Securities Litigation

One of three counts in Volkswagen's recent $4.3 billion guilty-plea was for obstruction of justice arising from a litigation-hold botched by house counsel.

As VW prepared to admit the defeat-device problems to US regulators, VW Group of America ("GOA") informed VW AG of a forthcoming litigation hold. The litigation holds were not issued simultaneously across the enterprise: VW GOA proposed its hold on August 26, 2015 but issued it on August 28. VW AG's corresponding hold was proposed on August 31, and issued September 1.

In the interim, in-house counsel Attorney A communicated with engineers and other custodians who would be subject to the holds. During these meetings, Attorney A: (a) tipped the custodians to the forthcoming holds; (b) "again told the engineers that the hold was imminent and recommended that they check what documents they had"; (c) and told them to keep newly-created, potentially harmful documents on thumb-drives and save final versions on the network "only if necessary."

While "there will be a hold, see what you have" perhaps could be well-meaning, the Plea Agreement's Statement of Facts recites "that several employees understood [the statements] as suggesting the destruction of these materials"; in fact, at least 40 people subsequently destroyed documents.

Although VW discovered and self-reported the document destruction - even forensically recovering some - the obstruction became a material part of the government's case.

If the circumstances sound familiar, they should. It's a variation on the obstruction issue that felled Arthur Andersen during the Enron scandal. Arthur Andersen LLP v. United States, 544 U.S. 696 (2005) (reversing obstruction conviction based on document destruction in advance of imminent litigation hold).

The VW case provides these take-aways for litigation holds:

• Issue litigation holds simultaneously across the enterprise, not seriatim among differing entities or custodians.

• The more pre-issue discussion of a hold (even among counsel), the more likely it is to leak.

• Don't "tip" custodians to forthcoming holds, because nothing good can come of it. Corollary: If you know enough to "tip" about an impending hold, it's time to just issue the hold.

• When communicating to custodians about a litigation hold, always do so in writing and repeat their duty to preserve.

• Don't alter normal business practices post-hold (save for routine internal-investigation and privilege / work-product protocols).

United States v. Volkswagen AG, No. 16-20394 (USDC EDMI Jan. 11, 2017) (Third Superseding Indictment and Plea Agreement at ¶ ¶ 73-82). DOJ's Jan. 11, 2007 Release is here.

Thomas K. Potter, III (tpotter@burr.com) is a partner in the Securities Litigation Practice Group at Burr & Forman, LLP. Tom is licensed in Tennessee, Texas and Louisiana. He has over 30 years' experience representing financial institutions in litigation, regulatory and compliance matters. See attorney profile.

© 2017 by Thomas K. Potter, III (all rights reserved).