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generis
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My answer is (E). It took me 37 seconds.

(A) What does "they" refer to? It is ambiguous at best.
(B) What does "most" refer to?
(C) What does "them" refer to?
(D) What does "most" refer to?
(E) Now, it is so clearly. "E" has no competitors!
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The only thing to answer this question correctly is understanding that "they mostly fail to indicate the outcome of cases, and approximately one-fifth are inaccurate" is a modifier for records.
Now lets go through the options.

(A) in that file they mostly: No clear antecedent for they. Out

(B) in that file most: most of what? quite ambiguous.

(C) most of them in that file : Here them may be correct, as only records in the file can logically indicate the outcome of cases. But lets see if we can get any better option.

(D) most in that file same as B.

(E) most records in that file: This one is best as this option can express the meaning of the sentence in more logical way than option C does. Correct.
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(A) in that file they mostly - they refers to both employers and records which creates ambiguity , no clear antecedent here.

(B) in that file most - missing subject ? What most ?

(C) most of them in that file - them creates an ambiguity here same as option "A"

(D) most in that file - Missing subject again , most of what ?

(E) most records in that file - correct option
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Employers often obtain arrest records of applicants for employment from the Federal Bureau of Investigation's computerized file, but in that file they mostly fail to indicate the outcome of cases, and approximately one-fifth are inaccurate.

(A) in that file they mostly Incorrect

they refers who?

(B) in that file most Incorrect

what in that file fail to indicate?

(C) most of them in that file Incorrect

them refers what?

(D) most in that file Incorrect

what in the file fail to indicate?

(E) most records in that file Correct
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The official explanation is here.
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