Regulatory Fundamentals Group v. Governance Risk Management Compliance

Defendant’s “Malicious” Spoliation of Evidence Results in Terminating Sanctions

After finding that the defendant engaged in the “planned, repeated and comprehensive” destruction of evidence, New York District Court Judge Katherine B. Forrest granted plaintiff’s request for terminating sanctions.

In this case, Regulatory Fundamentals Group, LLC (“RPG”) sued defendant Gregory V. Wood, an attorney, and two of his corporate entities, Governance Risk Management, LLC (“GRMC”) and Manhattan Advisers, LLC (“MAL”) for copyright infringement. As part of its service providing business solutions to investment funds, advisors, investors and service providers, RFG created copyrighted materials about financial regulations. RFG distributed these materials through various channels including a password protected web-based system, a blog and emails. Defendant’s companies GRMC and MAL also helped financial institutions comply with regulatory requirements. RPG and GRMC executed an agreement pursuant to which GRMC was to obtain clients for RPG. These clients would then be given access to RPG’s web site containing RPG’s copyrighted material but which was branded with GRMC’s name and marks. Under the agreement, RPG emailed Wood copyrighted materials from its RGF Pathfinder and RFG Watch services.

RFG alleged that Wood breached the agreement by taking RFG’s copyrighted material, removing RFG’s copyright information, replacing it with defendants’ copyright information and posting a modified version on MAL’s website. RFG also contended that Wood distributed the information to hundreds of third parties via email. Wood did not deny that he distributed the RFG content via email and contended that his conduct was acceptable under the agreement. RFG sent a cease and desist demand to Wood and subsequently initiated litigation and issued document requests.

After the commencement of discovery, Wood’s counsel informed RFG that defendants “might be missing certain emails.” Wood’s counsel also informed RFG that he had terminated his account with “MacHighway,” the third party vendor that hosted the defendants’ websites and email domains. Wood stated that he believed that the emails stored by MacHighway were downloaded onto his computer, but they were not. Upon termination of the account the emails hosted by MacHighway were destroyed and could not be restored. RFG then filed a motion for spoliation and the imposition of sanctions and the court held an evidentiary hearing.

At the hearing, Wood claimed that until recently he was unaware of his obligation not to destroy documents relevant to a pending litigation even though he had been a practicing attorney. The court rejected this argument, noting that Wood had at least a “basic understanding of the moral, ethical and legal responsibilities” not to destroy documents requested in a litigation.

Based upon his testimony, Wood sent out between 4,000-10,000 emails containing RFG’s copyrighted content. The court found that the emails Wood sent and any responses he received were “plainly relevant to the litigation.” The court indicated that these emails would have demonstrated how and to whom RFG’s content was distributed if they led to further contact or business.

Wood testified that he manually deleted emails even after the start of the litigation. Wood also terminated his contract with MacHighway who hosted the corporate website for GRMC/MAL and its associated email domains resulting in all the emails and content on their servers being lost. The court found Wood’s explanation for terminating the relationship (either based on cost or because he was shutting his business down) “not credible.” The court held that as litigation had commenced, Wood was under an obligation not to destroy documents or terminate his existing MacHighway account. The court also noted that after receiving his notice of deposition on spoliation issues, “Wood took certain actions either to genuinely determine if he could reverse what he had done, or merely to create a more favorable record, or both.” Specifically, Wood contacted MacHighway and informed them that he “desperately” needed to have his historic emails restored and was informed that it was not possible. Wood then reactivated his account for a short time and testified that he was able to retrieve some historic emails. However, a MacHighway representative stated that this was impossible and the court noted that the “credible evidence does not support ‘recovery’ of the previously deleted emails, but rather selective repopulation” by Wood with emails he obtained from a colleague. After terminating the contract with MacHighway a second time, Wood sent a series of emails to MacHighway in what the court described as “an attempt to create a false record and transfer blame from Wood to MacHighway and to minimize his personal culpability.”

In its discussion, the court found that the emails Wood deleted were both directly relevant to RFG’s claims in the case and the “best and most complete evidence of Wood’s conduct,” and that without the emails RFG was “clearly prejudiced.” With respect to Wood’s conduct, the court found that he engaged in “serial spoliation” in an “attempt to reduce his liability exposure.” The court indicated that Wood “created a fictitious record and engaged in additional misconduct in an attempt to cover his tracks” when he realized his spoliation would not be “overlooked.” Additionally, the court held that “Wood’s knowing and intentional spoliation was done in bad faith.” The court based its finding on the “chronology of events” and relied heavily on its “abiding belief that Wood lied during his testimony.”

In its analysis regarding the imposition of sanctions, the court found that neither monetary sanctions nor the imposition of an adverse inference was a sufficient remedy given that the loss of the emails prevented RFG from proving the full extent or scope of Wood’s conduct. The court therefore granted RFG’s request for terminating sanctions finding that any other sanction would “fail to account for the prejudice or to sufficiently penalize Wood or deter others from engaging in such misconduct.” Judge Forrest also indicated that she would consider awarding reasonable attorney’s fees and ordered RFG to submit billing information.

In Regulatory Fundamentals Group v. Governance Risk Management Compliance, 13 Civ. 2493 (KBF) (S.D.N.Y. Aug. 5, 2014)

In a subsequent September 24, 2014 order, the judge required Wood to pay $366,100 in fees and expenses.

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