, the court recommends that NSI be compelled to produce all “Weekly Supervisory Checklists” or equivalent documents from 2001 and imposes a $5,000 sanction against NSI for failing to meet the requirements of Rule 26(g).
Additionally, E*TRADE and FBW argue that Nomura Canada did not properly investigate its response regarding the recordings of traders’ telephone calls. Initially, NSI stated that the lines were not recorded, but later claimed recordings from a specific period were inaudible due to a malfunction. E*TRADE provided evidence suggesting that some calls during that timeframe were indeed audible. Nomura Canada contends that E*TRADE misinterpreted its responses, but the court finds its argument unconvincing. Therefore, the court recommends that Nomura Canada be ordered to produce recordings from August 30, 2001, to February 22, 2002, allowing for privilege concerns to be addressed through a privilege log or in camera review.
Sanctions of $5,000 are recommended against Nomura Canada to reimburse E*TRADE for reasonable expenses incurred due to Nomura Canada’s violation of procedural rules. E*TRADE alleges that the Nomura Defendants made knowingly false statements and engaged in "deliberate fabrications," while FBW refrains from supporting these claims of intentional misconduct, arguing that intent is not necessary for sanctions. NSI counters that E*TRADE mischaracterizes its responses to discovery requests, asserting compliance with all obligations. The court finds that, while the parties’ actions are questionable, E*TRADE has not provided sufficient evidence to substantiate claims of deliberate misrepresentation by the Nomura Defendants, although their failure to preserve evidence suggests possible bad faith.
E*TRADE also contends that the Nomura Defendants inadequately designated 30(b)(6) witnesses, but the court deems the witnesses provided sufficient. Allegations that the Nomura Defendants violated a bankruptcy court order are not fully supported, aside from evidence preservation issues. E*TRADE claims NSI conducted insufficient searches for relevant documents, but NSI asserts that multiple searches have been performed. The court concludes that allegations alone do not justify sanctions under Rule 26(g)(3) without substantiating evidence. Lastly, NSI and Nomura Canada have filed motions for attorney fees and costs against E*TRADE and FBW.
E*TRADE's motion for sanctions against Nomura International, Inc. and Nomura Canada, Inc. is recommended for approval, along with Ferris, Baker Watts Inc.'s joinder in this motion. In contrast, the motions for attorney fees and costs filed by Nomura Canada and NSI against E*TRADE and FBW are recommended for denial. The court also advises that Nomura Canada must produce all relevant business telephone records and recorded calls involving Reed, while NSI must provide Supervisory Reports or Checklists for 2001. Additionally, the court recommends striking the phrase “if any” from NSI and Nomura Canada’s discovery responses and presenting adverse inferences to the jury regarding unpreserved information from both entities in the E*TRADE and FBW actions. All discovery must be completed by February 29, 2005. Furthermore, NSI and Nomura Canada are each directed to pay E*TRADE $5,000 in incurred costs. The court has reviewed the recommendations de novo despite the plaintiffs’ arguments for a different standard of review. The litigation history reveals that NSI initiated a breach of contract complaint against E*TRADE in New York before the Minnesota case, which is currently stayed as the Minnesota action proceeds. Kenneth D'Angelo has pled guilty to federal charges related to securities fraud, and Wayne Breedon has invoked his Fifth Amendment rights in the civil proceedings. The court has considered subsequent correspondence from both parties but notes that negative rhetoric detracts from the substantive issues at hand.
E*TRADE presents evidence indicating that NSI had control over Nomura Canada, highlighted by the supervision of Reed by both Thomas Wu (Nomura Canada) and Anthony Venditti (NSI), NSI's role in Reed's hiring and termination, and Reed's need to obtain approval for certain lending activities. The parties dispute the relevant time frame for the investigation, with NSI claiming it to be 2001, while E*TRADE argues it extends from 1999 to the present. Chessler testified that deleted emails are retained on backup tapes, which NSI later misrepresented regarding their retention policy. NSI's failure to correct its misinformation resulted in the loss of relevant emails from 2001 due to a three-year overwrite policy. E*TRADE criticizes NSI's discovery responses for being boilerplate and ambiguous, suggesting that the district court should require NSI to clarify which requests have been addressed. E*TRADE also contends that NSI did not retain recorded telephone calls from traders, despite acknowledging the existence of such recordings before the September 11 attacks, and argues that the last five days of calls before the attacks should have been preserved. NSI claims that its recording system was destroyed during the attacks, leading the court to conclude that NSI cannot be held responsible for documents no longer in its possession.
