Protecting Privilege — New Rule 502 mitigates the risk of inadvertent e-discovery disclosures

By Michael Kozubek

Published in the 2/1/2009 Issue of Inside Counsel.

Privilege review has been a major culprit in the skyrocketing cost of e-discovery. With hundreds of thousands of documents subject to discovery in numerous cases, attorney-client communications and work-product information frequently end up in the hands of the opposing party. Because the production of privileged documents during discovery waives the privilege, discovery teams scour through documents trying to ensure nothing slips through that could damage their case. Still, with the volume of electronically stored information, inadvertent disclosure is almost inevitable, with potentially devastating results.

“Cases have been lost in part because of inadvertent disclosures,” says Bobby Balachandran, CEO of Exterro, a legal hold and workflow software provider.

But that risk diminished when Rule 502 of the Federal Rules of Evidence (FRE 502), originally drafted by the Judicial Conference Committee on Rules of Practice and Procedure, recently became law. The new rule is designed to mitigate the expense of privilege review while protecting companies from potentially large liabilities arising from inadvertent disclosures of privileged communication.

The rule provides that privilege is not waived when privileged communications are inadvertently disclosed, provided the holder of the privilege took “reasonable steps” to prevent disclosure and to rectify the error.

Litigators celebrated the enactment of FRE 502 while warning that it is not a panacea and does not remove the need for sound e-discovery management practices.

“The new rule is welcome news for litigants,” says David Lender, a partner at Weil, Gotshal and Manges. “An inadvertent production will not result in the waiver of the privilege as long as reasonable steps are taken to preserve the privilege before production.”

CVS Pays $2.25 Million and Toughens Practices to Settle HIPAA Privacy Case

The U.S. Department of Health and Human Services and the Federal Trade Commission today announced that CVS, the nation’s largest retail pharmacy chain, will pay the U.S. government a $2.25 million settlement and take corrective action to ensure it does not violate the privacy of its millions of patients when disposing of patient information such as identifying information on pill bottle labels.  The settlement, which applies to all of CVS’s more than 6,000 retail pharmacies, follows an extensive investigation by the HHS Office for Civil Rights (OCR) for potential violations of the Health Insurance Portability and Accountability Act of 1996 (HIPAA) Privacy Rule.

In a coordinated action, CVS Caremark Corp., the parent company of the pharmacy chain, also signed a consent order with the FTC to settle potential violations of the FTC Act. OCR, which enforces the Privacy Rule, opened its investigation of CVS pharmacy compliance with the Privacy Rule after media reports alleged that patient information maintained by the pharmacy chain was being disposed of in industrial trash containers outside selected stores that were not secure and could be accessed by the public.

At the same time, the FTC opened an investigation of CVS. OCR and the FTC conducted their investigations jointly. This is the first instance in which OCR has coordinated investigation and resolution of a case with the FTC. “OCR is committed to strong enforcement of the HIPAA Privacy Rule to protect patients’ rights to privacy of their health information. We hope that this agreement will spur other health organizations to examine and improve their privacy protections for patient information during the disposal process,” said Robinsue Frohboese, acting director of OCR. “Such safeguards will benefit consumers everywhere.”

The Privacy Rule requires health plans, health care clearinghouses and most health care providers (covered entities), including most pharmacies, to safeguard the privacy of patient information, including such information during its disposal. Among other issues, the reviews by OCR and the FTC indicated that: * CVS failed to implement adequate policies and procedures to appropriately safeguard patient information during the disposal process; and * CVS failed to adequately train employees on how to dispose of such information properly. Under the HHS resolution agreement, CVS agreed to pay a $2.25 million resolution amount and implement a robust corrective action plan that requires Privacy Rule compliant policies and procedures for safeguarding patient information during disposal, employee training and employee sanctions for noncompliance.

HHS and FTC also will require CVS to actively monitor its compliance with the resolution agreement and FTC consent order. The monitoring requirement specifies that CVS must engage a qualified independent third party to conduct assessments of CVS compliance and render reports to the federal agencies. The HHS corrective action plan will be in place for three years; the FTC requires monitoring for 20 years.

The HHS Resolution Agreement and Corrective Action Plan can be found on the OCR Web site at http://www.hhs.gov/ocr/privacy/hipaa/enforcement/examples/cvsresagrcap.pdf. OCR has posted new FAQs that address the HIPAA Privacy Rule requirements for disposal of protected health information.

They can be found on the OCR Web site at http://www.hhs.gov/ocr/privacy/hipaa/enforcement/examples/disposalfaqs.pdf.

Information about the FTC Consent Order agreement is available at http://www.ftc.gov .

Feds Set Sights on ‘Gatekeepers’ in Fraud Investigations

Joe Palazzolo
Legal Times

Federal law enforcement officials said Wednesday they are targeting lawyers, mortgage brokers, real estate brokers and other “gatekeepers” who perpetrated fraud that contributed to the current economic crisis — a clear warning shot as the federal government is pumping billions of dollars into the financial sector.

“They have the most to lose, they’re the most likely to flip, and they make the best examples,” said Neil Barofsky, the special inspector general for the Troubled Assets Relief Program, during a congressional hearing on fraud enforcement. Senate Judiciary Committee Chairman Patrick Leahy, D-Vt., was even more blunt: “I want to see these people prosecuted,” he said. “Frankly, I want to see them go to jail.” The hearing was meant to underscore the need for more law enforcement resources amid an upsurge in mortgage and corporate fraud investigations.

Leahy and Sen. Charles Grassley, R-Iowa, have introduced a bill that would expand the scope of federal fraud laws and provide funding for more prosecutors and investigators. FBI Deputy Director John Pistole told the committee that mortgage fraud investigations nearly doubled in the last two years to more than 1,600 in 2008. The bureau, he said, has more than 530 corporate fraud investigations open, including 38 directly related to the current financial crisis.

Pistole said he could see that number potentially rising into the hundreds. But federal law enforcers could do much more with additional resources, he said, pointing to the Justice Department’s successes in the wake of the savings-and-loan crisis of the 1980s. At the time, 1,000 agents and forensic investigators and dozens of federal prosecutors were devoted to the effort, which produced more than 600 convictions and $130 million in restitution. Compared to the $160 million lost during the S&L crisis, the current situation is far more dire, with financial institutions globally reducing their assets by more than $1 trillion.  But the Justice Department’s focus on national security has diminished the fraud ranks.

Pistole said 240 agents, supplemented by investigators from other agencies, are working on fraud cases stemming from the economic crisis. Rita Glavin, acting head of the Justice Department’s Criminal Division, said the department was in discussions with Barofsky about how best to handle criminal referrals and prosecutions when his office uncovers wrongdoing. She also said the Justice Department’s fraud section had created a mortgage fraud working group, with a collection of other enforcement agencies. Sen. Sheldon Whitehouse, D-R.I., asked Glavin whether DOJ had any designs for a nationwide mortgage fraud taskforce. Then-Attorney General Michael Mukasey repeatedly rejected the idea, saying individual U.S. Attorneys’ Offices were better equipped to handle the work. Glavin said the department was studying the issue. “No decision has been made with respect to that,” she said.

E-Discovery Trends in 2009 — New developments in e-discovery will affect enterprise general counsel and compliance officers, law firms serving corporate clients, and IT departments

By Christine Taylor, January 9, 2008, 12:10 PM

A few years ago, the Taneja Group coined the term “Information Classification and Management” (ICM) to describe the technology of locating and classifying data throughout the enterprise. ICM covered sub-technology sectors such as e-discovery, compliance, data security control, and data management. However, we saw the term “e-discovery” trump the more comprehensive name as rabid attention turned from ICM to the specifics of civil litigation software tools. We are now seeing the e-discovery term itself take on a fuller usage, more akin to ICM. People do use the term when talking about civil litigation, but are also expanding it to encompass compliance, corporate governance, data classification, and even knowledge management.

In this broad sense we have looked at the trends of the e-discovery market as they impact its largest stakeholders: the enterprise general counsel and compliance officers, law firms serving corporate clients, and IT.

The crux of the matter is that e-discovery and its related areas will be extremely hot for litigation and compliance, especially those related to the financial meltdown. The market increasingly understands the necessity of e-discovery software tools and systems, and will move toward proactive e-discovery adoption. A more reactive approach will remain alive and well as many companies will still avoid implementation until driven to it by a lawsuit or federal investigation. But companies will increasingly understand that the e-discovery solution phenomenon is much more than a litigation aid. It also has major effects on federal compliance and internal governance, and potentially on data management throughout the enterprise.

For more see byteandswitch.com.

E-Discovery Requirements Are About to Hit Canadian Firms

As Canadian firms brace for new e-discovery rules, they can look to their U.S. counterparts for technology lessons.

By Anne Rawland Gabriel

Time is growing short for Canadian securities firms to prepare for the scheduled April enforcement of the new Canadian National Instrument 31-103 (NI 31-103), regulation that significantly expands record keeping requirements for electronic communications. Fortunately NI 31-103 substantively mirrors U.S. regulations already in place, which means Canadian firms have the opportunity to learn from others’ experiences.

“NI 31-103 is very similar to SEC and FINRA requirements in the U.S.,” substantiates Carolyn DiCenzo, a Gartner research VP. “It’s important to remember that the spirit of the law is communications and not just one particular type of communication, such as e-mail or instant messaging.”

For more see wallstreetandtech.com.

Obama Administration Could Mean More Compliance Regs

January 5, 2009
By Drew Robb

Just as accounting scandals earlier this decade led to new regulations like Sarbanes-Oxley, last year’s global financial meltdown coupled with Democratic control of the White House and Congress seems like a recipe for a host of new compliance regulations — and thus more business for storage vendors and more work for storage administrators.

But the changes won’t stop with an Obama presidency and the 111th Congress. The leaders of the Group of 20 industrial and emerging countries (G-20) have been meeting to consider global regulations aimed at raising bank capital standards and regulating hedge funds, with European leaders at the forefront of the new financial market regulation.  While it might be years before all this results in any kind of international consensus, another round of regulation is almost certainly at hand.

* * *

SOX and other regulations like FRCP stimulated interest in the archive and nearline disk market and exposed tape media’s shortcomings for meeting search and audit requests.

“Generally, additional regulation mandates that organizations have to demonstrate their ability to reproduce transactional records within a specified timeframe when requested,” said Brian Kelly, an executive at Ernst and Young Global Ltd. “After the failure of some major organizations to respond to such audit requests, an overhaul of the archival process was mandatory.”

For more see enterprisestorageforum.com.

Reviewing Your Email and Internet Usage Policies

Written by Sue Walsh on January 2, 2009

As the year comes to a close it’s good time to review your Email and Internet usage policies and insure that they are clear and comprehensive. The folks over at SmartBiz have published some helpful tips to assist you. Here’s an excerpt:

As the Internet and email have become a big part of our everyday lives, employers need to make clear the separation between work and non-work. What someone would consider appropriate with friends may be out of line in the workplace. Each practice needs to have a clear, written policy in place to eliminate confusion by the employees on what is and is not acceptable.

Such policies are critical in this day and age. It only takes one email or dubious website to cause your business a lot of trouble in the form of viruses, security or confidentiality breaches, even lawsuits. So keep your policy updated and easily available to all your employees!

Welcome to 2009: the year of the regulator

Michael Herman

British businesses will have to navigate a “regulatory minefield” in 2009 as global law enforcement agencies and regulators step up activity in response to the economic downturn, leading lawyers warn.

Neil Gerrard, head of the regulatory and litigation practice at DLA Piper, said: “I have no hesitation in calling the developing situation a regulatory minefield – and this is not an exaggeration. We are operating in an unprecedented time of financial pressures and market volatility and the authorities are more determined than ever that everyone will play by the rules.”

Mr Gerrard’s comments, which are echoed across the legal industry, follow an intense burst of regulatory activity in 2008. Last year saw the Financial Services Authority (FSA) launch its maiden criminal prosecutions for insider dealing and forging documents as well as tens of civil cases for market abuse and other offences. It also saw the Office of Fair Trading (OFT) launch its first criminal price-fixing prosecutions and levy record fines on businesses for breaking competition rules. Elsewhere the Serious Fraud Office (SFO), HM Revenue and Customs and the Health and Safety Executive all announced major investigations against British businesses and individuals.

Robert Wardle, former director of the SFO and a consultant at DLA Piper, said the aftermath of the credit crunch would create a particular focus: “We live in a fast changing world and have witnessed drastic and irreversible changes to our financial sector this year with the effects due to continue well into the new year and into the next decade,” he said.

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“In the UK, the SFO has already announced a 50 per cent increase in investigations planned for 2009, whilst the FSA and City of London Police are keen to show that London is no soft touch on regulatory enforcement,” Mr Wardle added.

Although experts are divided over whether there is an increase in the actual level of corporate crime committed during an economic downturn, they are united in the belief that the level of such crime which is discovered always surges when times are tough. “When credit dries up and management changes, fraud comes to light,” Mr Wardle said, “There will be lots of material for regulators to look at it in 2009.”

As well as having more material to investigate, regulators and prosecutors will have the benefit of new tools to help pursue wrongdoing. In particular, Mr Wardle points out that the current recession is the first for which the Fraud Act 2006 will be in effect. In addition to simplifying the offence of fraud, the act also criminalises new practices such as making false representations and failing to disclose information, making it easier to prosecute behaviour that previously slipped outside the definition of fraud.

For more see timesonline.com.

SEC Files Settled Foreign Corrupt Practices Act Charges Against Siemens AG for Engaging in Worldwide Bribery With Total Disgorgement and Criminal Fines of Over $1.6 Billion

The Securities and Exchange Commission filed a settled enforcement action on December 12, 2008, in the U.S. District Court for the District of Columbia charging Siemens Aktiengesellschaft (“Siemens”), a Munich, Germany-based manufacturer of industrial and consumer products, with violations of the anti-bribery, books and records, and internal controls provisions of the Foreign Corrupt Practices Act (“FCPA”). Siemens has offered to pay a total of $1.6 billion in disgorgement and fines, which is the largest amount a company has ever paid to resolve corruption-related charges. Siemens has agreed to pay $350 million in disgorgement to the SEC. In related actions, Siemens will pay a $450 million criminal fine to the U.S. Department of Justice and a fine of €395 million (approximately $569 million) to the Office of the Prosecutor General in Munich, Germany. Siemens previously paid a fine of €201 million (approximately $285 million) to the Munich Prosecutor in October 2007.

The SEC’s complaint alleges that:

Between March 12, 2001 and September 30, 2007, Siemens violated the FCPA by engaging in a widespread and systematic practice of paying bribes to foreign government officials to obtain business. Siemens created elaborate payment schemes to conceal the nature of its corrupt payments, and the company’s inadequate internal controls allowed the conduct to flourish. The misconduct involved employees at all levels, including former senior management, and revealed a corporate culture long at odds with the FCPA.

For more see SEC.gov.

SEC Files Settled Books and Records and Internal Controls Charges Against Fiat S.p.A. and CNH Global N.V. For Improper Payments to Iraq Under the U.N. Oil for Food Program — Fiat Agrees to Pay Over $10 Million in Disgorgement, Interest, and Penalties

The Securities and Exchange Commission filed Foreign Corrupt Practices Act books and records and internal controls charges against Fiat S.p.A. and CNH Global N.V. in the U.S. District Court for the District of Columbia. Fiat S.p.A., an Italian company, provides automobiles, trucks and commercial vehicles. CNH Global N.V., a majority-owned subsidiary of Fiat, provides agricultural and construction equipment. The Commission’s complaint alleges that from 2000 through 2003, certain Fiat and CNH Global subsidiaries made approximately $4.3 million in kickback payments in connection with their sales of humanitarian goods to Iraq under the United Nations Oil for Food Program (the “Program”). The kickbacks were characterized as “after sales service fees” (“ASSFs”), but no bona fide services were performed. The Program was intended to provide humanitarian relief for the Iraqi population, which faced severe hardship under international trade sanctions. The Program required the Iraqi government to purchase humanitarian goods through a U.N. escrow account. The kickbacks paid by Fiat’s and CNH Global’s subsidiaries diverted funds out of the escrow account and into Iraqi-controlled accounts at banks in countries such as Jordan.

According to the Commission’s Complaint:

During the Oil for Food Program, Fiat’s subsidiary, IVECO S.p.A., used its IVECO Egypt office to enter into four direct contracts with Iraqi ministries in which $1,803,880 in kickbacks were made on the sales of commercial vehicles and parts. After agreeing to pay the ASSFs, IVECO Egypt increased its agent’s commissions from five percent to between fifteen and twenty percent of the total U.N. contract price, which the agent funneled to Iraq as kickbacks. The agent submitted invoices for the inflated commissions, and IVECO financial documents show line items for “contract pay-back” due to the agent. IVECO and the agent secretly inflated the U.N. contracts by ten to fifteen percent. Despite the agent’s invoices being held for one year and the unusually large commissions, IVECO paid the invoices. In one instance, IVECO set up a bank guarantee in the amount of the ASSF in favor of a Dubai-based firm that operated as a front company for Iraq. IVECO’s bank guarantee was canceled and, instead, the agent established an identical bank guarantee to conceal IVECO’s role. A line item identified as “pay-back” on IVECO documents corresponded to the amount of the agent’s bank guarantee. The ASSFs were incorrectly recorded as legitimate commissions on the company’s books and records.

For more see SEC.gov.