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A party that destroyed potential evidence after its lawyers at Pashman Stein failed to impose a litigation hold and left it to the company's nonlawyer CFO to sort out what was relevant has been slapped with spoliation sanctions.
In a ruling on Wednesday, District Judge Esther Salas found that N.V.E., an Andover, N.J., nutritional supplement company, did not destroy records deliberately but was grossly negligent in failing to preserve them.
She imposed monetary sanctions and gave defendant Jesus Palmeroni 14 days to file an affidavit setting forth his fees and costs for identifying the destroyed evidence and filing the spoliation motion in N.V.E. v. Palmeroni, 06-cv-5455.
She refused Palmeroni's request to bar N.V.E. from offering evidence on certain claims but held that the jury would be instructed that it could draw an adverse inference from the destruction.
In November 2006, N.V.E. sued Palmeroni -- its former vice president of sales, fired the previous January -- under the Racketeer Influenced and Corrupt Organizations Act, alleging a scheme to defraud N.V.E. by making deals with brokers for kickbacks on commissions.
An amended complaint added claims that Palmeroni conspired with N.V.E. employees and others to buy N.V.E. products at cheaper international prices and undercut N.V.E. by reselling them in the U.S. rather than exporting them.
Palmeroni denied the allegations and asserted a counterclaim accusing the company of firing him in retaliation for complaining about or refusing to participate in illegal or fraudulent activities.
Salas held that N.V.E.'s duty to preserve evidence relating to Palmeroni's employment and firing arose no later than January 2006, when it terminated him. The company admitted it knew then that litigation was imminent.
Pashman Stein, of Hackensack, was retained around May 2006 and admittedly failed to issue a litigation hold.
N.V.E. Chief Financial Officer Erling Jensen testified that prior counsel sent an e-mail telling N.V.E. staff not to destroy documents but Salas, having no proof of the e-mail's content, was not convinced that Jensen's memory was correct.
Pashman Stein failed to oversee the discovery process, leaving Jensen "responsible for not only gathering the documents to produce in discovery but making relevance calls without the assistance of counsel," Salas said, adding she was "extremely surprised to learn that Mr. Jensen has received no assistance from counsel, nor has any counsel from Pashman Stein visited N.V.E. over the five years this litigation has been pending to review any documents."
Salas said she could not "fathom how N.V.E. can be confident that it has produced all relevant information and that no relevant information has been destroyed when there has not been a single attorney reviewing the documents to confirm this fact is true."
Salas found that after January 2006, N.V.E. improperly deleted Palmeroni's e-mails and destroyed electronic records and papers kept in a storage room.
The electronic records were on a system that N.V.E. upgraded in November 2005, though it did not complete the transition until after Palmeroni's departure. It kept the old system but claimed the documents, which allegedly include accounting and financial records as well as invoices, were no longer accessible.
The storage room documents, shredded in 2009 by a receptionist at Jensen's request, included accounts payable and receivable, purchase orders, commission statements, and correspondence dating from the 1980s to 2004.
N.V.E. claimed that Jensen confirmed the documents were not related to the litigation and, when the shredding took place, it knew only about the kickback scheme and not the claims added in the amended complaint.
Palmeroni's e-mails were erased from his laptop and the company's server, along with those of co-defendant Vincent Rosarbo, a former N.V.E. salesman, and their respective assistants. N.V.E. claimed it thought it transferred all the messages when it upgraded to a new e-mail server before Palmeroni's termination, though it could not find those prior to 2004. Its systems administrator testified that he tried without success to power up the old server.
During oral argument on May 26, N.V.E.'s lawyers told Salas that the company hired a forensic computer expert who recovered the information deleted from Palmeroni's laptop and that those e-mails would be produced once a privilege review was completed.
Aidan O'Connor of Pashman Stein says N.V.E. is considering asking for reconsideration or an interlocutory appeal. "I don't think anyone could have predicted that we would not be able to get into our old computers," he says. He also notes that Palmeroni never took N.V.E. up on its offer that he could hire an expert to try to access the data.
He says that since the case was filed there's been a "sea change" in the law regarding litigation holds, which are "now done as a matter of course."
Palmeroni's counsel when the spoliation motion was filed, Westfield solo Fred Shahrooz Scampato, says, "if you represent a company that's being sued or bringing a lawsuit, you have an obligation to issue a litigation hold letter."
His new lawyer, Hackensack solo Robert Vort, declines to comment.
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