Shredding the dirt

In the wake of Andersen's stripped reputation, Grania Langdon-Down looks at the implications of document destruction and finds that even within law firms there are tricky decisions to be made about what records can be destroyed

When top five accountants Andersen destroyed documents relating to the failed US energy giant Enron, it put its reputation in the shredder as well.

For litigation lawyers in the UK, the golden rule for clients is 'don't shred'.

In the US, Andersen now faces an indictment hearing and initial prosecution with a possible maximum penalty of 350,000 and a five-year probationary period.

Its UK arm was put under the spotlight when the firm was forced to admit that one partner and two managers had been seconded to London and had 'cleaned up' files.

City firm Herbert Smith did a short report for Andersen in London on the incidence of shredding and concluded that no London partner had any responsibility for the material disruption of any documents.

While shredding on such a grand scale may be unusual, Russell Sleigh, senior litigation partner with Lovells, says the consequences of destroying any pertinent documents can be severe - 'and Enron shows just how severe it can be.

You are always aware of the possibility that documents might have been destroyed and are on the look out for it'.

He adds: 'It is also standard under the Civil Procedure Rules that if you no longer have a document which is relevant to the issues in the action, you have to explain what has happened to it.'

That gives the other side an opportunity to challenge your credibility so it is always better to deal with issues head-on, he says.

Patrick Gearon, litigation partner with London firm Gordon Dadds, agrees.

'My advice to companies is always "don't shred".

If you have a genuine problem and the bank is about to pull the rug, the last thing you should do is shred anything.

'If the liquidator or receiver notices anything is missing, it immediately changes their mindset.

Enron has amplified that aspect about a million times because now any receiver or liquidator who sees evidence of shredding will instantly think of fraud.'

He says he has only had one case involving mass shredding: 'It was brought by the Serious Fraud Office and I was defending the finance director.

Literally the entire accounts department was shredded but that rebounded mightily on them because, while the prosecutors were able to use their resources to put together a picture which showed there had been some kind of fraud, any documents which might have rebutted it had gone.

We managed to get quite a lot off the company's hard drive - but so did the SFO.

It was a real own goal.'

For Mr Sleigh, the Enron scandal should focus companies' minds on having document-retention policies.

'Many large commercial companies have policies, but you would be surprised how many don't and are totally haphazard about what they keep and what they don't keep.'

Law firms are under a duty to retain clients' files, with annex 12a of the Guide to the Professional Conduct of Solicitors, 1999, eighth edition, recommending a minimum of six years.

Most firms also have policies for shredding sensitive waste material.

The antics of Benjamin Pell - Benjie the Binman - who made a career out of rummaging through lawyers' rubbish bins for incriminating material to sell to newspapers, sent a shiver down many spines.

Sensitive waste material is now shredded, put in special bags and disposed of separately - 'we leave nothing to chance,' says one chief operating officer.

Mr Gearon explains: 'When it was discovered in the Hamilton/Fayed case that material found in the rubbish bins of Neil Hamilton's barristers' chambers was used to cross-examine him, a shiver went through the legal profession and since then, things aren't binned any more but are shredded to avoid that kind of grand embarrassment.

But this is purely for security and doesn't involve any documents relevant to a case.'

Jennifer McDermott is a litigation partner at Lovells and acted for the Daily Star against Jeffrey Archer.

'If we have a case like that which is highly sensitive, we will shred spare copies of documents or working drafts which are no longer needed and put them in bags to be taken away specially to make sure they don't fall into the wrong hands.

Everybody is very alive to the fact that confidential documents must be treated with the utmost care.'

Clifford Chance litigation partner Jeremy Kosky surveyed law firms about their policies on shredding when he did his masters in law at Nottingham Law School five years ago.

He found they looked primarily to the Limitation Act 1980 for how long they should keep files.

But he now believes they could be in for a shock after Brocklesby v Armitage last year.

This case broadened the ability of claimants to bring actions - for instance against their lawyers - over a bad piece of advice, long after normal time limits.

Mr Kosky says: 'There is also the question of what is a document - does it include text messages, voice mail? I think English courts would probably consider them to be documents which shouldn't be destroyed when litigation is in the air.

It is a minefield.

However, as fiduciaries and as officers of the court, we really should be preserving our files using modern document imaging and electronic storage rather than following routine destruction policies.'

Alison Crawley, head of professional ethics at the Law Society, says she is not aware of document destruction being an issue.

'We haven't got an anti-shredding rule because we are not aware of any mischief in the profession.

'I am not inclined to say, as a regulator's rulewriter, that just because something has happened in the accountants' world, we should have some rule about shredding for solicitors.

If the courts do lay down guidelines when professionals should or shouldn't do things, then we will consider to what extent they apply to solicitors.'

For many industry observers, the vision of accountants shredding tons of documents is the height of corporate stupidity - not just because of the inference that it is part of a cover-up but because almost any paper document is going to be recoverable from the computer systems of the company concerned.

Peter Cherry, a litigation partner at Addleshaw Booth & Co, says: 'There are a growing number of technical consultancies who specialise in extracting information from computers and laptops.

'We had a case where a senior director of a client was found to have taken a bribe.

We got the clients to get his PC and laptop, and sent them off to a consultant who found one very incriminating document tucked away on the hard drive.'

He adds that destroying documents is actually quite difficult.

'You have to destroy all the copies - with e-mails, how do you know where it has been forwarded? It may be referred to in another document and, given the level of forensic study you make of documents in litigation, you generally pick that up, which puts the other side in the position of having to explain its absence.'

He says that in these days of whistleblower laws, unless you personally are going to destroy documents in the dead of night, somebody will tell.

'As you can see with Andersen, they weren't able to keep it secret.

I think it was a knee-jerk, panic reaction and I don't think they had thought it through at all.'

Mr Cherry says they send out a standard letter to clients if litigation appears likely, telling clients to retain all documents that currently exist and to stop creating new ones 'without first engaging the brain - the e-mail "we are stuffed on this one, Brian" is one you would rather not have to disclose later on.

The aim is to manage the process.

From my experience, if an English judge gets the idea that you have played fast and loose with documents, you will suffer horribly.

It is regarded as a major sin.

It also gets you in the realms of contempt of court, conspiracy to pervert the course of justice, with some very nasty sanctions.

The only rule is don't do it because the very worst will be assumed'.

Mr Sleigh points out that section 450 of the Companies Act 1985 says an officer of a company who destroys, mutilates or falsifies, or is privy to the destruction, mutilation or falsification of a document affecting or relating to a company's property or affairs is guilty of a criminal offence punishable by a fine, imprisonment or both unless he can prove he had no intention of concealing the state of affairs of the company or defeating the law.

'What is interesting is it reverses the burden of proof.

That section normally arises in the context of company investigations by the Department of Trade and Industry but it also applies generally,' he says.

Willie Manners, head of litigation at City firm Macfarlanes, agrees.

'It is one of our rules that as soon as a dispute is in the offing, we warn clients that they mustn't go around destroying records.

In almost every case, we push, and are pushed ourselves, very hard on disclosure.

Normally, if someone is naughty about documents, the case will settle because it is well known civil judges dislike it intensely.'

Mr Manners remembers one case involving the managing director of a small company who walked out of the business.

'It became clear that he and his secretary had spent the previous two weeks shredding things.

We said that was very sinister, he said no, he was just throwing away ten years of accumulated rubbish.

But we then found he was getting commissions from customers paid directly to him and we went to them for the information.

It is counter productive in the long run because it normally gets found out and judges hate it.'

Mr Manners believes solicitors probably keep too much.

'We make it clear to clients how long we keep documents.

Probate and tax files tend to be kept not quite in perpetuity but pretty nearly.

However, files connected to buying or selling a house, we would keep them six years.

It is a matter of contract between us and our clients.'

Tony Guise, litigation partner at Fairmays and president of the London Solicitors' Litigation Association, says he has never encountered anything here on the scale of Enron.

'However, the shredders in the Enron case need to be pilloried as a deterrent, otherwise corporations will get it into their minds that the way to avoid problems is to shred everything.'

As Mr Manners warns: 'It is a dirty world we live in.'

Grania Langdon-Down is a freelance journalist