Failure to Preserve Data Renders Compliance Officer Liable

The Securities and Exchange Commission (“SEC”) recently gave yet another reminder of the importance of adequately preserving electronically stored data.

The SEC, on July 2, 2010, found that vFinance Investments Inc., a Florida based broker dealer, violated securities laws by failing to preserve and produce electronic communications requested by the SEC as required by Section 17(a) of the Securities Exchange Act of 1934. In re vFinance Investments Inc., SEC, Admin. Proc. File No. 3-12918, 7/2/10.

As another example of the increasing common trend of holding corporate executives responsible for e-discovery failures, the SEC determined that the firm’s former chief compliance officer, Richard Campanella, was liable for willfully aiding and abetting vFinance’s violations. The SEC sustained an ALJ’s decision censuring Campanella and assessing penalties of $100,000 and $30,000 against vFinance and Campanella, respectively. Campanella was also barred from the industry for two years by the SEC.

vFinance’s failure to preserve and produce electronic communications of a branch manager at one of the firm’s offices was the source of the penalties. In July 2005, the SEC Enforcement Division contacted Campanella to alert him to a document request regarding Lexington Resources, Inc. The branch manager acted as a “market maker” for its stock. Although Campanella was aware that the branch manager would not produce the requested documents, it was nearly six months after the division’s request that he threatened to fire the branch manager for not responding. Despite the manager’s noncompliance, Campanella did not terminate the manager, allowing the branch manager time to destroy the documents sought by the Enforcement Division. Further, while Campanella knew that the branch manager was sending and receiving email relating to Lexington Resources from a personal email account, he never implemented a system to preserve such email.

Campanella was found liable for aiding and abetting vFinance’s violations even though he did not have actual knowledge that his failure to act constituted a violation. The SEC held that “recklessness is sufficient to establish aiding and abetting liability, and here we find Campanella’s conduct was variously knowing and extremely reckless,” which is different than the standard for aiding and abetting in federal district courts, where actual knowledge is required.

The end result is that (1) corporate executives are not immune from e-discovery sanctions even by virtue of being a few corporate steps removed from the process; and (2) the standard for liability in SEC actions is recklessness rather than actual knowledge.