The Sarbanes-Oxley Act, enacted into law in July 2002, is the Congressional response to the Enron and WorldCom scandals. While the Act applies primarily to public companies issuing securities registered under the Securities Exchange Act of 1934, it has significant implications for private companies as well. Most important, in the wake of document shredding allegations at Enron, Congress enacted new federal statutes criminalizing the destruction of certain corporate business and financial records and any retaliation against employees who provide information to law enforcement regarding possible crimes. As a result, all public and private corporations should take steps to create effective policies for monitoring the retention and destruction of their paper or electronic records.
The New Federal Crimes Relating to Document Destruction
Section 802 of Sarbanes-Oxley makes it a crime to alter, destroy, cover-up or falsify any document with the intent to "impede, obstruct or influence" any federal investigation or any bankruptcy case. The new crime carries a maximum sentence of 20 years. The statute broadens criminal liability by extending criminal liability to the destruction of documents relating to any federal investigation - even low level executive or administrative inquiries or any bankruptcy case. Worse yet, Section 802 applies to "contemplated" investigations, imposing potential criminal liability even where corporate officers have no actual notice of the investigation.
Section 1102 of the Act adds a separate offense, also punishable by up to 20 years, for persons who alter or destroy documents or records with the intent to impair their use for "official proceedings," even before a subpoena has been issued. This statute closed a loophole. Prior to its enactment, obstruction of justice statutes prohibited individuals from persuading others to destroy documents, but not from acting alone to do so.
These two new crimes are supported by prohibitions in Section 1107, entitled "Retaliation Against Informants," which imposes fines and imprisonment up to ten years for retaliation against employee whistleblowers.
Implications of the Act
These new criminal statutes present serious questions for public and private companies and their officers, directors and employees: How does a business protect against the alteration or destruction of documents that are not yet the subject of a government investigation - civil or criminal? How does a business determine what investigations may be "contemplated" and what documents may be relevant or material to such future investigations? How far in advance of a federal inquiry or bankruptcy proceeding can a company be deemed to have "contemplated" that the government might seek these documents? How does a company protect against employee retention of documents that should have been destroyed but that the employee saves for possible use in a future investigation?
The express provisions of the Act or Court interpretation do not answer these questions. Until the Courts give further guidance, businesses should take the following steps to avoid potential liability:
- The creation of paper and electronic document retention and destruction policies.
- Identifying the likely focus of any future government investigations of the business. This will require an assessment of the regulations applicable to the business and a review of any past investigations or inquiries.
- The establishment of training programs for employees emphasizing the importance of document retention and review, the risk of any improper destruction of documents, and the potential criminal liability for both for the destruction of documents and retaliation against whistleblowers.
- The creation of policies and practices encouraging employees to report all inquiries that might relate to federal investigations, as well as corporate wrongdoing confidentially or anonymously.
- The enactment of procedures that allow employees to file complaints if they believe they have been discriminated against for whistleblowing.
- The identification of an individual within the company who is responsible for investigating allegations of wrongdoing, particularly with respect to documents.
- The creation of specific policies applicable to the destruction of all documents (or to specific types of documents) that require an assessment of their relevance to present or potential future investigations. No business should allow the automatic destruction of documents.
The criminal provisions of Sarbanes-Oxley and the substantial fines and sentences mandate that all companies establish, evaluate, and continually review their document retention policies. The Act provides a powerful tool to prosecutors who may convince lower level employees that they can be prosecuted for obstruction of justice in order to build cases against corporations or their officers. All companies must act to ensure that they, and their employees, are aware of, and protected from, the potential criminal liability created by the Act.
Wilbur A. Glahn, III has been a Director at McLane, Graf, Raulerson & Middleton since 1985. He is a member of the firm's Business Litigation Group, focusing his practice on business and commercial disputes. He currently serves on its Management Committee and is admitted to practice in the state and federal courts in New Hampshire and Massachusetts, the First Circuit Court of Appeals and the Supreme Court of the United States.