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$1.45B Verdict Against Morgan Stanley a 'Wake Up Call'

If corporate America hasn’t heard the alarm bells ring by now, the recent $1.45 billion fraud verdict against Morgan Stanley should surely do the trick.

The Wall Street giant was slammed with the whopping judgment mainly because it repeatedly failed to timely produce e-documents as part of routine discovery requests, primarily e-mails stored on backup tapes.

Morgan Stanley’s botched discovery efforts so exasperated the Florida trial court judge overseeing the case, Elizabeth Maass, that she took the unusual step of imposing a partial default judgment against the company as punishment, which dealt a crippling blow to Morgan Stanley’s defense.

At the beginning of trial, Maass told the jury to assume that the defendant helped defraud the plaintiff, Ronald Perleman, who had claimed that Morgan Stanley conspired with one of its clients, Sunbeam Corp., to misstate the value of its assets and stock when Perelman sold one of his companies to Sunbeam in exchange for its stock. As a result, at trial all Perleman had to prove was reliance on that fraud as well as its damages.

While the punishment against Morgan Stanley for its discovery errors may have been extreme, it is certainly not alone in its struggles to locate stored e-mail and other electronic documents. It’s a problem that bedevils other companies as well.

Managing the flow of burgeoning electronic documents – stored on PCs, PDAs, laptop computers and back up tapes – through an effective documents retention policy has been for in-house counsel a “best practices” discussion point for a number of years.

But bringing it to fruition is often a daunting task because upper management often resists the good faith efforts of company counsel to make documents retention a core business objective – due in part to complacency and a concern over the costs involved.

“It can be tough. In-house counsel can be handcuffed by upper management,” said Geoffrey W. Millsom of Adler Pollock & Sheehan in Providence, R.I. But their “jobs just got a lot easier as a result of the Morgan Stanley case.”

In-house counsel must press ahead on convincing their companies that efficiently managing electronic documents is a business imperative, if for no other reason that courts expect companies to do so.

“The Morgan Stanley case is not surprising,” said B. Jay Yelton III of Miller Canfield in Detroit. “It’s another in a line of cases from the past few years where courts have been less tolerant of things slipping through the cracks. The judge had pretty much had it with Morgan Stanley. She said, ‘you don’t know where the documents are and you can’t figure out how to find them. You’re not taking this seriously.’ Courts are telling companies to get organized.” [See sidebar for description of leading cases.]

A “warning shot” like the Morgan Stanley verdict will hopefully get companies to pay attention and “buy in” to effective e-records management, Yelton added.

Morgan Stanley’s effort to portray its discovery delays as inadvertent fell flat with the trial judge.

“It didn’t much matter whether it was inadvertent or on purpose,” said John R. Bielema, who practices at Powell Goldstein in Atlanta. The judge “had a belief it was on purpose because it was so badly botched, so badly coordinated, so badly delayed. She presumed it was in bad faith.”
Getting it Done

The importance of centralizing records management as much as possible is a key lesson from the Morgan Stanley case.

“Morgan Stanley fell short because records were stored all over the company,” said Millsom. “There was a lack of a centralized repository for storage of back up tapes.”

The benefit of a centralized system is that records are usually found and accessed fairly readily, and it’s less likely that documents are stored and retained in an inconsistent manner.

“If you have a designated person as the contact, you don’t have to go on a fishing expedition and ask every person at every cubicle what they know,” said Bielema.

An added benefit is that it’s easier for in-house counsel to assess who needs to be involved from the get-go, a crucial first step that can avoid problems down the road as companies head deeper into litigation.

“What struck me about the Morgan Stanly case,” said Millsom, “was that there seemed to be miscommunications between counsel and other employees of the company. It didn’t appear that everyone knowledgeable about the records communicated effectively with the attorneys. This points out the importance of having a comprehensive meeting at the beginning of major litigation. Companies need to empower as many people with knowledge to help the lawyers – both inside and outside counsel – to get their arms around the universe of responsive documents. You need to cast the net wide enough to bring into the litigation team anyone who can put their hands on the information.”

Where in-house counsel can play a particularly critical role is persuading senior management to get invested in the process and push for a coordinated effort, Millsom added.

Having outside counsel assist in communicating this important point can help, said Kathleen C. Stone of Looney, Cohen, Reagan & Aisenberg in Boston.

“Inside counsel can work effectively with outside counsel to explain to the business people why e-mails must be preserved in certain cases, and have them understand how the company can pay a heavy price if individual employees fail to preserve electronic documents. You don’t want outside counsel to do this alone and make it seem like they’re this 1,000 pound gorilla from the outside. You should make it a joint effort, because in-house counsel can couch it in terms that the business people can understand.”

Preserving records and then being able to track them down during litigation requires diligence and planning, according to Yelton.

“When a lawsuit is filed or an outside investigation is likely,” he suggested, “you need to pull together a team that includes outside counsel, IT people and key internal employees involved in the underlying allegations. Come up with a plan. Don’t wait until discovery requests are served.”

And once a company starts locating and retrieving e-documents, it has to be organized in logical manner.

“One of the goals is to realize what is missing,” Yelton said. “It helps you identify the gaps.”

Documents retention policies typically include a “litigation hold” – a directive that stops, once litigation is commenced, the routine destruction of documents as part of the retention policy.

But just sending out an e-mail reminder of the litigation hold policy will likely not ensure compliance.

“It’s not enough to just send an e-mail to every employee with bullet points on the information that’s being sought,” Bielema stressed. “In-house counsel has to monitor the ongoing efforts and verify the process is working. People will ignore an e-mail. A lot of follow up and prodding is needed. In-house counsel needs to be leading the charge, because outside counsel doesn’t have the relationship with inside employees.”

Bielema also suggested creating a “paper trail” to document compliance with a document retention policy and a litigation hold.
Expanded Skill Set

Aside from the litigation context, in-house counsel must expand their skill set to include an understanding, even if rudimentary, of IT at their companies.

You can’t bury your head in the sand and just assume it’s an “IT-thing.”

“In-house counsel must have a clear understanding of how technology is set up – who the knowledgeable people are internally, how to locate all potentially relevant information and how to access it,” said Bielema. “I’m afraid that in a lot of companies that’s not the case. You need to know the system right now and fix things if they’re messy.”

Stone added: “In-house counsel has to be become intimately knowledgeable of the computer operations at their companies – how e-documents are created, preserved and catalogued.”

Indeed, records management, according to Yelton, is an ongoing process – even in the absence of major litigation or government investigations.

“Your company should be destroying what they don’t need, organizing what they do need, and getting to know what is retained,” Yelton explained.

“You have to have an organized structure at the front end and have it in a format that makes sense,” he continued. “You’re in immediate trouble if you go into litigation without a plan in place. If you don’t know what you have and where to find it, how can you stop someone from unintentionally deleting it?”
State of Technology

Software packages are becoming more readily available that help companies make sure that employees are storing e-mails logically, consistently and for specified periods of time, according to IT specialist Mark Oudersluys.

“Having the software in place will help companies assess what has been retained and as well as locate it,” said Oudersluys, who helps clients of Miller Canfield develop and maintain records retention programs.

For example, e-folders can be established to retain e-mails consistent with a company’s documents retention policy, he noted. And employees receive periodic signals to either store an e-mail or delete it, and if they fail to follow the policy, their e-mail accounts can be shut down.

“Everything can be filed consistently and at the end of a pre-arranged time period, the content is automatically deleted,” he explained. “The automatic deletion feature is synchronized on the company’s main server, as well as individual desk top computers, laptops and PDAs. The software can take into account individuality in storing e-mails, but individual use is tied into a master retention policy.”

And a litigation hold feature can automatically revoke the destruction time frame to avoid inadvertent deletion of potential evidence, Ourdersluys said.

Online archiving is not always to implement, he admitted. But that’s where consistent, steady training of employees comes in.

“A company has to inform its employees what the retention policy is and why it’s being implemented,” said Ourdersluys. “You need to keep it in front of people, and you need to have some compliance process to verify that employees understand it and are complying with the policy. Your company should conduct periodic audits that encourage employee understanding and flags the need for additional training, if necessary.”

Online archiving also allows for word searches, as compared to back up tapes, which generally have to be reproduced on paper and pored over page by page – often a time consuming, expensive task.

The use of back up tapes will eventually decline, predicts IT specialist John Osborn, who works with Ourdersluys.

“It’s not a very good medium. Over time, it decays. And it’s not nearly as fast as CDs or DVDs,” Osborn said.

But some companies fear that online archiving will create more discoverable data, which has caused them to continue using back up tapes, according to Steven Lilley or iLumin Software Services, Inc.

But an effective documents retention policy streamlines what is retained electronically, Lilley noted.

“You can create a ‘smart’ archiving system using the rules of a particular business and that’s consistent with what regulators are requiring,” Lilley said. “You save groups of data specific to certain business issues or product lines. It reviews e-mail for content based on concepts, rather than just reviewing the mail generally. It’s a consistent process and not necessarily every piece of evidence is retained.”

For trial counsel, “it’s easier if you have an archive in place because you spend less time worried about the proper collection of the data and more time reviewing for responsive data,” Lilley said.

In the end, the storage medium used is less important than an effective records management program, Ourdersluys observed, which essentially means having a policy that’s clearly defined and consistently enforced.

Questions or comments can be directed to the writer at [email protected].

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