A Revolution in e-discovery The Persuasive Economics of the Document Analytic Approach

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1 KPMG FORENSIC A Revolution in e-discovery The Persuasive Economics of the Document Analytic Approach ADVISORY

2 The cost of e-discovery probably the largest single cost in litigation today poses an economic threat to any company facing litigation. In cases with large volumes of potentially relevant documents, document analytics can be an effective and strategic tool for managing costs and meeting electronic discovery challenges. Stephanie Mendelsohn, Partner, Reed Smith Regulatory Litigation Group, e-discovery & Records Management Team, and The Sedona Conference Working Group on Electronic Document Retention and Production

3 Foreword The use of electronic media in business has led to a massive explosion of digital documents, especially . E-discovery discovery of digital documents by traditional means is grossly unsuited to handling the growing volume. In this case, traditional refers to using either paper or e-paper. Those organizations that have a traditional mindset toward e-discovery are seeing their costs soar. However, law firms now have the technological capability to easily manage e-discovery by using sophisticated document analytics in a purely electronic environment, and more effectively and efficiently than paper- or e-paper-based approaches allow. Because of this breakthrough, law firms have the opportunity to provide more competitive, costefficient services to their clients, and corporate counsel are enabled to drastically reduce litigation costs for their organizations. Unfortunately, the persuasive economics driving this new method remains widely unknown. This paper provides an apples-to-apples comparison of traditional and nontraditional e-discovery approaches to help law firms and corporate counsel evaluate their options. Using our KPMG Forensic SM engagement experience with dozens of companies, we break down each approach into process components and analyze these in terms of cost, time, and effectiveness. Based on the assumptions we have used for this study (e.g., document review rates, attorney hourly rates, photocopy rates), we calculate that the document analytic approach can be nearly 10 times more cost-effective than traditional approaches. We offer our template as an analytical tool to help the reader arrive at an independent conclusion based on his or her own cost assumptions.

4 CONTENTS Background 1 e-discovery Approaches 2 Hard Copy Approach 2 Imaged Hard Copy Approach 3 e-paper Approach 5 Document Analytic Approach 5 Comparing the Approaches 6 Cost and Time Comparisons 7 Transition to the Document Analytic Approach 12 Document Analytic Success Story 13 Conclusion 14

5 Background We re concerned with e-discovery in the first place because as much as 92 percent of information produced each year is stored in digital format, according to a 2003 study 1 by the University of California, Berkeley. Businesses are far more prolific in generating digital data than paper documents. Any e-discovery approach needs to deal with a large and rising volume of unstructured digital data, particularly in format. Additionally, this study concluded that fewer than 10 billion s were sent per day worldwide in the year Researchers expect this number to increase to 61 billion by 2006, with spam accounting for as much as one third. One reason for the growing volume of stored is the precipitous decline in the cost of digital storage, thanks to commoditization and lower-priced, high capacity drives making it to market. For example, compare the $193 price per megabyte of storage in 1980 with today s price of less than $0.01 per megabyte. Volume isn t the only challenge for e-discovery. According to Law Technology News (January 2004), as much as 70 percent of s and corporate documents are duplicates. Extraneous and repetitive data escalates costs at every stage of any e-discovery process. An effective e-discovery approach must be able to separate the wheat from the chaff as early as possible to avoid incurring exorbitant costs. Since the essence of discovery is sharing of documents, the issues concerning volume and redundancy, as well as file size (gigabytes) and ease of transmission, become particularly acute when companies face multiproduction matters or multijurisdictional litigation, both of which require coordinating discovery among widely dispersed legal support teams. Law firms need to compare the cost and staffing requirements associated with printing, packing, and trucking documents to Web-based file sharing, for example. All e-discovery approaches have two major types of components: (1) document review and (2) various mechanical processes needed to prepare documents for review and to implement production. Since document review is performed by an attorney or paralegal and is highly labor intensive, this aspect of e-discovery is extremely costly. Mechanical (nonreview) processes are less so, although highly inefficient methods can drive up costs. Any approach that emphasizes mechanical processes (the more computerized the better) and contains billable hours by attorneys will tend to prevail. 1 A Revolution in e-discovery 1

6 e-discovery Approaches We present four different approaches to handling one hypothetical set of electronic documents in a typical discovery matter. In the first approach, we apply a traditional hard copy methodology (digital to print), which results in tremendous effort and costs. In the second approach, we force a hard copy methodology (digital to print to digital) onto the electronic review environment. In the third approach, we present what we refer to as a first generation e-discovery process. While the software and data standards differ somewhat from the paper discovery environment (digital to TIFF, PDF, or HTML), the approach is essentially the same. 2 A Revolution in e-discovery Finally, we present the document analytic approach, which keeps documents native 2 to limit conversion costs and applies concept clustering and mapping technology to group related documents and expedite the review. The first phase in all e-discovery approaches is preserving the electronic data. We will refer to the resulting data file as the corpus. How quickly each e-discovery approach can reduce the size of the corpus has everything to do with its ultimate effectiveness. The following graphics indicate the phases for each approach preserve, pare (in some cases), process, produce as well as the sequential steps within each phase. Each step represents a line item on the e-discovery bill to corporate counsel. The height of each arrow roughly corresponds to the phased reduction of the size of the corpus, which directly correlates to the dollar amount of the bill. Hard Copy Approach In the hard copy approach, the electronic evidence is first preserved and a copy is made available to the review team. This working copy is then printed to paper. Next, the pages are serially Bates numbered for reference and several working photocopies are made. Only after the review sets have been Bates numbered and copied can the attorneys perform their reviews on a document-by-document or page-by-page basis. Those documents deemed responsive to the case are then flagged (via a coding sheet, document flag notes, or color indicator markings), which assigns metadata and intelligence to the document. Finally, the responsive set is photocopied for production. PRESERVE PROCESS PRODUCE Preserve Print Bates Numbering Copy Document Review & Coding Copy Responsive Deliver The height of each arrow roughly corresponds to the phased reduction of the size of the corpus. 2 For definitions of technical terms, please see the e-discovery Glossary on page 4.

7 Printing everything to hard copy casts a wide net over the population of documents and assures that the corpus excludes nothing in the early phase that could be relevant to the case. However, by maximizing the size of the corpus, this approach increases the risk of omitting important documents during review due to paper mishandling or simple error. Attorneys and paralegals often use page decisions or document decisions per hour metrics to measure the progress of their matters and the review team s efficiency. These rates are at their lowest in the hard copy approach relative to other approaches. 3 Imaged Hard Copy Approach Similar to the hard copy approach, the imaged hard copy approach preserves the electronic evidence and proceeds to print the data to paper. From the working hard copy, the documents are unitized to reflect document breaks and scanned to image. An OCR engine is run on the scanned images to enable full text keyword searches, and the documents are coded manually to capture specific, predefined metadata (author, date, cc, bcc, etc.). Once imaged, the documents are loaded to a repository on a discovery management software platform. Attorneys can then perform the document review, collaborate on the documents, and manage production sets. PRESERVE PROCESS PRODUCE Preserve Print Prep & Scan The height of each arrow roughly corresponds to the phased reduction of the size of the corpus. OCR Load to Repository Document Review Deliver Counterintuitive as this approach may seem data to paper and then back to data it is performed by a considerable number of law firms and e-discovery organizations. 3 Many professionals are under the false impression that they can review pages faster by flipping them in the traditional way than by using a computer and a mouse (see e-paper and document analytic approaches below). In fact, the physical activity of flipping pages does not equate to speed or effectiveness. That s because the paper review approach does not efficiently and accurately capture useful information about the documents and make that information quickly available to the discovery team. Code A Revolution in e-discovery 3

8 e-discovery Glossary Bates number Bates numbering goes back to the 1890s, when Bates Manufacturing Company in New York invested in an automatic handheld numbering machine. Bates Stamping is the process of placing sequential numbers on a page. pare Usually the second phase of e-discovery. Eliminate nonresponsive, duplicative, and irrelevant data by applying such criteria as date, custodian, file type, key words, and native file review technologies, such as document analytics. 4 A Revolution in e-discovery corpus The complete data file(s) subject to e-discovery. The size of the corpus is reduced through the various phases of e-discovery. custodian An individual whose and data are subject to review. Custodians are also potential witnesses. dedupe Short for deduplicate. This is the process of suppressing exact binary duplicates for purposes of review. document analytics For purposes of an investigation or litigation, KPMG defines document analytics as the emerging practice of applying algorithms and technology to identify relationships and relevance of documents within a group. e-paper Short for electronic paper as viewed in a static, rastered image, such as a TIFF or PDF file format. metadata Literally, data about data. Metadata describes how, when, and by whom a particular set of data was collected, and how the data is formatted. In the legal context, metadata contains document creation and/or modified date, author, file paths, and similar information. native file Refers to a file in the original or default file format of a specific software application. OCR Optical character recognition. The branch of computer science that involves reading text from paper and translating the images into a form that the computer can manipulate. PDF Portable document format. A file format developed by Adobe Systems that makes it possible to send formatted documents and have them appear on the recipient s monitor and printer as they were intended. preserve The first phase of e-discovery. Creating a duplicate of potentially relevant and responsive data to prevent loss and establish a full chain of custody. process Usually the third phase of e-discovery. Mechanically or electronically prepare the corpus for production, often by converting documents to TIFF or PDF file formats. produce, production Usually the fourth phase of e-discovery. Includes reviewing documents for privilege, redacting privileged and/or confidential information, assigning production numbers, and transferring documents to appropriate media for delivery to opposing parties. This is often performed by using discovery management software. raster To print an image to a static, bitmap file, such as a TIFF. responsive Relevant to the matter that is the subject of discovery or e-discovery. TIFF Tagged image file format. One of the most widely supported file formats for storing bitmapped images on personal computers. unitize To separate or classify into units, such as documents. Note: Some definitions sourced from merriamwebster.com and webopedia.com.

9 e-paper Approach The e-paper approach is used by most of today s service providers. Upon preservation, data is kept in its native electronic format where duplicates are suppressed and data is culled by keywords and metadata, such as date ranges, file types, and so on. The resulting dataset is rastered into static TIFF, PDF, or HTML images, which are then loaded along with their associated metadata to an online discovery management software platform. Attorneys can then perform the document review, collaborate on the documents, and manage production sets. PRESERVE PARE PROCESS PRODUCE Preserve Document Analytic Approach Given the challenges and costs of dealing with today s large discovery matters, as well as the inherent limitations and risks of keyword searching, companies and service providers are beginning to establish more sophisticated criteria in their initial culling and rastering of data. Hence, the emergence of document analytics. Preserve Dedupe & Cull Dedupe & Cull Extract & Raster Native Review Load to Repository PRESERVE PARE PROCESS PRODUCE Extract & Raster Document Review Load to Repository Deliver The height of each arrow roughly corresponds to the phased reduction of the size of the corpus. Document Preparation Deliver The height of each arrow roughly corresponds to the phased reduction of the size of the corpus. For purposes of an investigation or litigation, KPMG defines document analytics as the emerging practice of applying algorithms and technology to identify relationships and relevance of documents within a group. Using document analytics, like documents are clustered based on the co-occurrence of their respective noun or noun phrases in a native review environment. For example, documents related to accounting will likely contain words such as income statement, balance sheet, cash flow, or reconciliation, whereas documents related to personal may include nouns such as football game, dinner plan, or spouse s name. Accordingly, the technology is able to distinguish between the two categories of documents and cluster them separately. A Revolution in e-discovery 5

10 Document analytics takes e-discovery automation beyond simple deduping and culling. It also assists in the document review by enabling the attorney or paralegal to digitally highlight and explore clusters and complete the review function many times more quickly than earlier approaches (see example of screen at left). After this native review, the responsive set of documents much smaller than in the e-paper approach is rastered and loaded to a discovery management platform where further redaction and quality control take place. COMPARISON OF APPROACHES 6 A Revolution in e-discovery Comparing the Approaches The hard copy approach suffers by (1) capturing documents with obsolete processes and (2) casting the widest possible net. With this approach, no paring occurs prior to review, as indicated in the table below. The same is true of the imaged hard copy approach. However, the main advantage here is that review can be done with a computer and Boolean and keyword searches rather than with stacks of paper documents. The e-paper approach provides the first significant improvement in the e-discovery process by removing duplicates and culling by keywords and metadata early on, thereby drastically reducing volume and the cost and time required for subsequent steps. However, the e-paper approach, like the hard copy approach, is still unable to put language and other data into any type of context from one document to the next. Finally, the analytic approach revolutionizes e-discovery by categorizing and relationally sorting documents according to content, thereby facilitating drastic time-savings in document review. HARD COPY IMAGED HARD COPY E-PAPER DOCUMENT ANALYTIC Preserve Preserve Preserve Preserve Preserve Pare Dedupe and cull Dedupe and cull Attorney native document review Process Print Print Extract and raster Extract and raster Bates number Prep and scan Repository load Repository load Copy OCR Document prep Code Repository load Produce Attorney document review and coding Attorney document review Attorney document review TIFF review Photocopy responsive documents Deliver Deliver Deliver Deliver

11 Cost and Time Comparisons A Hypothetical Case Applying the four approaches to a hypothetical case provides an apples-to-apples cost comparison. We use a scenario of a small to midsized e-discovery case that requires a production to a government agency or an adversary in a litigation context. The scope of the case is as follows: 15 custodians = 15 hard drives Assume an average of 2 gigabytes (GB) of data per custodian (1 GB = billion bytes) Total estimated data size = 30 GB Assume 50,000 pages per GB (if printed out or imaged) Total page estimate = 1.5 million pages Assuming 2,000 pages per box if printed, total boxes = 750 boxes Cost Calculations Using KPMG Forensic Pricing Assumptions The following tables provide cost calculations for each approach using standard rates. The reader may wish to substitute different rates. Again, we view each approach in terms of activities that are performed on the corpus: preserve, pare, process, and produce. Note that the first two (traditional) approaches skip the paring phase. A Revolution in e-discovery 7

12 HARD COPY APPROACH QUANTITY RATE COST ($) 8 A Revolution in e-discovery Preserve 15 hard drives $800 ea 12,000 Pare NA NA NA Process Print: 30 GBs of data x 50,000 pages/gb = 1.5 million pages $0.06 ea 90,000 Bates number 1.5 million pages $0.02 ea 30,000 Copy: create two sets (client copy and law firm working copy) = 3 million pages $0.06 ea 180,000 Produce Document review and issue coding: 1.5 million 100 page decisions per hour 15,000 hours $200/hr 3,000,000 * Photocopy responsive documents: assume 10% of paper is responsive x 1.5 million pages = 150,000 pages $0.06 ea 9,000 Total $3,321,000 *This cost does not reflect facilities and support for managing 750 boxes of paper. IMAGED HARD COPY APPROACH QUANTITY RATE COST ($) Preserve 15 hard drives $800 ea 12,000 Pare NA NA NA Process Print: 30 GBs of data x 50,000 page/gb = 1.5 million pages $0.06 ea 90,000 Prepare and scan: prepare and unitize the pages by document, then scan 1.5 million pages $0.18 ea 270,000 OCR scan 1.5 million pages $0.06 ea 90,000 Objective coding: 1.5 million 4 pages per document = 375,000 docs $1.50 ea 562,500 Repository load: load 1.5 million TIFF images (approx. 88 GBs) = 6 months hosting $6,500/mo 39,000 Produce * Document review: 1.5 million 200 page decisions per hour 7,500 hours $200/hr 1,500,000 Delivery: assume 10% of pages are responsive x 1.5 million pages = 150,000 pages $0.04 ea 6,000 Total $2,569,500 *Given keyword search capabilities (via OCR) and bibliographic search capabilities (via objective coding), we assume the review team can review 200 pages per hour versus hard copy at 100 pages per hour.

13 E-PAPER APPROACH QUANTITY RATE COST ($) Preserve 15 hard drives $800 ea 12,000 Pare 1 Dedupe & cull 1.5 million pages Typically billed with extract & raster in the Process phase, not as a separate item Process Extract & raster: assume 50% of the 1.5 million pages are suppressed via deduping, keyword, and other metadata filtering 750,000 pages $0.15 ea 112,500 Repository load: 750,000 TIFF or PDF images (approximately 44 GBs when rastered) 6 months $3,500/mo 21,000 Produce 2 Review: 750, page decisions per hour = 3,750 hours $200/hr 750,000 Deliver: assume 20% of e-paper is responsive (net of duplicates) x 750,000 = 150,000 pages $0.04 ea 6,000 Total $901,500 1 Paring here includes keyword searching and deduping, but does not include native file review as in document analytics. 2 Given keyword search capabilities (via OCR) and bibliographic search capabilities (via objective coding), we assume the review team can review 200 pages per hour versus hard copy at 100 pages per hour. DOCUMENT ANALYTIC APPRO A CH QUANTITY RATE COST ($) Preserve 15 hard drives $800 ea 12,000 Pare Original GB: dedupe and keyword searching 30 gigabytes $1,000/GB 30,720 Load data for native review 15 gigabytes $3,500/GB 53,760 Native file review for responsiveness: 15 GBs x 50,000 pages/gb = 750,000 pages 750,000 1,000 pages/hour = 750 hours $200/hr 150,000 Process Extract & raster: assume 20% of data reviewed is deemed responsive after native review 20% of 15 GBs = 3 GBs x 50,000 pages/gb = 150,000 pages $0.15 ea 22,500 Repository Load: 150,000 TIFF images 6 months $1,000/mo 6,000 Produce TIFF review for privilege, redaction, and production: 150, page decisions per hour = 375 hours $200/hr 75,000 Deliver 150,000 pages $0.04 ea 6,000 Total $355,980 A Revolution in e-discovery 9

14 Nonreview and Review Cost Comparison Review costs represent the largest single nut of the total costs in all approaches. The hard copy approach uses rudimentary processes, which necessitate extensive review hours. The imaged hard copy approach halves the review cost but triples nonreview costs. NONREVIEW VERSUS REVIEW COSTS 10 A Revolution in e-discovery APPROACH NONREVIEW REVIEW PERCENTAGE REVIEW Hard copy $ 321,000 $3,000,000 90% Imaged hard copy 1,069,500 1,500,000 58% e-paper 151, ,000 83% Document analytic 130, ,000 63% The e-paper approach substantially reduces nonreview costs by using a digital environment to perform deduping and culling tasks. The major breakthrough occurs with the document analytic approach, which drastically reduces review time as we have noted above. Nonreview and Review Time Comparison The corpus size and review speed contribute directly to the time required for completing the e-discovery process. Differences in time required are apparent even between the e-paper approach and document analytics, as shown in the graphs on page 11. Although the e-paper approach includes a deduping function, it takes longer at every stage to reduce the corpus.

15 E - PAPER APPROACH CORPUS SIZE CORPUS SIZE PRESERVE PARE PROCESS PRODUCE TIME & EXPENSE DOCUMENT ANALYTIC APPROACH PRESERVE TIME & EXPENSE Review Analysis PARE PROCESS Review costs have a significant impact on total e-discovery costs because of the high hourly rate of attorneys ($200/hour in the sample). It is therefore useful to isolate the factors that contribute to review costs, namely page quantities (the corpus) and review speed. REVIEW TIME = CORPUS X REVIEW SPEED PRODUCE TIME & EXPENSE SAVINGS APPROACH PAGES IN CORPUS REVIEW SPEED Hard copy 1.5 million 100 pages/hour Imaged hard copy 1.5 million 200 pages/hour e-paper 750, pages/hour Document analytic 750,000 1,000 pages/hour A Revolution in e-discovery 11

16 Transition to the Document Analytic Approach A law firm may have little incentive to upgrade its e-discovery approach if it is already successfully billing for traditional services. Corporate counsel may be unaware of potential cost savings in the discovery phase of litigation, or it may have limited ability to engineer these savings through its law firm. Needless to say, what works in the short term potentially overcharging clients may not work in the long term since both vendors and buyers will need to stay competitive. Inevitably, market pressures will assert themselves, especially when the transition to modern e-discovery is so painless. 12 A Revolution in e-discovery Modern e-discovery is a buy, not build, proposition. That s because few organizations can afford the investment required to build an efficient e-discovery infrastructure. Nor do they need to. The economics of the document analytics approach to e-discovery means that a law firm can outsource the entire document management process to a dedicated e-discovery provider and still come out ahead. With outsourcing, the law firm gets out of the document management business photocopying, coding, imaging, rastering, boxing, shipping, and so on enabling it to reduce or reallocate support staff. With the review phase highly streamlined, attorneys can spend more time on higher-value strategic issues of the case, thereby offering better service to their clients. Modernized e-discovery offers the potential for both higher profit margins for law firms and reduced bills for corporate counsel. Change management issues are minimal when a law firm outsources document management to a professional. These may include: Staffing changes Training in document sharing and review technology New vendor oversight responsibilities New cost accounting. For some organizations a myth persists that introducing new technology results in loss of control. In reality, new technology can offer different and better controls. In the case of document analytics and Web-based document sharing, law firms and clients have the ability to assess exposure quickly with snapshot reviews, obtain automated audit trails and status reporting, find documents quickly and in proper context, view the matter as a whole or in parts, and leverage past work.

17 Document Analytic Success Story An e-discovery service provider assisted a client s corporate and outside counsel during the course of an SEC investigation of suspected accounting irregularities related to revenue recognition. The scope of the investigation included 21 high-interest employees and their preserved , shared network files, and local hard drives. The service provider performed the services described in the table below, using a document analytic approach. SEC INVESTIGATION CASE ACTIVITY TIME REQUIRED DERIVED RATE Preserve Pare Process Identified and preserved 168 GBs (3,829,000 pages) based on custodian & date range 192 hours 1 19,943 pages/hour Suppressed 62.5% of the 3,829,000 pages (duplicate and threads) to arrive at a review set of 1,438,500 pages 96 hours 39,885 pages/hour Ran two 12-hour shifts of 30 reviewers for 3 days; reviewed 1,438,500 pages; identified 2,625 responsive pages (<.01%) 2,160 hours 666 pages/hour Convert responsive set to TIFF images. Apply redaction and Bates numbering. 12 hours pages/hour Produce Delivered 2,625 pages via compact disc 48 hours NA 3 Total 1 Hours in this and the following table refer to people hours. 2,508 hours 2 Assuming 2 million TIFF images or fewer, 12 hours is the minimum and includes setup, quality control, and data validation. 3 Production is process driven, rather than page driven. This SEC case provides a concrete example of activity rates and total time required for each phase of e-discovery, from preservation to production. If we apply the same rates to the hypothetical case (except where we have already included a rate), we obtain the following: HYPOTHETICAL CASE ACTIVITY APPLIED RATE ESTIMATED TIME Preserve Identified and preserved 1.5 million pages 19,943 pages/hour 75 hours Pare Process Suppressed 50% of the 1.5 million pages to arrive at a review set of 750,000 pages 39,885 pages/hour 38 hours Reviewed 750,000 pages, identifying 150,000 responsive pages (20%) 1,000 pages/hour hours Convert responsive set to TIFF images. Apply redaction and Bates numbering. NA 12 hours 2 Produce 150,000 pages NA 8 hours Total 883 hours 3 1 Uses the assigned rate of the hypothetical case. Using the rate of the SEC case (666 pages/hour) would yield a total of 1,126 hours required for the e-discovery. 2 Assuming 2 million TIFF images or fewer, 12 hours is the minimum and includes setup, quality control, and data validation. 3 Using the review rate of the SEC case (666 pages/hour) the total would be 1,259 hours. A Revolution in e-discovery 13

18 Conclusion By looking at four e-discovery approaches applied to one scenario, we see that e-discovery efficiency depends on the efficiency of the review component, which in turn depends on the efficiency of the mechanical processes that prepare the discoverable material (the corpus) for review. Time is money. Photocopiers, computerized imaging, computerized deduping and culling, Internet-based document sharing, and document analytics have successively streamlined the process. Content relationships are now at the fingertips of the document reviewer. There is little doubt that the review itself will become further automated. 14 A Revolution in e-discovery Law firms and corporate counsel need to consider the ease and potential cost savings of the outsourcing option, the efficacy of document analytics, and long-term competitive pressures to realize cost savings. KPMG Forensic s template may serve as a useful tool for validating one approach over another, depending on expense rates and other marketplace variables. Our hypothetical sample results show document analytics to be 2.53 times more cost effective than e-paper, 7.22 times more cost effective than imaged hard copy, and 9.33 times more cost effective than traditional hard copy. These findings, our common-sense analysis of each approach, and empirical evidence from the SEC case all argue strongly for e-discovery modernization. For further information about this white paper or KPMG Forensic, please contact: Chris Paskach Partner in Charge Forensic Technology Services cpaskach@kpmg.com The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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