Evidence | Tort Lawsuit Defense
Insurance | Hidden Cameras | E-Messages
Law and politics give institutions incentive to collect and archive plentiful records. The best way to maintain plentiful records in practice is to archive email.
Records are evidence of due diligence and responsible corporate behavior. In the past, records were expensive to keep and manage. But costs are plummeting as information technology advances.
A case in point: The use of a taser in police work is controversial because, legally speaking, officers should use it only when circumstances warrant. But proving, after-the-fact, what the circumstances were can be difficult. So the company that makes tasers sees an opportunity. Recognizing that the cost of gathering and storing video evidence is declining, the company has developed a video camera for police officers to wear while on duty. The camera will capture trainloads of data. The company has further developed a technology for economically storing and managing that data. Veronica Dagher, “New Taser 'Shoots' Evidence,” Wall St. J., Sept. 2, 2009.
Update: A police officer in Fort Smith, Arkansas, was wearing a video camera when he fatally shot a gunman, November 2009. The police department released the video record to local media. The local prosecutor investigated the shooting, and part of the investigation included review of the video record. The prosecutor concluded that the officer acted lawfully, as he had ordered he gunman nine times to drop the gun he was pointing at officers.
Insurance
For an enterprise like a police department or a doctors' office, greater quantities of records can mean reduced risk of liability for negligence (tort). Good records support a defendant’s position that its people exercised due care and it therefore is not liable.
For physicians, lawyers and other professionals, classic advice for the avoidance of malpractice claims is to make and retain thorough records of services performed.
Hidden Cameras
In this technological age, hidden cameras and surprise evidence are becoming more common. They can embarrass an organization, as they did ACORN, a high-profile advocacy group for the poor.
Yet, surprise evidence may evaporate if the organization maintains its own detailed records that counteract the surprise. Example: In the famous murder prosecution of Carolyn Warmus, a key issue was whether she placed a phone call to a gun shop. At trial, her defense team produced “surprise evidence” – an original telephone bill – showing she did not make the call. But the evidence backfired because the prosecution established that the “original” bill was in fact a forgery. It did so by drawing on secure computer records at the telephone company and testimony from a telephone company employee.
Electronic Message Archival
The electronic records in an enterprise such as a government agency are often in diverse formats and locations, which makes long-term retention and management difficult. The enterprise therefore has incentive to emphasize the archiving of electronic messages such as e-mail. Three reasons:
1. Electronic messages represent a detailed, time-stamped diary of many of the day-to-day activities and intentions of the executives and staff at the enterprise.
2. The IT industry has fielded numerous, competitive products for archival of enterprise electronic messages. Good archive products support economical retention and rigorous searching of records. Good archival includes storage of records in a non-proprietary format like XML.
3. If electronic messages are the focal point for record archiving, then the enterprise can direct employees to use electronic messages generously as the journal of their activities. Journaling can include attaching to email documents like spreadsheets or (short) videos.
–Benjamin Wright
Mr. Wright teaches the law of data security and investigations at the SANS Institute.
advice
September 11, 2009
June 22, 2009
Internet Terms, Contracts, Disclaimers
Financial Derivatives Yield Unexpected Incentives
Hedge Fund Public Disclaimer of Liability-Responsibility?
The World Wide Web is changing contract and commercial law practices. As a global medium for broadcasting terms, notices, conditions, and disclaimers, the web empowers business innovators preemptively to warn their trading partners of risk and to disclaim responsibility to prospective counterparties. Business innovators might therefore use the web to reduce their legal risk.
This blog post presents an advanced idea. To explain it will require space, so please hang with me as I lay out my argument. First I will explain how forward-thinking traders like hedge funds can be exposed to new legal liability. Then I will explain a method for containing that exposure, a method that could apply to more than just hedge funds and financial markets.
The legal desire to warn others and disclaim liability is acute in the cutthroat world of financial derivatives and structured finance. Derivatives (which are fueled by efficient digital
technology), especially credit default swaps (CDS), allow aggressive traders to assume unconventional, counterintuitive positions – positions that may surprise and even anger other parties. Three examples:
1. George Soros says some of the bondholders in the AbitibiBowater and General Motors bankruptcies perversely preferred to dissolve the companies rather than reorganize them on account of the bondholders’ positions in credit default swaps. “CDS are instruments of destruction that ought to be outlawed,” he proclaimed (emphasis added). Further, to hold both a bond and a corresponding CDS simultaneously “is like buying life insurance on someone else’s life and owning a license to kill him.” George Soros, “My three steps to financial reform,” Financial Times, June 17, 2009.
2. Some analysts complain about a Fidelity mutual fund that simultaneously held both bonds issued by the distressed Six Flags company and hedged CDS positions relative to those bonds. According to the analysts, the mutual fund turned down a reasonable restructuring offer for the Six Flags company. Strangely, the mutual fund preferred that Six Flags sink into bankruptcy where bondholders as bondholders would receive less. The Economist magazine goes on to observe, “By purchasing a material amount of a firm’s debt in conjunction with a disproportionately large number of CDS contracts, rapacious lenders (mostly hedge funds) can render bankruptcy more attractive than solvency.” “CDSs and bankruptcy: No empty threat,” The Economist, June 20, 2009, p. 79 (emphasis added to highlight that the Economist thinks the mutual fund's behavior was bad and presumably should be punished).
3. Amherst Holdings, a Texas investment firm, “ambushed” some big banks. The banks were counterparties to which Amherst had sold CDSs so that the banks could hedge their losses on bonds they owned representing defaulting mortgages. From the sale of the CDSs, Amherst and its associates earned multimillion dollar fees from the banks. Under the terms of the CDSs, team Amherst would have to pay handsomely as the losses from the defaulting mortgages were allocated under the bonds to the banks. But then Amherst executed a maneuver that prevented the banks from collecting under the CDSs. It used a little-known legal loophole to arrange (with the party that services the bonds) for the bonds to be paid in full! The banks were not prepared for this scenario. The result was that team Amherst did not have to pay as expected under the CDSs. On balance, Amherst made money, and the banks lost the substantial fees they had paid team Amherst for the CDSs. Some of the banks have complained to industry trade associations that Amherst acted improperly. Zuckerman, Ng & Rappaport, “A Daring Trade Has Wall Street Seething,” Wall Street Journal, June 12, 2009. Deutsche Bank averred that a maneuver like Amherst’s might be illegal.
In each of these three stories, counterparties or other investors felt the successful traders had acted unfairly, possibly deceptively and perhaps even illegally.
When large sums of money are lost unexpectedly, losers are prone to seek legal or political redress. They might try to claim, for example, that they were victims of fraud or that they were entitled to more disclosure of the other party’s intention, position, or strategy.
Web Notice to Pre-empt Complaints
But in anticipation of the possibility of such legal claims, unconventional traders might take steps long in advance. They might pre-empt such claims by issuing a general warning and disclaimer. They might conspicuously publish on their Web pages a notice like this:
“Notice. This is notice published by ABC Hedge Fund (the “Fund”) to the attention of any party that may have a direct or indirect relationship to the Fund’s investments, including but not limited to an investor, a counterparty or the issuer of debt, equity or other rights, interests or securities. Please be advised that the Fund may assume or take advantage of innovative, unconventional or surprising positions. While the Fund shall always stay in full compliance with all applicable laws, please be alert that the Fund may aggressively pursue trading or investment strategies that are novel or counterintuitive. Except to the extent the Fund otherwise explicitly agrees in writing, the Fund disclaims responsibility to (a) inform others of its intentions, trading positions or investment strategies, or (b) look out for the interests of others or divine their intentions, strategies or expectations.”
Publication of such a notice/disclaimer would create electronic records suggesting that prospective “victims” had been warned in advance.
How effective might such a notice be? Although the legal effect of any kind of disclaimer can rarely be certain for all circumstances, support is growing for the proposition that general-distribution legal notices can be delivered by way of publication on the web. Observe four angles on the topic: