A message to Wall Street banks.. Don’t hit the delete button

Keeping a document shouldn’t be difficult. Governments and companies have long known that they need to record and preserve important communications not only for posterity, but for purposes such as legal disputes and regulatory matters. As conversations have moved from pen and paper to fax, telephone and e-mail, the legal requirements have also changed.
Oh, how British brokers complained about costs and complications in the early 2000s when British regulators began requiring them to record mobile phone conversations. But they adapted to it.
Now we are back again. Citibank, Morgan Stanley and some other Wall Street banks said this month they expect to pay $200 million each for failing to keep text messages and WhatsApp conversations on bankers’ personal phones. JPMorgan Chase, which collapsed last winter, admitted it did not keep tens of thousands of letters. This week, prosecutors alleged that a former Goldman Sachs banker tried to delete text messages in which he allegedly discussed classified insider trading information. But he denied any wrongdoing.
Regardless of the sector, this is ridiculous. Bankers have been using text messages and WhatsApp for years, and some lenders have banned the use of such apps on business phones. However, no one seems to have thought about the risks posed by personal devices, even as working from home during the pandemic has made surveillance more difficult.
These failures stem in part from knowledge gaps: Compliance departments are rarely in-depth about technology, and IT departments often lack understanding of regulatory concerns. But there is another man-made failure. Most people prefer to do whatever is convenient for them or to avoid embarrassment. If not, why spend money or make efforts to save communications that may not show you and your colleagues in the best shape?
Deterrence by punishment is difficult. The failure to keep the data is largely hypothetical: when the evidence disappears, it becomes difficult to know how serious the case of destruction is. But judges have generally given companies the benefit of the doubt. The US Supreme Court noted in a 2015 amendment to the Court’s rules that it is “often impossible” to retain all relevant data due to the “increasing volume of information stored electronically” and the multiplicity of devices involved.
And when prosecutors tried to bring criminal cases, it was not easy for them. Accountancy firm Arthur Andersen collapsed after being accused of destroying documents belonging to collapsed energy group Enron, but her conviction was overturned three years later.
Federal prosecutors twice tried and failed to convict famed banker Frank Quatrone of sending an email in December 2000 to Credit Suisse employees titled “Time to clean up these files,” shortly after telling him has that the bank received a grand jury subpoena. But they reached a settlement in which the charges were dropped.
The US regulators who have brought $200 million worth of business on Wall Street must hope that these hefty fines will make a difference.
A federal judge in Minnesota has taken another crack at a case filed on behalf of victims of a $3.65 billion fraudulent Ponzi scheme masterminded by Tom Peters, who is currently serving a 50-year prison sentence. The bankruptcy trustee claims in documents filed with the court that Peters Bank was “complicit” in the scheme and that it “turned a blind eye” to “alarming behavior”. The bankruptcy trustee of Bank of Montreal, which bought Peters Bank after the fraud was discovered, wants to pay $1.9 billion plus interest. But the Bank of Montreal denies responsibility. A jury trial is scheduled for October.
But a federal judge found a problem with the preservation of the documents. In 2010, after Peters’ arrest but before the Bank of Montreal takeover, the bank shut down the servers and destroyed dozens of backup tapes despite being asked to keep evidence. Then Bank of Montreal employees added to the mistake after the takeover by not telling the court that they had found more backup tapes in 2014 and that no one had seen their contents. Then, after a third batch of tapes was found in 2017, Bank of Montreal employees didn’t immediately notify the court or the plaintiffs and gave testimony the bankruptcy court called “misleading.”
The judge imposed what some lawyers call an evidentiary death penalty. The jury in the case will be told that the Bank of Montreal willfully destroyed evidence it knew was damaging to its position. The bank said in a statement that it “respectfully disagrees” and “will continue to vigorously defend itself.”
But anyone considering investing more time and money in evidence preservation should consider the “penalties for destruction” facing the Bank of Montreal. Technology is in full swing. When the first call of a conversation arrives on the Metaverse platform, responding with a blank look is not a reliable option.

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