DoubleLine Capital LP v. Odebrecht Finance, Ltd

Background

Plaintiffs DoubleLine Capital LP, DoubleLine Income Solutions Fund, and DoubleLine Funds Trust brought securities-fraud and related state-law claims concerning bonds issued by Odebrecht, S.A. Plaintiffs alleged that defendants concealed a large bribery scheme and misrepresented the financial and business effects of that scheme.

The sanctions motion concerned MyWebDay, an internal “shadow” accounting system that tracked illicit bribe payments. In January 2016, defendants intentionally destroyed the physical encryption keys needed to access the system. The parties did not dispute that the keys were destroyed intentionally. The system itself allegedly remained in existence, but the parties stated that the destroyed keys prevented access to its information.

Plaintiffs requested a mandatory adverse-inference instruction under Federal Rule of Civil Procedure 37(e)(2). Such an instruction would allow or require the jury to treat the lost information as unfavorable to defendants. Defendants argued principally that sanctions were premature because discovery was still underway and that the information might be replaceable through additional discovery.

Court’s analysis

Judge Moses applied Rule 37(e), which governs lost electronically stored information. The court considered whether defendants had a duty to preserve the information, whether plaintiffs were prejudiced by its loss, whether the information could be restored or replaced, and whether defendants acted with the specific intent to deprive plaintiffs of its use in this litigation.

The court held that the duty to preserve had arisen before the January 2016 destruction. Although this lawsuit had not yet been filed, defendants knew that their international bribery scheme was under investigation, including by United States authorities. The court concluded that defendants were on notice that litigation was likely and that the information could be relevant to future litigation.

The court also found that plaintiffs were prejudiced. The more detailed information allegedly contained in MyWebDay could help plaintiffs prove issues including the materiality of alleged misstatements, defendants’ state of mind, reliance, and the connection between the alleged misconduct and plaintiffs’ losses. The court rejected defendants’ proposed stipulation as a complete solution because it would not provide or establish the specific facts plaintiffs believed the MyWebDay data would have shown.

The court further held that the lost information could not be restored or replaced through additional discovery. Suggestions that employees might have sent the information in unencrypted emails, or that another accessible copy of the system might exist, were described as speculative or unlikely. The court therefore found that the information was permanently lost for purposes of Rule 37(e).

The court did not, however, find the specific intent required for the severe sanctions authorized by Rule 37(e)(2). Plaintiffs showed that defendants intentionally destroyed the encryption keys, but they did not show that defendants destroyed them with the intent to deprive plaintiffs of the information’s use in this litigation. Because that specific intent was not established, the court denied the requested adverse-inference instruction.

Ruling and remedy

Under Rule 37(e)(1), the court permitted plaintiffs to present evidence and argument to the jury about defendants’ intentional destruction of the encryption keys and the loss and possible relevance of the MyWebDay information. The jury may consider that evidence along with the other evidence in the case. The district judge will determine the precise scope of the evidence and any related jury instruction at trial.

The court did not impose monetary sanctions. It concluded that plaintiffs’ letter-motion was granted in part and denied in part: sanctions were imposed under Rule 37(e)(1), but the requested adverse-inference instruction under Rule 37(e)(2) was denied.