Banks face fines for discarding e-mails

Merrill Lynch execs told lawmakers nothing on Tuesday

By David Schepp BBC News Online North America business reporter

The top US markets watchdog is seeking to fine six large investment banks for allegedly failing to keep electronic-mail communications as required by federal law.

The Justice Department ought to look at this in light and in view of what it really is - destruction of evidence

John Lawrence Allen, attorney

The Securities and Exchange Commission (SEC) may seek as much as $10m (£6.4m) in penalties from six brokerages for failing to maintain e-mails and produce them upon investigation.

The banks include Morgan Stanley, Goldman Sachs, Merrill Lynch and Deutsche Bank as well as units of Citigroup and US Bancorp.

The SEC seeks the fine, equivalent to $1.67m each, for failing to store e-mails for sufficient time and for taking too long to hand them over to investigators.

Each firm has been notified by the SEC, NASD and the New York Stock Exchange apprising them of the regulators' intention to sanction them for the alleged activities.

All the banks refused comment on the investigation.

Sending a message

Critics say the fines amount to a slap on the wrist for the brokerages.

"The Justice Department and the SEC ought to look at this in light and in view of what it really is - destruction of evidence," says securities-litigation attorney John Lawrence Allen.

The deleting of e-mails is as much destruction of evidence as the shredding of paper documents, Mr Allen told BBC News Online.

"It's criminal obstruction of justice," he says. "And it should be prosecuted."

Mr Ashcroft is talking tough over corporate fraud

The SEC as a regulatory agency has no authority to bring criminal charges, it can only levy civil penalties.

Criminal charges must be brought by the Department of Justice, the nation's top law-enforcement agency.

Nevertheless, supporters of the possible SEC action say it sends a message the government is actively pursuing corporate wrong-doers no matter where they stand in the company chain.

The proposed fines are not related to SEC investigations into stock-market flotations or research conducted by analysts at the investment banks.

As part of the sanctions, the firms would be censured and would promise not to repeat the offence.

'Smoking gun'

E-mail messages have proven invaluable in investigators' ability to point to evidence against investment banks and corporations for fraud.

New York state attorney general Eliot Spitzer used such e-mails when last spring he charged Merrill Lynch for disseminating "tainted" advice to its clients, resulting in millions of dollars of losses to investors.

Merrill and the state of New York reached an agreement in May, which resulted in a $10m fine for the brokerage even as it admitted no guilt.

Electronic messages also proved fateful in the recent trial of Arthur Andersen, the auditor to ill-fated energy-trader Enron.

David Duncan, the lead auditor for Andersen who oversaw the accounts of Enron, admitted to retaining a correspondence that came to be known as the "smoking gun" e-mail that prophesised the forthcoming accounting scandal.

More disturbing to some is the recent crackdown on e-mail destruction may indicate the practice is more widespread than believed.

While many firms have established guidelines for the retention of paper documents, it is not clear what, if any, exist for electronic correspondence.