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Failure to Preserve Mobile Data Leads to Multiple Sanctions in the Court of Chancery

Goldstein v. Denner, C.A. No. 2020-1061-JTL (Del. Ch. Jan. 26, 2024)
As more business is conducted via personal mobile devices, modern eDiscovery practice in Delaware generally involves the preservation of custodial mobile data. The failure to preserve relevant data while under a duty to do so may lead to the Court imposing sanctions.

In this action, which involved allegations of insider trading by a hedge fund principal leading up a company sale, the plaintiff served document requests for text messages, but the defendants produced none. The defendants explained that text messaging went against the hedge fund’s policies and procedure for business communications. However, after other parties produced text messages including the principal defendant, the plaintiff moved for sanctions. 

The Court determined that the defendants had spoliated evidence. The hedge fund’s principal claimed that relevant texts were inadvertently lost upon the upgrade of his mobile device, but the Court viewed this with skepticism, noting that the data should be backed up in the cloud, and that the text messages were the only data that was missing. The plaintiffs also requested texts from the hedge fund’s general counsel, who stated he had lost his text messages when his phone fell into a swimming pool. The fund’s head trader’s phone also was set to delete texts after 30 days. The spoliation occurred despite the defendants’ custodians’ being subject to a litigation hold.

Noting that the plaintiff would not be able to use the missing texts to prove its case or disprove any defenses, the Court imposed the following sanctions: 1) a presumption that the hedge fund traded on the basis of non-public information, and that defendants failed to conduct a reasonable sale process; and 2) that the defendants’ burden of proof be increased by one level, rising from a preponderance of the evidence to clear and convincing evidence.

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