Logs and Audit Trails for Data Privacy and Internal Control
Filtering Attorney Work Product
Electronic records such as email serve as memorials of business actions and as evidence of legal responsibility. But they are also vulnerable to abuse by privacy infringers or trade secret thieves.
One key to protecting e-records is metadata. Meta-data comprises all the ancillary notes and audit trail surrounding a given record (a given e-mail) . . . the system logs showing when a record was created, who accessed it and when, how and when it was changed, to whom it was forwarded and possibly much more. Metadata can illuminate an auditor or detective about the status, the history or the security of the record in question.
For records containing personally identifiable information (PII), good meta-data can be invaluable as an instrument of privacy. Metadata can deter a snoop. A busybody in a hospital who wants to peek at a celebrity’s patient record will think twice before doing so if he knows the system will create an audit trail showing what he saw and when he saw it. Further, in the investigation of a hacker incident, system logs can inform whether (for instance) the crook accessed credit card record X or social security number Y. Armed with this information, an investigator can evaluate whether the hacker did or did not actually breach the security of record X or record Y.
Example: In the wake of a security breach at one of its hotels, Best Western International was able to evaluate the breach and narrow the universe of affected credit card numbers by inspecting specific logs on the computer in question.
Accordingly, a well-crafted e-mail archival system will maintain extensive meta-data about each electronic mail record. The M+Archive product for instance keeps tabs on who viewed a record, when it was printed and so on.
Be all that as it may, sometimes system logs are undesirable. For example, when an attorney turns over records in an eDiscovery request, she normally should not turn over metadata that constitutes her own work product. As she reviews individual emails in an archival system, the system may be keeping meta-records showing which records she accessed, when she accessed them and how often. Those records are probably her attorney work product, which normally is excluded from disclosure in the discovery phase of litigation. She should normally screen out any such work product when she turns over required emails to another party.
I spoke to Ranjit Sarai, e-discovery expert at Messaging Architects. “The management of meta-data in an enterprise archival system can be tricky,” he said. “Normally you want the system to be making meta records for security and accountability purposes. But sometimes ediscovery lawyers want to turn this logging feature off, or they want to filter out their work product metadata before delivering records to an adversary. We have experience helping an attorney understand the options and craft a solution for her particular case.”
–Ben Wright
Mr. Wright often serves as a public speaker on the law of electronic records and investigations.
email investigation
August 05, 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: