Forensic Update

Reflections on information management within the legal and regulatory arena

Regulator Fines Financial Services Company $9 Million for Email Spoliation…

Posted by Johnny Lee on May 28, 2013

FINRAThe Financial Industry Regulatory Authority (“FINRA”) announced last week that it had levied fines against LPL Financial LLC (“LPL”) to the tune of $7.5 million for thirty five “separate, significant email system failures, which prevented LPL from accessing hundreds of millions of emails and reviewing tens of millions of other emails.”  FINRA also determined that LPL had made “material misstatements” during FINRA’s inquiry into the email failures, resulting in the establishment of a $1.5 million fund “to compensate brokerage customer claimants potentially affected by its failure to produce email.”

While this is technically not a spoliation sanction, which can only be issued by a court, it is nonetheless what those in the eDiscovery arena recognize as punishment for the failure to preserve relevant evidence.  FINRA’s Chief of Enforcement said that LPL simply failed to “expand its compliance and technology infrastructure” as LPL grew.  This resulted in LPL failing “in its responsibility to provide complete responses to regulatory and other requests for emails.”

To be clear, FINRA felt that these failures were both systemic and severe.  To illustrate just a few of the thirty five enumerated failures, see just a few examples below.

  • LPL failed to supervise 28 million “doing business as” (DBA) emails sent/received by thousands of representatives who were operating as independent contractors over a four-year period.
  • LPL failed to maintain access to hundreds of millions of emails during a transition to a less expensive email archive (with 80 million of those emails becoming corrupted in the process).
  • For seven years, LPL failed to preserve and review 3.5 million Bloomberg messages, as required by regulation.
  • LPL failed to preserve emails sent to customers via third-party email-based advertising platforms.

The Chief of Enforcement sums this up in a rather pithy statement: “This case sends a strong message to firms to make sure your business does not outgrow your compliance systems.”  Indeed…message received.

For more on FINRA’s consent announcement, please click here. To read the actual consent agreement, please click here.

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