‘Legal hold’ saves Halliburton in criminal case, grows as corporate mitigation tool

Halliburton Energies, one of the world’s largest oilfield service companies, last month pleaded guilty to destroying evidence pertaining to the 2010 Deepwater Horizon explosion. The company paid the statutory maximum fine of $200,000 under a plea agreement reached with the US Department of Justice in July.

The fine is a veritable slap on the wrist compared to the steep criminal penalties imposed on the other operators and contractors who were responsible for the explosion and the resulting environmental calamity along the entire United States Gulf Coast. The soft treatment of Halliburton Energies is largely a testament to the rigor of its “legal hold” procedures.

This term is now commonplace in the e-discovery arena. Essentially, it means the process of assuring that regular procedures for the destruction of data are halted and that persons who gather, maintain and preserve pertinent data are advised of the necessity to preserve data that may be relevant in anticipated litigation.

In a September joint memorandum, the Justice Department detailed the steps the company took concerning the evidence and information preservation notices issued to persons or custodians who handled relevant information. By following these procedures and documenting them, Halliburton showed that the deletion of key computer simulations occurred at the hands of a rogue employee. Federal prosecutors said these procedures allowed the company to promptly notify them of the deletion and spoliation.

Halliburton case has vital lessons for financial institutions

The case presents important lessons for financial institutions that operate under tight legal and regulatory scrutiny and are subject to numerous data gathering and preservation pressures. The case also highlights that evidence preservation procedures can help legitimize the legal positions organizations take and provide cover in the event contingencies arise.

The case also reflects the sprawling data challenges faced by large businesses, including global financial institutions, whose thousands of employees routinely handle sensitive information. For these organizations, the ability to corroborate internal controls can mitigate adverse civil, criminal and regulatory consequences, especially when the problems were conceived and fostered by a dishonest employee, or the “enemy within.”

According to court filings by the Dept. of Justice, Halliburton Energies employees purged computer simulations that may have showed it performed inadequate cement work on the Deepwater Horizon oil rig. The files, which the Justice Department said would likely have played a role in determining who was to blame for the explosion and resulting spill, may have deflected blame from BP and other errant contractors.

Deleting computer simulations and wiping ‘recycling bin’

Prosecutors said in one court filing that a Halliburton executive ordered senior managers to preserve information related to the explosion. One of these persons, Anthony Badalamenti, instructed subordinates in May 2010 to delete the simulations and wipe them from the computer’s “recycling bin,” according to the Justice Department.

Prosecutors explained in a criminal information against Halliburton:

“Halliburton, through [Badalamenti], then directed (a) program manager to delete the results [of the computer simulations]. [Badalamenti] had been previously instructed by another Halliburton executive to preserve material related to the [oil well] and was not authorized to direct the deletion of this data. Program manager felt uncomfortable deleting the simulations, but nonetheless… deleted the simulations….”

Halliburton made efforts to recover the simulations without success, the Justice Department said. Nonetheless, it added, the company’s actions signaled “full, truthful, significant and valuable” cooperation that factored heavily in the relatively soft plea agreement that was proposed.

‘Just the cost of doing business’

US district Judge Margaret Triche-Milazzo, of the Eastern District of Louisiana, accepted the agreement on September 19, saying it “adequately reflects the seriousness of the offense.” Halliburton pleaded guilty to a misdemeanor of “unauthorized destruction of evidence” and also received a sentence of probation of three years.

Susie McMichael, a Halliburton spokesperson, told ACFCS the company made a $55 million contribution to the National Fish and Wildlife Foundation in July, which she said was not a condition of the plea agreement.

The donation has done little to mollify critics who describe the plea agreement as not fitting for the crime of destruction of evidence or commensurate to the $4 billion criminal penalty that BP paid and the $400 million that Transocean, operator of the oil rig, paid.

“For Halliburton, the Justice Department’s fine is just the cost of doing business,” said Allison Fisher, Outreach Director of the advocacy group, Public Citizen, in Washington, DC.

“The meager penalties tell big corporations you can hide evidence and cover things up,” she told ACFCS.

The Justice Department agreed to not file additional criminal charges against Halliburton, but may still pursue charges against company employees. On the day of the agreement, the department filed a criminal information, or the equivalent of an indictment, against Badalamenti on misdemeanor charges of destruction of evidence.

Plea agreement may affect Halliburton civil liability

Halliburton still faces civil penalties. The first phase of a trial before US district Judge Carl Barbier, in New Orleans, to determine the extent to which each company was at fault ended in April. Judge Barbier, who held a non-jury bench trial as is common in federal admiralty cases, has not ruled. It is unclear how the plea agreement may affect his ruling.

Halliburton has said the failure of BP to reinforce the rig with sufficient metal collars, not its cement work, was to blame for the explosion.

The second phase of the civil trial focusing on the breadth of the spill and the effort to contain it is set to start on September 30.

Punishment fitting the crime

The Halliburton Energies case also shines light on the methods used by the Justice Department to pursue evidence spoliation or destruction.

Kelly Strader, a law professor at Southwestern Law School, in Los Angeles, said government prosecutors have many tools at their disposal. Those it used against Halliburton are a weaker variety, he said.

“Given the scale of the harm caused by the oil spill, it is surprising that the government would accept a plea to a relatively minor charge,” he told ACFCS. “Although we don’t know the details of Halliburton’s evidence destruction, typically such acts lead to multiple felony counts, including obstruction of justice.”

Strader, a former criminal defense lawyer, equates the Halliburton case to the Enron scandal where that company’s now-defunct public accounting firm, Arthur Andersen, was convicted of the felony of obstruction of justice for shredding documents about Enron’s finances.

Deepwater Horizon reminiscent of Enron to some

“The Deepwater Horizon oil spill produced catastrophic damages analogous in some ways to the tremendous economic harm that resulted from Enron’s demise,” he said. “In that context, the plea deal seems very lenient.”

The 1986 Computer Fraud and Abuse Act, under which Halliburton was charged, at Title 18, US Code Sec. 1030, “Fraud and related activity in connection with computers,” penalizes “Whoever knowingly causes the transmission of a program, information, code, or command, and as a result…, intentionally causes damage without authorization, to a protected computer.”

Justice Department spokesperson, Peter Carr, told ACFCS the Halliburton Energies plea agreement represents “a fair and just application of the appropriate law to the charged conduct.”

DOJ: Cooperation, ‘legal hold’ spared Halliburton Energies

Last month, the Department of Justice reiterated that Halliburton Energies to a “voluntarily and promptly” disclosed the evidence tampering offense, and that Badalamenti appeared to have acted without the knowledge of his superiors.

Strader said the government hedged its bets.

“It may look odd to accept a plea to a [destruction of evidence] charge rather than the underlying crime, but cover-up crimes are often easier to prove than the substantive offenses,” he said.

Information Charging Destruction of Evidence

Halliburton-US Department of Justice Joint Memorandum