Electronic Data Records Law | How to Win E-Discovery

Litigation Hold

Lawsuit Strategy

If an enterprise is not archiving e-mail in a systematic way, e-discovery can be a headache when a lawsuit it filed.  This lesson applies just as much to a plaintiff (the one who initiates a lawsuit) as to a defendant (the party against whom the lawsuit is filed).  A case in point is The Pension Committee of the University of Montreal Pension Plan, et al. v. Banc of America Securities LLC, et al., No. 05 Civ. 9016 (SAS), 2010 WL 184312 (S.D.N.Y. Jan. 15, 2010).  In this case,
several institutional investors (the “plaintiffs,” which included a university pension fund) sued hedge fund managers (the “defendants,” which included a subsidiary of Bank of America) to recover $550 million in investment losses. 

In a lawsuit, e-discovery is a two-way street.  The plaintiff can demand that defendant turn over its email, and the defendant can demand that the plaintiff turn over its email.  So in this case the defendants said, “Plaintiffs, you have drug us into court regarding these investments.  We demand to see your email concerning these investments.” 

The plaintiffs had been haphazard in retaining email.  In practice, the essence of their policy (which, largely, was not in writing) was to retain much of their email for short periods of time – a few weeks, maybe a few months, maybe a year . . . it all varied because the plaintiffs had no systematic policy for archiving email.  Different employees made different decisions about keeping e-mail.  But the general practice was to destroy rather quickly.

The judge said that at the time the plaintiffs started to prepare for the lawsuit (2003-2004), they should have instituted a “litigation hold” on all relevant email, wherever it may be, whether on servers, laptops or even backup tapes if the email was stored only in backup.  The judge’s reasoning was that if the plaintiffs think they are going to be in a lawsuit, then they need to preserve the evidence related to the topic of the lawsuit.  They should not let the evidence be destroyed; they should allow emails to be erased.

Analysis:  The reality is that in any enterprise (public sector or private sector) a litigation hold is VERY HARD to implement in practice.  A litigation hold requires real work, diligence, expertise and forethought to find, evaluate and preserve all the relevant email (the relevant email can be voluminous, involving, in a case like this, maybe thousands of messages).  The plaintiffs did not institute a good litigation hold at the right time, and therefore the court believed important emails were deleted and relevant evidence had been lost.

Result:  Because the plaintiffs did not do what they should have done, the court ruled the defendants were entitled to a remedy in the form of a so-called “negative inference.”  When a party like a defendant is awarded a “negative inference,” it gets a strategic advantage in the lawsuit.  The strategic advantage means it will be easier for the party (the defendant) ultimately to win the lawsuit. [Technical detail: The negative inference in this case was that the jury would be told that plaintiffs possessed relevant email evidence, but lost it, and the evidence is more likely to have supported the defendants’ side of the case.]

The court also ruled that plaintiffs must pay some of the defendant’s attorney and expert fees/costs related to e-discovery.  Ouch.  That ruling is expensive for the plaintiffs.

Lesson:  Litigation is hard to predict.  But for many enterprises, they know that eventually they will be involved in lawsuits of one nature or another, and they will be expected to have instituted a litigation hold to preserve email.  Knowing precisely when and how to institute the litigation hold is, in practice, very hard. 

Courts like the one in this case are becoming progressively more demanding in their standards for litigation hold on email. 

Thus, a haphazard policy on email retention, which generally includes short retention periods (such as 90 days and the like), can come back to haunt an enterprise like the university pension fund in this case.  As a practical matter, the risk of this problem can be mitigated by adopting a policy to archive the emails of important people – like investment analysts and decision makers -- for numerous years (e.g., seven years).

--Benjamin Wright

In collaboration with Netmail, Mr. Wright leads on-site workshops for the development of electronic records policy in mid-to-larger sized enterprises.

 

E-mail Records: Friend or Foe?

Electronic Mail Snippets Viewed in Context

For honest people, email records can often be their best defense.  Ask Matthew Tannin and Ralph Cioffi, former hedge fund managers for Bear Stearns.  Their detailed email records persuaded a criminal jury to acquit them.  That is, the jury could not find them guilty of fraud or dishonesty, as prosecutors alleged.

Thank goodness Bear Stearns did not follow the common legal advice to destroy email quickly.  Many lawyers recommend deleting email and text
messages quickly because they can provide adversaries scraps of conversation that can be misconstrued and taken out of context. 

Many lawyers and archivists recommend, for example, that email systems be configured to purge email, by default, after only 15 days or 30 days.  Such recommendations are always supplemented with the requirement that employees do something that is impractical – i.e. read all of their emails and promptly take affirmative action to keep those that are important records while allowing the others to be purged.  Experience shows that requirement is routinely ignored in practice because employees just don't have time to follow it.

In the Tannin-Cioffi case, prosecutors said the defendants were dishonest and lying to fund investors.  As evidence, the prosecutors pointed the jury to small passages clipped from emails.  In one e-mail, Tannin observed “simply no way for [the fund] to make money – ever.”  Prosecutors said this statement proved Tannin lied to investors because a few days later he expressed on a conference call his comfort with the fund’s prospects.  Amir Efrati and Peter Lattman, “U.S. Loses Bear Fraud Case,” Wall St. Journal, Nov. 11, 2009.

Some lawyers think juries are so dumb they will consider no more evidence than a few words from an email.

But in fact the Tannin-Cioffi jury considered a lot more.  It evaluated the context of that snippet of words.  It weighed the entire e-mail from which the snippet was clipped.  Amir Efrati, “Bear Loss Besets Prosecutors,” Wall St. Journal, Nov. 12, 2009.  Further, the jury considered many other emails between the men.  The jury noted for example that during the time that the prosecutors said the men had given up on the fund, their email records suggested they were working furiously hard to save it.  The jury focused on one e-mail exchange showing them working at 4 in the morning!

Notice how the detailed timestamp (metadata) on the email saved these alleged white collar criminals from jail.  Old fashioned paper letters did not record such a rich diary of business activities.  Here the electronic diary depicted the defendants doing the right thing. 

For good business people, lengthy, complete email and text message records -- including all the metadata -- are a friend.

The only people who have incentive to destroy their electronic message records quickly are mobsters, the Mafia.  They of course are motivated to toss all the smoking guns and dead bodies into the river.

Update:  Former AIG executive Joseph Cassano is also thankful for plentiful records.  Records saved him from criminal prosecution for allegedly hiding problems with AIG's mortgage-related investments in 2007.  Although prosecutors were on the verge of indicting him, notes taken by outside auditor PwC suggested that he had disclosed the problems.

–Benjamin Wright

Mr. Wright often serves as a public speaker on technology law for groups like CPA societies or Institute of Internal Auditors.  Here is an ARMA podcast describing Messaging Architects' work in e-mail archiving, including its workshop (led by Mr. Wright) for development of an email records policy in an enterprise.

Internet Terms, Contracts, Disclaimers

Financial Derivatives Yield Unexpected Incentives

Hedge Fund Public Disclaimer of Liability-Responsibility?

Web Notice to Pre-empt Complaints | EMail Disclaimer | Contract Enforcement | Battle of the Forms

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: