A federal judge has sanctioned 13 plaintiffs suing two collapsed hedge funds for negligence and gross negligence for their failure to preserve electronic files in discovery.

Saying “most plaintiffs conducted discovery in an ignorant and indifferent fashion,” Southern District Judge Shira A. Scheindlin will assess monetary sanctions against all 13 plaintiffs and give an adverse jury instruction for six of the worst offenders in The Pension Committee of the University of Montreal Pension Plan v. Banc of America Securities LLC, 05 Civ. 9016.

“While litigants are not required to execute document productions with absolute precision, at a minimum they must act diligently and search thoroughly at the time they reasonably anticipate litigation,” Schiendlin said in her 87-page opinion. “All of the plaintiffs in this motion failed to do so and have been sanctioned accordingly.”

The lawsuit was brought by investors who sought to recover losses of $550 million following the liquidation of two hedge funds based in the British Virgin Islands. Banc of America and other defendants have already settled the case, which involves a total of 96 plaintiffs.

The chief defendant remaining is Citgo Fund Services, which was hired by the two hedge funds to perform certain administrative services.

t was Citgo that brought the sanctions motion, and it is Citgo that will be compensated, with a yet-to-be-determined amount, in the form of costs and attorney’s fees, including fees and expenses associated with filing sanctions motions, reviewing declarations and deposing declarants.

Citgo, its parent company and two directors will also benefit in the adverse jury instruction with respect to six plaintiffs. Scheindlin said she will tell the jury that relevant evidence was destroyed after the duty to preserve arose and that the plaintiffs were grossly negligent. It would then be up to the jury to decide whether the evidence was relevant.

The six plaintiffs who will get the adverse instruction, including the Morton Meyerson Family Foundation and the Defined Benefit Plan for Hunnicutt & Co., she said, conducted “severely deficient” searches in response to document requests in 2003 and 2004.

The judge criticized the six plaintiffs for:

• failure “to institute a timely written litigation hold” — a communication to employees to stop the routine and legitimate destruction of data in anticipation of commercial litigation or a civil enforcement action;

• failure “to collect or preserve anyelectronic documents prior to 2007;

• continued deletion of electronic documents after the duty to preserve arose;

• failure to request documents from key players;

• delegation of search efforts without supervision from management: and

• destruction of backup data potentially containing responsive documents of key players and/or submitted misleading or inaccurate declarations.

via Law.com – Plaintiffs Sanctioned for Failure to Produce Electronic Files in Hedge Fund Suit.