Free Compendium of Unreported Decisions - District Court of Delaware - Delaware

Case 1:04-cv-01394-GMS

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE

CAPTAIN BARBARA L. CONLEY, Plaintiff, v. COLONEL L. AARON CHAFFINCH, individually and in his official capacity as the Superintendent, Delaware State Police; LIEUTENANT COLONEL THOMAS F. MACLEISH, individually and in his official capacity as the Deputy Superintendent, Delaware State Police; DAVID B. MITCHELL, individually and in his official capacity as Secretary of the Department of Safety and Homeland Security, State of Delaware; and DIVISION OF STATE POLICE, DEPARTMENT OF SAFETY AND HOMELAND SECURITY, STATE OF DELAWARE, Defendants.

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C.A.No.04-1394-GMS

PLAINTIFF'S COMPENDIUM OF UNREPORTED CASES FROM HER OPENING BRIEF IN SUPPORT OF HER MOTION FOR SANCTIONS AND OTHER RELIEF (D.I. 142).

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Respectfully Submitted, THE NEUBERGER FIRM, P.A. /s/ Stephen J. Neuberger THOMAS S. NEUBERGER, ESQ. (#243) STEPHEN J. NEUBERGER, ESQ. (#4440) Two East Seventh Street, Suite 302 Wilmington, DE 19801 (302) 655-0582 [email protected] [email protected] Dated: January 17, 2005 Attorneys for Plaintiff

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Briefs and O ther Related Do cuments United States District Court, N.D. Illinois, Eastern Division. David D ANIS, on b ehalf of himself and all others similarly situated, Plaintiffs, v. US N C OM MUN ICA TION S, IN C., et al., Defend ants. No. 98 C 7482. Oct. 23, 2000.

REPORT AND RECOMMENDATION SCHENKIER, Magistrate J. *1 Day in and day out, in countless courts throughout this country, courts resolve disputes of every kind imaginable. Even when disappointed (or outraged) by the outcome, the parties to these disputes do not engage in lawlessness or self-help. H aving had their day in court, the parties accept judgment and move on with their lives. They would not do so unless they had faith in the integrity of our judicial system. Not a faith that the system is perfect and will never err, but rather a faith that the system will give the p arties a fair opportunity to be heard. This fair opportunity to be heard is achieved through lawyers for each side, having obtained and marshaled the relevant evidenc e, presenting their clients' respective positions vigorously. Our system is premised on the view that through this clash of competing stories, judges and juries will have the information they need to make a fair decision. In our system of civil litigation, the discovery process is the principal means by which lawyers and p arties asse mble the facts, and decide what information to present at trial. Federal Rule of Civil Procedure 26 requires a party to produce non-privileged docum ents which are "relevant

to the subject matter involved in the pending action." That requirement embraces not on ly documents adm issible at trial but also documents and information that are "reasonably calculated to lead to the discovery of admissible evidence." This broad duty of disclosure extends to all documents that fit the definition of relevance for the purposes of discovery-whether the doc uments are good, bad, or indifferent. While it may seem contrary to the adversarial pro cess to require such "self-reporting," it is in fact a central tenet of our discovery process. The duty of disclosure finds expression not only in the rules of discovery, but also in this Court's Rules of Professional Conduct, which prohibit an attorney from "suppress[ing] any evidence that the lawyer or client has a legal obligation to reveal or produce," Rules for the Northern District of Illinois, LR 83.53.3(a)(13), or from "unlawfully obstructing another party's access to evidence.... Id. LR 83.53.4(1). This duty of d isclosure would be a d ead letter if a party could avoid the duty by the simple expedient of failing to preserve documents that it does not wish to produce. Therefore, fundamental to the duty of production of information is the thresho ld duty to prese rve documents and other information tha t may be relevant in a case. That duty, too , finds exp ression in this Court's Rules of Professional Conduct. See Rules for the Northern District of Illinois, LR 83.53.4(1) (a lawyer shall not "unlawfully alter, destroy, or conceal a document or other material having potential evidentiary value"). Suffice it to say, there is no "bad document" exception to these duties of preservation and p roduction. These twin obligations are so ingra ined in our system, and in the lawyers and parties who operate within it, that the obligations routinely are discharged without question. Parties and attorneys frequently are ca lled up on to preserve and produce d ocuments that are against their interest in a particular case. And when they do so, the parties and the attorne ys uphold the integrity of our litigation system and inspire c onfidence in it. *2 Conversely, when a charge is made that relevant information has be en de stroyed , and especially when a

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charge is made of intentional destruction, it is a charge that strikes at the core of our civil litigation system. The motion prese ntly before this Court presents just such a charge. This lawsuit involves a class action brought by two groups of purchasers of common stock issued by USN Com munications, Inc. ("USN"), which is now in bankruptcy. The suit alleges a variety of federal securities law violations against three groups of defenda nts: (1) eleven officers or directors of USN; (2) three companies who managed the underwriting of USN 's initial public offering in February 1998; and (3) the accounting firm that audited USN's financial statements and provided various consulting services to USN. In earlier rulings in this case, the District Judge denied a motion to dismiss (except as to one claim against certain individual defendants), and certified the case as a class action, with the class period running from February 4, 199 8 to November 20, 1998. The trial in this case is set to commence on December 4, 2000. On December 13, 19 99, plaintiffs filed a motion for sanctions against six of the eleven individual officer and director defendants: Richard B rekka, J. Thoma s Elliott, James Hyne s, W illiam Johnston, David Mitchell, and Eugene Sekulow. Mr. E lliott is the only one of those defendants who held the positio n of inside director to USN during the class period; the remaining defendants named in the motion were outside directors to USN during the class period. Plaintiffs premised their motion on the assertion that "USN employees, acting at the direction or under the supervision of the individual defendants and U SN's senior officers, destroyed virtually all evidence of the massive fraud alleged in plaintiff's complaint" (Pls.' 12/13/99 Mot., at 1). As a sanction for this alleged misconduct, plaintiffs sought the most draconian remedy available under the rules against the individual d efendants name d in the motion: a default judgment. On January 13 , 200 0, the District Judge referred the motion to this Court for a report and recommendation (doc. # 117) (subsequently, the referral was expanded to all discovery motions) (doc. # 131)). This Court held a status hearing on the sanctions motion on January 21, 2000. At that time, it was obvious that little discovery

had yet been do ne in the case: no d ocuments had yet been produced from U SN , and no depositions had yet been taken. Accordingly, the Court entered and continued plaintiffs' motion for sanctions pending completion of discovery, which would allow p laintiffs (and, if necessary, the Court) to determine more precisely what, if anything, had been destroyed; what information remained available notwithstanding any alleged destruction; and what prejudice, if any, the plaintiffs had suffered. At that time, non-expert fact discovery was set to close on April 30, 2000; by an order of the D istrict Judge dated M arch 14, 2000 , the period for non-expert fact discovery was extend ed to July 7, 2000 (doc. # 151 ). *3 The parties indeed have engag ed in discovery-with a vengeance. In the nearly six months between January 21 and July 7, 2000, the parties exchanged in excess of one million pages of documents, and took and defended some ninety non-expert fact depositions. The discovery was not only extensive, but was extraord inarily contentious-not including the sanctions motion, this Court has been required to rule on 27 contested discovery motions brought by the various parties, both plaintiffs and defendants alike (see doc.135, 137, 145, 157, 162, 165, 170, 183, 188, 191, 212, 214, 216, 225, 226, 276 ). On July 12, 2000, after the completion of non-expert fact discovery, the Court discussed the status of plaintiffs' motion for sanctions. The plaintiffs indicated that they still wished to pursue the sanctions motion, and sought leave to file an addendum to advise the Court of further information developed in disco very. For their part, counsel for the individual defendants threatened to file a motion pursuant to Rule 11 of the Federal Rules of Civil Procedure if plaintiffs persisted with the sanc tions motion. Because of the substantial additional information developed since the filing of the original sanctions motion, the Court suggested-and plaintiffs agreed-to withdraw their original motion for sanctions. The Co urt granted plaintiffs leave to file an amended motion for sanctions, if they chose to do so, by July 25, and set a briefing schedule that would apply if the motion were filed (doc. # 191). On July 25, 2 000, plaintiffs filed an amended motion

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for sanctions (doc. # 208 ), directed at the same six individual defendants as the original sanctions motion (the amended motion and memorandum will be referred to as "Pls.' 07/25 /00 A m. M em."). FN1 The amended motion alleges, among other things, that these individual defendants are "corporately" responsible for "having supervised, sanctioned, or permitted the destruction of crucial USN ... Finance, Accounting and Sales Department hard copy and electronically stored documents and d ata critical to plaintiffs' proof," in violation of the Private Securities Litigation Reform Act of 1995 ("PSL RA"), 15 U.S.C. § 78 u-4(b )(3)(C )(i), a preservation order entered by the District Judge on February 2, 19 99, and the Fed eral Rule of C ivil Procedure 37 (Pls.' 7/25/00 Am . Mem. at 1-2). In the amended sanctions motion, plaintiffs continue to seek the ultimate sanction against those d efendants of a default judgment. Pursuant to the schedule set by the Court, the amended sanctions motion was fully briefed as of August 15, 2000: Mr. Elliott submitted an opposing memorandum ("Defs.' Mem."); the outside directors joined in that memorandum, and filed an additional memorandum of their own ("Outside Dirs.' Mem ."); and plaintiffs filed a reply ("Pls.' Rep ly Mem .").

provide copies of their Rule 26 expe rt repo rts (doc. # 275). On September 7, 2000, all parties complied with that order (see Defs.' 09/07/00 S ubm ission; P ls.' 09/07/00 N otice). *4 Because the briefs and the supporting papers raised certain issues as to credibility of statements made by various witnesses, the Court planned to hold a hearing during the wee k of Aug ust 21 to take in-court testimony. At the request of plaintiffs, and with the agreement of the individual defendants, the hearing was pos tponed to August 28-29, 2000 (doc. # 241). Thereafter, at the request of counsel for certain individual defendants, the matter was further rescheduled-over the plaintiffs' o bjections-to September 11-12, 2000 (doc. # 245). The evidentiary hearing took place at that time, with the parties calling a total o f twelve witnesses, including two of the individual defendants on this motion-M essrs. Elliott and Hynes. FN2 At the close of that evidentiary hearing, the Court requested (doc. # 292), and has since received, further submissions by the parties stating the fees and costs they claim to have incurred in connection with the sanctions motio ns and related matters (see Pls.' 09/29/00 Subm ission; Certain Outside Dirs.' 09/29/00 Submission; Elliott's 09/29/00 S ubmission; H ynes' 09/29/00 Sub mission).

FN1. Plaintiffs' statement that this Court ordered a sanctions motion to be filed (Pls.' 7/25/00 Am. Mem. at 1 n. 1) is incorrect. The Court did not order plaintiffs to file an amended sanctions motion; they were free to file or no t to file a motion. What the Court ordered was that if such a motion were to be filed, the plaintiffs must do so by July 25. Upon reviewing the briefs, on A ugust 24, 20 00, the Court ordered the individual d efendants to p resent a supplemental subm ission setting forth, by Bates number and other identifying information, a list of certain doc uments that the individual defendants claim ed to have produced but that plaintiffs claim they did not possess (doc. # 24 5). T he individual defendants provided that submission on Septem ber 5 , 200 0 ("D efs.' 09/05/00 Submission"). On September 6, 200 0, the Court ordered that the ind ividua l defendants supplement that submission , and tha t the plaintiffs

FN2. The witnesses at the hearing also included an individual (George Doyle) whom plaintiffs sought leave to add to their witness list on September 7, 2000, on the ground that he would testify about "newly discovered evide nce." The Co urt granted that motion (doc. # 283), over the written objection of the individual defendants (doc. # 282). Before turning to the Co urt's findings and recommendations, the Court makes several observations about how this sanctions motion-and the case in general-has been litigated by the parties. Sorting out what happened here has been a challenging task not only due the com plexity of some of the issues presented, but-regrettably-due to assertions of counsel that often have confused than clarified the issues. On a

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number of occasions, plaintiffs have asserted that certain documents were not produced, when in fact it later turned out that the documents long ago had been produced. Conversely, defendants have on occasion informed the Court that they have p roduced certain documents, when in fact it turned out that the y had not. Moreover, throughout these proceedings, the submissions by the lawyers too often have offered overblown rhetoric rather than accurate information and careful reasoning. In the Court's judgment, there are several reasons why-despite the high level of experience and quality of the attorneys-this has occurred. First, even to this day, neither side to this motion has demonstrated to this Co urt a co mple te mastery of what types of do cuments were generated by USN in the ordinary course of business, how they were used, or their significance. In part, this may be a function of the fact that USN went into bankruptcy, and that the lawyers repre senting the individ ual defendants do not have a functioning client to which they can go for ready answers to such questions. In part, this may be attributable to plaintiffs' decision to take a case in which they had six months to conduct fact discovery and, instead of focusing and tailoring their discovery efforts accordingly, attemp ting to co mpress into a six-month time frame the amount of discovery that they might have sought to take if discovery had extended for a much longer period. The result was inevitable: discovery proceeded at a breakneck p ace, and information was received faster than the attorneys could abso rb it. *5 Second, the heated rhe toric is, in the Co urt's view, a direct result of the serious charges that plaintiffs leveled against these defendants in the sanctions motion. Accusations of intentional misco nduc t are no t generally conducive to an atmosphere of civility and cooperation among the attorneys, and this case was no exception. The plaintiffs, of course, cannot and should not be criticized for challenging USN's program for preserving of documents: not only did they have a reaso nable basis to believe that adequate preservation steps were not taken, but (as is described below), they also were right. For their part, the individual defendants only further threw fuel on the fire by steadfastly defending a preservation program that was plainly inadequate.

However, in attemp ting to parlay that failing into a claim that their case had been un derm ined and that a default was appropriate, plaintiffs vastly overstated the missing evidence and its significance, and thus unreasonably upped the stakes of their sanctions motion. Again, the individual defendants did little to defuse matters. Indeed, even in their briefing in opposition to this sanctions motion, the defendants did not provide a straight-forward list of the key documents that the plaintiffs said they were missing but that they had in fact produced-until the Court ordered them to do so. As a result, both sides were the losers. They lavished huge sums of time and money on an issue that did not remo tely justify the expenditure, and which would have been more pro fitably spent focusing on the merits of this case. The Court makes the following findings: 1. As of Novemb er 12, 1998, the date that this litigation commenced, USN had a duty to p reserve documents and other information that might be discoverable in the litigation. 2. Plaintiffs have failed to establish that USN (or any of the individual defendants) intentionally destroyed, or directed others to destroy, do cuments to deprive plaintiffs of discoverable information in this case. However, plaintiffs have established that USN failed to imple ment adeq uate step s to discharge its duty to preserve documents and information that might be discoverable in this case. 3. Plaintiffs further have established that M r. Elliott, both as a defendant himself and as Chief Executive Officer of USN, ha d the authority and responsibility to implement a suitable document preservation program; that Mr. Elliott was at fault for delegating that function to a person who lacked the exp erience to perform that job properly; and that M r. Elliott further was at fault for failing to exercise any ongoing oversight to ensure that the job was don e pro perly. 4. Plaintiffs have failed to establish that the other individual defendants on the motion, who were outside

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directors without a physical presence at or supervisory role in the day-to-day operations at USN, are at fault for the failure to implement an adequate document preservation program-although, as will be described below, their conduct is not particularly worthy of praise. *6 5. The plaintiffs have established that as a result of the failure to implement an adequate preservation program, certain potentially disco verab le documents and information may have been lost. Mo reover, the evidence shows that each side has engaged in discovery conduct that unne cessarily increased the cost of this case for the other side. 6. Plaintiffs have substantially overstated the impact of the failure of USN to implement an adequate docum ent preservation program. The documents and information that plaintiffs claim were destroyed have, in the main, been produced-although, in some instances, that production has been by third parties rather than the individual defendants. Moreover, to the extent that there are some ga ps in the production of certain categories of documents that plaintiffs have described as critical, plaintiffs have failed to establish prejudice to their ability to litigate their claims. In short, the Court finds that while plaintiffs have shown that the document preservation requirement was not fully met, plaintiffs have fallen far short of substantiating their assertions that the individual defendants engaged in intentional destruction, or that the documents and information missing are "critical to plaintiffs' proof" (Pls.' 7/25/00 Am. Mem. at 1). In light of these findings, the Court respectfully recommends that plaintiffs' amended motion for sanctions be granted in part and denied in part as follows: 1. The Co urt recommends that the request for a d efault judgment be denied. The Court believes that this ultimate sanction is com pletely inappropriate in this case, where the Court finds no evidence of intentional destruction by the defendants and where plaintiffs have failed to establish prejudice. 2. In order that the jury not draw any inference adverse to plaintiffs from any gaps in the production of documents, the Co urt reco mmends that pursuant to

Fed.R.Civ.P. 37(b), the District Court inform the jury that any such gaps are the result of USN failing to produce those d ocuments, even though plaintiffs requested them. 3. The Co urt recommends that, as a result of his failure to adequately discharge his responsibility to institute a program to preserve documents, Mr. Elliott be required to pay a fine payab le to the re gistry of the Court of $10,000.00. Even though the Court finds that the failure to institute a preservation program has no t resulted in prejudice to the plaintiffs, the Court believes that this fine is appropriate as a sanction to impress upon Mr. Elliott the seriousness of the duty of preservation, and to deter others from failing to properly discharge that duty. 4. The Court recommends that no monetary sanctions be imposed on either party for their discovery missteps: the additional costs each has imposed o n the other are roughly comparable, and it would be counter productive at this point to engage in further litigation on this issue. 5. The Court recommend s that no attorneys' fees and costs be assessed in connection with the prosecution or defense of this mo tion. Plaintiffs claim that their fees and costs on the sanctions issue total $757,559.61, and (not to be outdone) the individual defend ants assess their fees and costs at $767,202.42. View ed separately, not to mention collectively, these statements of fees and costs are nothing short of shocking: they are wholly dispropo rtionate to what the evidence has disclosed. Because the conduct of each side has contributed to an excessive expenditure of fees and costs, the Court considers the fees and costs incurred to be a self-inflicted wound by each side, and that neither side should be forced to pay the costs and fees of the other side.

I. *7 W e begin with the factual findings, which are drawn from the pleadings, the discovery record and prior proceedings in this Court, the written submissions on the amended motion for sanctions, and the testimony at the evidentiary hearing on September 11-12, 2000.

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A. Th e Parties. This case proceeds as a class action, upon consolidation of 14 federal securities suits filed in this jurisdiction in late 1998 and early 1999 (see doc. # 12 (Pretrial Order No. 1)). FN3 On J une 17, 19 99, the plaintiffs filed an amended complaint in these consolidated cases ("the Consolidated Comp laint"). On O ctober 29, 1999 , the District Court certified a plaintiff class consisting of persons who p urchased sto ck pursuant to USN 's registration and pro spectus statements of February 2 and 4, 1998, and those who purchased USN stock between February 4 , 199 8 (the d ate of U SN's initial public offering) and November 20, 1998.

Vice President and Chief Financial Officer until app roxim ately July 1998; and Richard Brekka, Dean Greenwood, Do nald Hoffmann, James Hynes, William Johnston, Ian Kidson, Paul Lattanz io, David Mitchell, and Eugene Se kulow, all of whom were directors of USN. The underwriter defendants, Merrill Lynch & Co., Inc., Cowan & Com pany, and Do naldson, Lufkin & Jenrette Securities Corporatio n, allegedly were all involved in the management of the underwriting of USN 's initial public offering. The remaining defendant, Deloitte and Touche, L.L.P., audited USN's financial statements for the fiscal years p reced ing the public offering, and provided consulting services to USN b oth prior to and during the class period. No table by its omission from this roster of defendants is USN itself. USN was named as a defendant in each of the lawsuits originally filed. However, on or abo ut February 19, 1999, USN filed for bankruptcy protection. Thereafter, when the Consolidated Comp laint was filed on June 17, 19 99, U SN w as not named as a defendant-presumably, to avoid potential complications that might be created by the automatic stay that pro tects those who have filed for bankruptcy protection. See 11 U.S.C. § 362.

FN3. The other seven suits were filed in the Southern District of New York in late 1998, and by a stipulation of January 27, 1999 were transferred to this District: Glotzer v. USN Com munications, Inc., et a l., 98 C 8088, Kassover v. USN Co mmu nications, Inc., et al., 98 C 82 50, Murphy v. USN Com munications, Inc., et al., 98 C 836 9, Crowley v. USN Com munications, Inc., et a l., 98 C 8529, Cummings v. USN Communications, Inc., et al., 98 C 861 6, D a w so n v. U SN Com munications, Inc. et al. 98 C 87 81, and Raino v. USN Com munications, Inc., et al., 98 C 9189. Seven of the consolidated cases were origina lly filed in this District: Danis v. USN Com munications, Inc., et a l., 98 C 7482, Donoghue v. USN Communications, Inc., et al., 98 C 761 0, Rosenbaum v. USN Com munications, Inc., et al., 98 C 76 74, Egan v. USN Comm unications, Inc., et al., 98 C 8044, Chanik v. US N Com mu nications, In c., et al., 98 C 808 2, Ro op v . USN Comm unication s, Inc., et a l., 99 C 0067 , and Brent v. USN Comm unication s, Inc., et al., 99 C 119. The individual defendants in this case (many of whom are not the subje ct of the sanctions motion) are J. Thomas Elliott, a director and USN's President and CEO since April 19 96; G erald Swe as, USN 's Executive

B. T he Allegations of the C onso lidated Complaint. USN was a "local telecommunications reseller" which sought to purchase various local and long distance telecommunication services from Regional B ell Operating Companies ("RBOCs"), bundle them into a single package of services, and sell that package of services to the public. USN sought to persuade the existing customers of RBOCs to switch to USN by offering them lower rates for the pa ckaged services. W hen USN succeeded in gaining a customer, USN would "provision," or switch, the new customer from the existing telephone company over to USN. The gravamen of the Consolidated Complaint is that USN allegedly embarked on a scheme to build a seemingly large, but in reality fictitious, book of business in order to induce a larger telecommunications company to purchase USN. The Consolidated Complaint alleges that in aid o f this schem e, USN

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issued false public reports and statements to portray USN as successful, when in fact it was not. Plaintiffs allege that when the truth became known, the value of its shares plummeted, causing injury to investors. *8 The Co nsolidated Complaint is plead in four co unts: Count I alleges that all defendants have violated Section 11 of the Securities Exchange Act of 1933 ("the Securities Act"), and tha t the individual d efendants add itionally have violated Section 15 of that Act; Count II alleges that the underw riter defendants have violated Section 12 of the Securities Act (the District Judge has dismissed the Section 12 claim alleged against the individual defendants); Count III alleges that all defendants have violated Section 10(b) of the Securities Exchange Act of 1934 ("the Exchange Act"), and R ule 10b -5 promulgated thereunder; and Count IV alleges that the individual defendants have violated Section 20(a) of the Exchange Act. The fundamental premise of plaintiffs' amended sanctions motio n is that once the litigation commenced, USN destroyed key sales, financial and accounting doc uments that are "critical to plaintiffs' proof" that USN 's public financial statements were false and misleading. In particular, plaintiffs' amended sanctions motion focuses on several categories of documents: (1) Mo nthly Sales Roll Up Repo rts; (2) Final Sum and Final Sum Summary Repo rts; (3) Aged Ac counts Receivab le Reports; and (4) Monthly Close Packages (see, e.g., Pls.' Reply Mem. at 1-2). T hus, we be gin with an explanation of those documents, and the evidence concerning how they were used at USN in the ordinary course o f business.

four-week perio d for a cumu lative total covering app roxim ately a one-month period. The rep orts also provided projections by the sales force as to the number of lines sold and the amount of revenue that the sales would generate, as well as a comparison of the dollar value of the projected sales revenue to the sales q uota provided for that particular office or region (a samp le of a doc ument labeled "State Directors Report" was offered at the evidentiary hearing as Defendants' Exhibit 2). These "Monthly Sales Ro ll Up Rep orts" o r "State Directors Rep orts" were generated at least through N o v e m b e r 1997. T he re a fte r, be ginnin g in mid-December 1997, this type of sales information was contained in a computer-generated Sales Summary repo rt. One reason for using this computer system was an attempt to increase the reliability of the sales information repo rted fro m the field (Hrg . Tr. 4 22 (Dundo n)). Beca use sales people earned comm ission based on sales volume, there was a concern at USN that sales numbers could be changed after they were initially submitted in order to increase commissions; according to the testimony, the switch to a computer system to generate sales reports was intended to provide sales information "on a more structured and more, I guess, rigoro usly auditable ba sis" (Hrg. Tr. 422 (Dundon)). FN4

FN4. The parties disagree ab out wheth er a State Directors R eport is the same thing as a Monthly Sales Roll Up, and whether either of those reports continued to be generated after November 1997. W e address this dispute below (see 35-4 0, infra ). *9 After receiving sales repo rts from the field, U SN did not immediately switch the putative new customer to USN service. Rather, USN engaged in a process of "scrub bing," (that is, verifying) the sale, to make sure that the new customer actually desired to switch to USN, what level of service was requested, and whether the customer had provided all information necessary to effectuate the switch. This function originally was performed by the provisioning group in U SN; as o f approximately late 1997, this function was performed by a separate group, known as "B usiness

C. Business Documents Generated by USN. During the course of soliciting and signing up a new customer, USN generated various sales and marketing-related docum ents. One type of sales-related document tabulated and totaled the new sales, as reported by the U SN variou s sales offices. This doc ument, referred to variously by different witnesses as a "Monthly Sales Roll Up Rep ort" o r "State Directors Repo rt," tabulated sales on a w eekly basis, and then totaled (or, "rolled up") those sales over a

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Administration" ("BA"), which performed this check on the sales before providing the information to the provisioning group to actually effectuate the switch of the custom er (Pls.' 07/25 /00 A m. M em., App. 13 (Jeavons Dec. ¶ 9)). Once the switch was completed, and the customer was converted to USN, the customer would have to be billed for the services delivered. That billing function initially was outsourced to two companies: Spectrum and Profitec. As of the billing for the month ending October 1997, USN contracted with Spectrum to be the exclusive provider of issued bills for all U SN acco unts involving "competitive local exchange billing," including the Midwest and Northeast regions from November 10, 1997 onward (Hrg. Tr. 131-32 (D oyle)). In order to perform this billing function, Spectrum received various reports and information from USN, and sent various reports and information to USN. These exchanges of information were accomplished by e-mail and through a dedicated T-1 line. Information transmitted on this T-1 line did not run directly between Spectrum and U SN's UN IX co mputer system. Rather, information was transmitted through a file transfer protocol ("FTP") server that linked Spectrum and USN (Hrg. Tr. 141 (Doyle)). The sole purpose of this FTP server use was to pass large amounts of data back and forth between Spectrum and USN (Hrg. Tr. 348 (Struble)). According to the testimony of George D oyle, the founder and Executive Vice President of Spectrum, each month USN sent to Spectrum via the FTP server twelve to eighteen files (extracted from billing and financial databases) to use for billing (Hrg. Tr. 152, 158, 162 (D oyle); Hrg. Tr. 346-47, 381 (Struble)). Included among these files were credit files, which would show, on an acco unt by account basis, the amount of credit to be applied to a particular customer and the reason the credit was given (Id., at 147); Plaintiffs' Exhibit 3 is an example of such a cred it file (Id., at 149). Spectrum used the information from USN, as well as information obtained from the local or long distance carriers concerning usage (Hrg. Tr. 195-96 (Doyle)), to generate detailed billing information for each USN custom er acc ount.

This detailed billing information was transmitted over the T-1 line to USN (Hrg. Tr. 132, 145, 147 (Doyle)), where it was stored in a databa se called "REPGE N"-which is an acronym for "report generator" (Hrg. Tr. 349-50 (Struble)). Charles Struble, USN 's Vice President for Informatio n System s, described REPGEN as a physical data base, containing detailed records from Spectrum in the form of tables, as well as other financial information (Id., at 349). According to Thad Pellino, USN's Vice President of Revenue Assurance, who was responsible for calculating revenue and ensuring the accuracy of tho se calculations, this information was electronically accessible to USN , but was not conveyed by Spectrum to USN (or printed out by USN) in a hard copy repo rt forma t (Hrg. Tr. 299-300 ). Once the REPGEN information was received by USN, the finance group wo uld internally genera te selected repo rts to use for balancing and reconciliation (Hrg. Tr. 367 (Struble)). *10 In addition to this detailed source information, two repo rts relevant to billing were generated by Spectrum and delivered to USN. One such report was entitled Final Sum Summary, which Spectrum sent to USN by e-mail in an Excel spread sheet format. This report "aggregate[d] all billing categories or aggregate[d] each billing category for all accounts" and eliminated the account-byaccount detail, showing only totals by billing category (Hrg. Tr. 164 (Do yle)). T he other rep ort, entitled Final Sum, also was sent by e-mail in an Excel format, prior to 1998; accord ing to M r. Doyle, bec ause of the volume of information communicated in the Final Sum Repo rt, thereafter the report was converted to a Paradox forma t (which had greater capacity than Excel) and transmitted on the T-1 line (Hrg. Tr. 144 (D oyle)). FN5

FN5. As with the "Monthly Sales Roll Up" reports, there is conflict in the testimony as to what constitutes a "Final Sum" Report. Mr. Do yle identified the detailed, voluminous report marked as Plaintiffs' Exh ibit 2 as a Final Sum Report (Hrg. Tr. 134 , 135), which he said was sent to USN for every billing period in 1998 (Id ., at 140-41, 143-44). However, Mr. Pellino identified that document

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as a print-out from the REPGEN file, and testified that D efendants' Exhibit 7 (a much thinner document) was an example of the Final Sum Rep ort (Hrg. Tr. 293-94). Likewise, Mr. Struble distinguished Final Sum Rep orts from the REPGEN file, which he said contained the physical data behind the Final Sum Rep orts (H rg. Tr. 373 ). And , indeed, even Mr. Do yle at one point referred to Plaintiffs' Exhibit 2 not as a Final Sum Rep ort, but as Final Sum "detail files" (Hrg. Tr. 164)-which is consistent with the explanations by Me ssrs. Doyle and Struble. While the Court is inclined to cred it Mr. Pellino on this point, for the reasons d escribed below, this dispute is not ma terial to the outcome of the motion. USN 's Revenue Assurance Group, headed by Mr. Pellino, used the mo nthly billing information from Spectrum as the starting point for the revenue figures to be used in USN's financial statements (Hrg. Tr. 293 Pellino)). Adjustments then would be made to revenue and costs would be calculated, including the cost of the service purchased for the customer by USN from the RB OC s. In this regard, USN issued reports concerning not only the amou nts of accounts receivable, but also their age: that is, the length of time a particular amount had been outstanding but unpaid. The various revenue and cost information would be assembled in what USN referred to as a "Monthly Close Package" or "Revenue Close Package," which would then form the basis of the cost and revenue informa tio n set forth in U SN 's financial statements.

of databases which could be accessed through different software application. The databases included (1) the FPS database, which was a repository of the billing information for customers, product and pricing information, and custom er accou nt data that was used to send the various reports to Spectrum (Hrg. Tr. 346 (Struble)); (2) the "Vantive" system, which was used by the sales organization and contained marketing and sales information (and from which the Sales Summary repo rts were generated beginning in mid-December 1997) (Id ., at 348); (3) Mas 90 (and later Oracle), which contained the financial information of the company (Id., 348-49); and (4) "R EP GE N," which was the repository for information received from Spectrum concerning customer billing (Id., at 349). The Vantive system, which contained sales information, was maintained on a UNIX developmental server; the other databases mentioned, which contained financial and billing information, were on a UN IX production server. *11 Second, USN m aintained NT servers. The se servers were used by USN for e-mail, desk top computers, and local area networks (Hrg. Tr. 345-46 (Struble)). Through these systems, USN emp loyees could generate correspondence and other original documents. In addition, information contained in the databases on the UNIX system could be accessed through the desk top computers on the NT servers, but when accessed and/or cop ied electronically, the information also would remain stored in the UNIX database (Hrg. Tr. 346 (S truble)). Charles Struble was the person with overall respo nsibility for all computer systems at USN . Mr. Struble delegated direct responsibility for the two sides of the USN computer systems to two different people: Christopher Urban was responsible for the NT servers and desk tops and D avid Rohrman was responsible for the UNIX servers (Hrg. Tr. 350-51 (Struble)).

D. U SN's Co mputer S ystems. Because much of the informatio n at issue was stored electro nically (in addition to or in lieu of hard copy printouts), we turn to a discussion of the USN computer system. As of November 199 8, whe n the first lawsuits were filed, USN 's computer systems were divide d into two overarching categories (see Defs.' Demo nstrative Ex. 1). First, there was a UNIX server that contained a number

E. US N's Pre-Litigation Re tention Practices. Prior to the co mmencement of this litigation in November 1998, USN d id not have in place any formal retention policy cove ring the many categories of doc uments and electronic information US N regularly

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created and received (Hrg. Tr. 215 (M onson), Hrg. Tr. 249 (Elliott)). Thus, not surprisingly, as of November 1998 it appears that USN did not have a set of co mplete and organized files of impo rtant business documents that were readily accessible. In September 1998, an Arthur And ersen repo rt com mented on the inability to locate certain types of business documents at USN (P ls.' Rep ly M em., A pp. A ). Ho wever, as of the time this litigation commenced, USN did maintain several practices documents that are of relevance here with respect to preservation (or elimination) of hard copy and electric. First, with resp ect to e-mails, USN routinely created backup tapes that were stored on comp uters. U SN maintained copies of these back -up tapes only for a period of about thirty days, in order to facilitate disaster recovery; the tapes used to make these copies were then reused. Thus, these back-up tapes were not intended to, and did no t, create a n archival record of the e-mail system (Hrg. Tr. 393 (Struble)). Second, in app roxim ately the summer of 1998 , in anticipation of upcoming office closures and layoffs, USN put into place a set of procedures for "preserving company assets [and] retrieving key record s" (Pls.' 07/25/00 Am. M em., App. 12 (Foster Dec., ¶ 6)). Lane Foster, USN's Vice P resident for Human R esources, was placed in charge of developing these procedures (Id.). In putting together these procedures, M r. Foster met with in-house lawyers at USN (including De nnis Mo nson, USN's Vice-President, Secretary, and General Counsel), and with Tom Jeavo ns, a Se nior Vice-President for Sales (Id. at ¶ 7). A s a result of those discussions, the criteria that USN put into place for preserving documents from the closed sales offices focused on preserving two categories of documents: (1) original documents that were imp ortant to USN 's ability to service existing customers, and (2) other d ocuments that individual sales people wished to maintain for their personal reasons. D ocuments not falling into one of those categories would be discarded. *12 Third, in the summer of 1998, Mr. Urban was placed in charge of a project to purge the computer drives of terminated USN emp loyees. This program was initiated for several reasons: (1) USN was concerned

about security risks that might be created if terminated employees potentially could access the computers, and (2) computer server space was at a premium, and purging the computer files of former emp loyees would free up space of the servers (Hrg. Tr. 43 (Urban)). As part of the procedure implemented by Mr. U rban, when an employee was term inated, Mr. Urb an wo uld no tify appropriate people at USN that the terminated employee's files (including e-mail files) would be deleted, and that if anyone believed that something should be saved, then Mr. Urban was to be informed so that it would not be deleted (Id., at 43-46 ). This process had been ongoing for several months prior to the filing of this litigation in November 1998 (Id., at 43-46).

F. The Initiation of Litigation. On No vember 1 2, 19 98, the Glotzer case was filed in the Southern District of New York. In rapid succession, 13 other lawsuits were filed against USN in the Southern District of New York, the Northern District of Illinois and elsewhere. The Glotzer case d id not contain many of the detailed allegations that are prese ntly found in the Consolidated Complaint. However, in Glotzer, the plaintiff alleged, among other things, that USN falsely and m isleadingly stated that the money collected in the initial pub lic offering was sufficient to me et both capital expenditures and "anticipated negative operating cash flow for the foreseeable future" (¶¶ 66, 71(c)); that USN falsely and misleadingly stated that it attracted and retained customers well, due to its billing capabilities (¶¶ 67, 71(e)); and that USN in these and other ways materially misrepresented its financial condition (¶ 71). Immed iately upon the filing of the Glotzer lawsuit, USN was required to preserve for possible production in the lawsuit documents (whether in hard copy or electronic form) that might be discoverable. That duty flowed both from the Private Securities Litigation Reform Act of 1995 ("PSL RA") 15 U.S.C. § 78u-4(b)(3)(c)(i), and from a common law duty not to spo il documents that might be discoverable in the litigation. See, e.g., Barn hill v. United States, 11 F .3d 1360, 1368 (7 th Cir.1993).

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G. The N ovember 12 , 1998 B oard M eeting. The need to preserve documents in light of the Glotzer lawsuit, was discussed at a USN board meeting held on the evening of Novemb er 12, 1998, the day that the Glotzer case was filed. In attendance at that meeting were the defendants on this m otion (M essrs. Elliott, Brekka, Greenwoo d, Hynes, Johnston, Mitchell, and Sekulow); USN's Chief Op erating Officer, Dennis Dund on; USN's Vice-President/Secretary/General Counsel, Tho mas M onson; U SN's Executive Vice President (and formerly its general counsel), Ron Gavillet; and outside attorneys from the law firm of Skadden, Arps, Slate, Meaghe r & Flom ("Skadd en"). The affidavits and in court testimony establishes that the participants at the meeting are unanimous on one point: one of the Skadden attorneys, Mr. Kraus, made it clear, in vivid terms, that with filing of the lawsuit document prese rvation must be a top priority at USN. The witnesses testified that Mr. Kraus warned that he "could deal with bad documents," but "there was nothing worse than destroying documents," thus, he emphasized the "importance of maintaining the documents" (Hrg . Tr. 2 10, 2 15 (Monso n)); see also Defs.' Mem., App. 5 (M onson Supp. D ecl. ¶ 3)). *13 The testimony also has been unanimous that at the meeting, USN's directors took heed of this admonition and directed that USN management-headed by M r. Elliott, the CEO -promptly take steps to preserve documents. The witnesses differ, slightly, on how they recall the direction being phrased. Several witnesses indicate that the advice by Mr. Kraus and the direction by the board was that "all relevant documents be preserved and not destroyed" (See, e.g., Hrg. Tr. 247 (Elliott); Outsid e Dirs.' Mem ., App s. 4 (Aff. of D . Mitchell, ¶ 5) and 2 (A ff. of J. Hyn es, ¶ 3)) (emp hasis added). Other witnesses described the directive as requiring that USN preserve documents that "could be" or "may be" relevant to the litigation (See Defs.' Mem .' App s. 22 (Supp. Dec. of T. Elliott, ¶ 3); and 19 (Dec. of R. Gavillet, ¶ 2)). One witness stated that both the advice and the direction were broader: that "the Board and management needed to preserve and not destroy any corporate files" (Outside Dirs.' Mem., App.5 (Aff. of E. Sekulow, ¶ 3)) (emphasis added).

H. T he Step s T aken to Implem ent the B oa rd's Directive. Shortly after the November 12 , 1998 B oard meeting, the need to preserve documents was discussed at a USN staff meeting attended by USN officers and high level managers repre senting every business group within USN: operations, sales, marketing, information techno logy, revenue assurance, and customer service. The attendees included, among others Messrs. Elliott, Gavillet, Monson, and Dundon, all of whom had been at the Board meeting; Messrs. Jeavons and Patrick, from sales; Mr. Pellino; Messrs. Struble and Bethke, from Information Systems; Ellen Craig (another in-house lawyer); and Steve Parrish (Executive Vice-President of Operations) (see, Defs.' Mem., App. 18, (Dundon Dep. 252)). Mr. Dundon testified that this meeting had several purposes: to inform the managers of the lawsuit, and to assure them that the company would respond to it appropriately; and for Mr. Monson to relate to managers the need to preserve documents (Hrg. Tr. 408). At the meeting, Mr. Monson relayed Mr. Kraus' admonition concerning the dangers of document destruction, and directed that all documents be preserved (Hrg. Tr. 226-27) (M onson). Mr. Monson further instructed that his direction be communicated by the managers "within their respective dep artments" ((Defs.' Mem., App. 5 , Monso n Sup p. Dec., ¶ 4); see also Hrg. Tr. 358 (Struble)). Several witnesses who attended the meeting have testified that Mr. Monson indeed communicated a broad directive that all do cuments were to be preserved. Mr. Jeavons testified that a "substantial warning was given" (De fs.' Mem ., App. 4 (Jeavons Dep. 94 )), and while no direction was given as to what specific types of doc uments to retain, "my interpretation was don't throw out anything" (Id. at 95) (emphasis added). Similarly, Mr. Dundon testified that, while he could not recall any spe cific instructions being given at the staff meeting, "I think it was just a caution that most everything that the company had would need to be looked at by the law yers" (Defs.' Mem., App. 18 (Dundon D ep. 255)) (emphasis added). *14 However, the Court finds that after this staff

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meeting, Mr. Elliott personally took no affirmative steps to ensure that the directive was followed. Mr. Elliott did not direct that USN implement a written, comprehensive document preservation policy, either in general or with specific refere nce to the lawsuit; he did not instruct that any e-mail or other written communication be sent to staff to ensure that they were aware of the lawsuit and the need to preserve documents; and he did not meet with the department heads after this staff meeting to follow up to see what they had done to implement the document preservation directive (Hrg. Tr. 247-48 (Elliott)). Mr. Elliott had a day-to-day prese nce at USN, an d readily could have inquired into what was being done to preserve documents. He did not do so. Rather, it appears that Mr. Elliott attem pted to delegate that respo nsibility comp letely to Mr. M onson. In so doing, M r. Elliott exhibited extraordinarily poor judgment. He had at his disposal the Skadden law firm, with score s of experienced attorneys capable of developing and im plementing a suitable document preservation program in a major securities lawsuit. Instead, Mr. Elliott entrusted that task to M r. Mo nson, an in-house attorney with no litigation experience whatsoever, and w ith no experience in putting together a document preservatio n pro gram (Hrg . Tr. 208 (Mo nson)). Nor is there any evidence that Mr. Elliott (or Mr. Monso n, for that m atter) co nsulted with Skadden about how to implement such a program. Mr. Monson's approach to the document preservation task reflected his inexperience. Mr. M onson did nothing to ensure that all USN emp loyees who handled doc uments that might be discoverable were aware of the lawsuit and the need to preserve documents: he held no meetings with employees below the managerial level, and he did not issue any written com munications to anyone on the subject (Hrg. Tr. 216-17 (M onson); 247-48 (Elliott)). Mr. Monson did nothing to determine whether the managers who attended the staff meeting followed his direc tion of communicating to their respective departments the need to preserve docum ents, or if they did so, in a way that sufficiently impressed upon USN 's employees the urgency of the task. T his resulted in potential inconsistencies in whether or how USN 's managers communicated with staff on this

important matter. And, indeed, the evidence is that employees responsible for discarding d ocuments from the closed offices were unaware of any document preservation directive (e.g., Hrg. Tr. 1 7, 19 , 20 (Coleman); 103-04 (V an Dinther)). Mo reover, Mr. Monson did not review the pre-existing practices at USN relating to document preservation for terminated employees and closed offices, to determine whether these practices were still suitable in light of the need to preserve documents as a result of litigation. Had Mr. M onson conducted such a review, it would have been evident that they were not. *15 The criteria for preserving documents from closed offices created in July 199 8 (which called for saving doc uments necessary to service customers, and those requested by individual sales peop le) were far less inclusive than the broad directive Mr. Monson gave for documents to be preserved in light of the litigation. There were no spe cific criteria regarding what should be saved and what should not be saved related to the lawsuit (Hrg. Tr. 247-48 (Elliott)). Moreover, the plan implemented by Mr. Foster did not req uire attorneys to review documents before discarding them, whereas the message Mr. M onson delivered was that in light of the lawsuit, attorneys would need to review "mo st everything that the company had" (D efs.' M em., App. 18 (Dundon De p. 25 5)). Similarly, the procedure for purging e-mails from terminated employees was not reviewed in light of this lawsuit. While it may have been Mr. M onson's "expectation" that people who were intending to discard potentially relevant documents "against the backdrop of this litigation" would contact him for "further clarification" (Hrg. Tr. 245 (Monso n)), he failed to take steps to determine if that expectation was being met. The Court finds nothing in the record to suggest that, in the face of Mr. Kraus' warning and the B oa rd's directive, Mr. Elliott (either directly or through Mr. M onson) embarked on a scheme to willfully destroy documents, or to knowingly turn a blind eye to destruction of documents relevant to this litigation. FN6 Nonetheless, it was Mr. Elliott's responsibility, as the head of day-to-day management, to take steps to ensure that a suitable document presentation program was

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implemented. Through a failure to take action himself or to entrust that responsibility to someone with the experience to carry it out, Mr. Elliott failed to discharge that responsibility. The fact that this failure was the result of p oor judgment (perhaps clouded by the chain of events that had sent USN reeling at the time) rather than malicious intent provides an explanation for Mr. Elliott's conduct that helps show it was not willful-but it does not entirely excuse his failing.

for or given (Hrg. Tr. 2 05-0 6). W e give M r. Hynes in-court testimony on this p oint no weight. *16 For this lack of follow up, the outside directors may fairly be criticized. This lack of follow up reflects the view, as expressed by Mr. Hynes in his testimony, that the outside directors believed that taking an active role in ensuring p reservation o f documents was not part of their "responsibility as director[s]," but that "[t]he people down in the trenches who gathered the data" would perform that task (Hrg. Tr. 202, 204 (Hynes)). Th is myopic view begs the question of who was supposed to see to it that the "pe ople dow n in the trenches" actually carried out the task. The Court suspects that if the outside directors had instructed Mr. Elliott to pursue an advantageous corporate opportunity, they would have taken an "active" role to follow up to see what had been done. They should have done the sam e thing with respect to the less pleasant task of document preservation. None theless, the Court is mindful that these outside directors were just that: outside the company, without a day-to-day presence at USN. And, this is not a case where they learned of the du ty to preserve and d id nothing (or, even worse, directed document destruction). To the contrary, they gave a n explicit direction to Mr. Elliott to se e to it that documents were preserved. The Co urt finds tha t in the circumstances, the outside directors could reasonably rely on M r. Elliott following a Board level directive to implement a preservation program, and thus they are not at fault for Mr. Elliott's failure to do so.

FN6. Prior to the evidentiary hearing, Ms. Van Dinther had stated that Virginia Alpers, Mr. Elliott's secretary, had told Ms. Van Dinther that Mr. Elliot had instructed Ms. Alpe rs to throw away files. Ms. Alpers flatly denied that she had m ade such a stateme nt to M s. Van Dinther, or that Mr. Elliott had given her such an instruction (Hrg. Tr. 314 (Alpers)). At the hearing, Ms. Van D inther clarified that Ms. Alpers had said that Mr. Elliott had told M s. Alpers to "clean out" his old o ffice after a move; Ms. Van Dinther admitted that she did not know if certain documents already had been set aside to retain (Hrg . Tr. 121-22). Based on the Court's assessment of these witnesses and M r. Elliott (all of whom testified in person), the Court finds that Mr. Elliott did no t direct tha t relevant documents be discarded. As for the outside directors, the Court notes that the evidence is undisp uted that they preserved and produced their documents, and certainly gave no direction to destroy documents. But, these defendants also did no t play any active ro le in implementing a broader preservation policy at USN, and there is no credible evidence that they followed up with M r. Elliott or others to determine if their directive had been implemented. None of the affidavits or declarations submitted by the directors detail any such follow-up efforts. The only director to testify at the hearing, Mr. Hynes, suggested that he sought at least one assurance that the directive was being followed. However, Mr. Hynes' affidavit contained no such assertion; and in his in-court testimony, M r. Hynes could provide no details as to when, where or by whom the assurance was asked

I. The Gap s In USN's Docum ent Preservation. It is plain that USN mad e efforts to preserve documents-and, as will be discussed later, has produced a massive volume of hard copy and electronically stored information. However, the inadequacies in the document preservation program at USN created several potential gaps, which re sulted in documents being discarded without having been reviewed to determine whether they should have been preserved. Each of these gaps will be discussed below.

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1. The Closing of Sales Offices. As a result of financial distress, USN closed a number of sales offices in November 1998, including a substantial sales office located on the fourth floor of the USN offices at 10 South Riverside in Chicago. By November 1998, only the sales function remained on the fourth floor office; other administrative and executive functions had been moved elsewhere earlier in 1998 (Hrg. T r. 261 (Elliott); 228-29 (M onson)). Pursuant to the procedures implemented by Mr. Foster in July 1998, the documents in the closed offices were to be reviewed for the purposes of separating out and preserving those which were needed to support the customer base. T he sales department was req uired to review the documents to determine what was to be preserved; once that pro cess was com pleted, the rest would be discarded by persons under the direction of Mary Colem an, USN 's Facilities Manager, who reported to Mr. Foster. The person from the sales department involved in that screening process was Christine Van Dinther, an A dministrative Assistant to Messrs. Jeavons and Patrick. *17 Ms. Van Dinther and M s. Coleman both testified at the evidentiary hea ring. M s. Van D inther stated that, desp ite the program implemented by M r. Foster, she was never told what needed to be saved from the fourth floor; however, she "had an idea in [her] mind" that sales literature and customer files should be saved (Hrg. Tr. 104-05 (V an Dinther)). Ms. Van Dinther indicated that she identified and p laced in the bo xes those materials to be saved, as well as files from Ryan Mullaney, the former Vice-president of Sales and Marketing who had left USN in July 1998, and Lo ri Kloonan, his Administrative Assistant (Hrg. Tr. 104 (Van Dinther); see also Hrg. Tr. 266 (Elliott)). Ms. Van Dinther testified that when she pe rformed this function of identifying which documents were to be preserved, she was unaware of the lawsuit and of the directive that doc uments needed to be preserved for litigation (id., at 103-04). The individual defendants did not offer any testimony or other evidence at the hearing to contradict Ms. Van Dinther on this point. In light of USN 's failure to implement a program to ensure employees knew of and followed the d ocument preservation requirement,

the Co urt cred its this testimony. Ms. Coleman testified tha t her staff began discarding doc uments from the fourth floor office in November 1998, and that this process continued for several months through April 1999. It is undisputed that numerous dumpsters full of documents were discarded from that office during that time period (Hrg, Tr. 104, 107 (Van D inther)). When M s. Coleman discarded the documents, she believed that Ms. Van Dinther and the peo ple working with her in the sales group already had gone through the documents and identified what needed to be retained. Ms. Coleman indicated that she, too, perfo rmed this function without having been informed of the lawsuit, or any special prese rvation requirements imposed by it (Hrg. Tr. 17 (Coleman)). In light of the absence of contrary testimony, the absence of M s. Coleman or anyone from H uman Resourc es at the staff meeting at which Mr. Monson gave the directive to preserve documents, and the absence of any system atic follow up after that meeting, the Court find s this testimony credible. Through this process, numerous docume nts were discarded without ever having been reviewed by lawyers to determine their potential discoverab ility in this lawsuit (Hrg. Tr. 218 (Mo nson); 248 (Elliott)). That was a substantial flaw in U SN 's efforts to preserve documents. No netheless, the Court finds that, while it is impo ssible to say that no discoverable documents were discarded, it is unlikely that the sole sources of certain discoverable information were located in the closed sales o ffices. By November 1998, the executive and financial branches of USN had already been relocated to different floors at the Riverside locatio n. Thus, it is not likely that hard copy financial reports and other related doc uments had been moved to offices on other floors of the building. By all acco unts, the documents in the sales offices largely consisted of sales and marketing form s, which were not likely to poss