Electronic Data Records Law | How to Win E-Discovery

EDD Search and Analysis

Advanced ESI Culling, Clustering and Concept Review

E-discovery search and analysis engines are proliferating.   Enhanced keyword search methods (such as fuzzy search that looks for forensic gems like misspelled keywords) are coming to recognize more nuances.  Other analytical technologies are emerging as well, and they are influencing the outcomes of audits, lawsuits and internal investigations.

Take the Lehman Brothers bankruptcy, which oversees 3.2 billion e-mail and instant message records. To glean value from this ocean of records, investigators and auditors need more than just conventional keyword search.  New methods include visual mapping of users, dates, transactions and relationships and searches for concepts like compensation rather than just words like “salary” or “bonus.” Telis Demos, "Smoking-Gun Search Engines Find Profit," Fortune, March 2, 2009, p. 24.

Savvy inspection of eDiscovery records can uncover hidden inference and meaning, and dramatically change the result of lawsuits and investigations.  For instance, the US Department of Justice indicted David Stockman, ex-CEO of Collins & Aikman, for alleged fraud, supporting its indictment with extensive factual references and analysis – including the report of an internal investigation conducted by a prestigious law firm on behalf of the company’s board of directors.  For Stockman, the outlook was grim; at a minimum he faced a grueling criminal trial.  

However, during the pre-trial litigation, Stockman’s defense team assiduously assembled a 15-million  (!) document database of e-mail and other records from the company.  From this huge corpus, the team drew out unexpected insights about how business actually transpired at the company and about how supplier rebates (a key topic) worked in the industry.  The insights suggested that neither DoJ nor the internal investigator really understood the case.  These insights enabled the defense to construct a radically different interpretation of Stockman’s tenure as CEO and, eventually, to persuade the DoJ that it had made a mistake.  In an unusual about-face, DoJ withdrew criminal charges against Stockman before the trial began.

In other words, ESI data-mining is the reason Stockman walks a free man today.

According to Ranjit Sarai, eDiscovery specialist at Messaging Architects, litigants like Stockman can achieve courtroom advantage by exposing e-mail databases to advanced or experimental search techniques. “When an investigator is trying to understand a multitude of e-mail records, scrub them for privacy compliance or cull out privileged communications, keyword-oriented searches can be very tedious and can mask the big picture.  Alternative analytical tools can often yield better results.  For example, they can visually map things like time relationships, which can highlight suspicious activities or contradict an adversary’s interpretation of what happened in the case.”

To assemble such as database, a litigant like Stockman would need to access to the records in a machine-processable format, such as XML.  Sometimes courts roughly refer to such as format as "native format," but eDiscovery formatting is a complex topic.

–Benjamin Wright

Mr. Wright is an advisor to messagingarchitects.com, experts in e-discovery services, training and software.   Here is an ARMA podcast describing Messaging Architects' work in e-mail archiving, including its workshop 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:

A.  Historically newspapers were the accepted medium for publishing general legal notices to the public – notices of auctions, bankruptcies, forfeitures, zoning changes and public procurement.  But newspapers are dying, while the web becomes more popular.  The law is coming to learn it is easier to use search engines to find a notice on the web than to hunt for it by poring over old newspapers in a library.  Thus many organizations such as government agencies that must publish legal notices are shifting from expensive advertisements in newspapers to cheap postings on their web pages.  Emery P. Dalesio, Associated Press, “Move to online public notices looms over papers,’ USA Today, May 22, 2009.

B.  Google maintains that its users are legally aware of and contractually subject to the terms of its privacy policy, even if they have not actually seen those terms and even if those terms are not available as a direct, conspicuous link from google.com.  (Google.com is the primary entry point for users of the Google search engine.)

C.  In LeRoy Greer v. 1-800-FLOWERS.com a Texas court held that the legal terms published by a florist on its web page were binding on a consumer transaction executed over the telephone.

D.  Suzanne Shell published aggressive copyright terms on her web site. Then, citing those terms, she sued the Internet Archive for using an automated spider to make copies of her web pages in violation of the terms.  She had published those terms in plain English, which automated spiders cannot read, rather than in the more technically elegant robots.txt format, which is designed for spiders.  To some technologists, Ms. Shell's method of publication seemed outrageous and technologically regressive because it did not accommodate spider technology.  However, the Internet Archive handed Ms. Shell a measure of victory.  The Internet Archive settled and apologized to her – rather than risk finding out whether a court would enforce her terms.  Legally speaking there is little precedent to preclude a web site owner from assertively publishing terms that might be binding on certain other people who have not actually read them with their eyes.

Web-published notices and disclaimers might help all kinds of organizations, not just financial traders, step closer to their legal, compliance and electronic commerce goals.  US banks, for instance, might publish notices to their commercial customers to help them understand their risks and responsibilities for electronic funds transfers under UCC 4A.


EMail Disclaimer

One way to cultivate evidence that trading partners were aware of a disclaimer would be to link to it from the signature at the bottom of all outgoing emails.  Electronic mail records can come in very handy in a lawsuit, political dispute or white collar investigation.  E-mail is a common medium for effecting "novation" in the derivatives market.

Contract Enforcement

Traditional (Western) notions of contract enforcement by a court don’t apply in all places at all times.  For example, Chinese authorities are questioning the enforcement of complex, oil-related derivative contracts entered by companies like China Eastern Airlines Corp.  Chinese firms may not perform (make payments) under contracts as Western banks expected. They (or other Chinese authorities) may try to aborgate the contracts. James T. Areddy et al, “Beijing Backs Derivatives Fight,” Wall St. J., Sept. 8, 2009.

Globalization and other factors thus make contract performance more a matter of politics, reputation and public relations.  

In this environment, savvy traders (contracting parties) can use the web to bolster their positions with publicity and transparency.  They can publicly explain complex contract terms and their commitment to performing under those terms.  They can openly agree that any of their counter parties can publish and discuss all of their letters, e-mails, chat messages and other communications related to their contract performance.  They can ask trading partners to openly, publicly acknowledge their own commitment to the terms and to publicity.  

The Financial Times reports that Hong Kong lawyer Mushtaq Kapasi suggests the Western banks were unfair in dealing with Chinese companies because the banks had more information about the derivatives landscape than did the companies. Sundeep Tucker & Robert Cookson, "China's losses from foreign derivatives turn political," Fin. Times, 15 Sept 09. To prevent allegations of unfairness like this, commercial parties like the Western banks could (for example) publish on the web extensive videos -- in Chinese and many other languages -- explaining in detail how derivatives work and how to gather all the necessary information to be a sophisticated player in the market.  


Battle of the Forms

Web publication of legal terms for derivatives (and other structured finance) trades can also help a financial firm whose traders sometimes fail to follow procedures for confirming particular trades and establishing the terms that control those trades.  (A former professional in the Lehman Brothers legal department claims the legal terms for the firm's derivatives transactions were often confused or wrong.)  Publication of terms (with a statement that they always apply to the exclusion of any other terms) does not guarantee that they will control, but under "battle of the forms" law, such publication might cause the terms to control.   

–Benjamin Wright

Mr. Wright provides training (CPE) on cyber law, defense, ethics and investigations under the SANS Institute, where for years he as been educating professionals on e-contracts and computer banking lawsuits.

As the notice on the left column of this blog reminds you, Mr. Wright is not providing legal advice to anyone here.  If you need legal advice, you should consult your lawyer.

EMail Evidence | Criminal Defense

Should Corporate Executives Prefer Early Deletion of E-Records?

Some executives fear that e-mail will come back to haunt them, so they minimize their use of it.  And they want corporate e-mail destroyed quickly.  

But electronic records came to the rescue of David Stockman, former CEO of bankrupt auto parts maker Collins & Aikman.  Stockman and other executives were indicted by prosecutors for alleged lying about the company’s financial condition.  Prosecutors apparently based the charges on an investigation by an outside law firm working on behalf the company’s board of directors.  Stockman and his co-defendants maintained that they were victims of a rush to justice.  They said the law firm and the prosecutors failed to examine all the complex evidence carefully. 

They and the government undertook to assemble a database containing 10 million company records, including (no doubt) copious e-mail records.  Key topics in the case included C&A's:

*  day-to-day internal communications among executives and employees regarding the accounting and invoicing for particular transactions, and 

* day-to-day communications with suppliers -- involving innumerable, detailed, nitty-gritty negotiations and documentation over topics like transaction-by-transaction rebates.

From this massive database, the defendants drew evidence, bit-by-tiny-bit, to tell their side of the story.   In a database of this size, the ability to find the right evidence depends much on the careful selection of search methodology and search algorithms.  Sometimes the only effective way to comprehend what is in the database is to engage a selective sampling of records.

Eventually the defense prevailed.  In an unusual move, the prosecutors withdrew the charges, stating that they had come to reassess the evidence in the case.  

In other words, the executives were fortunate that the company retained so many records like e-mail.  E-archives exonerated the defendants.

In a putative corporate scandal, the relevant e-mail records can be maddeningly plentiful.  A large number of computer-based records is unsurprising in a modern white collar crime investigation or police raid of corporate offices.

In this case, the defendants' legal team patiently mined the company’s email (and other records) to build a convincing case that prosecution was unwarranted.

As the quantity of records in a case swells like this, the ability of parties to review records one-by-one declines.  Increasingly the law will favor those who can draw on statistical methods (or linguistic analysis) to tease out the evidence that tells their side of the case.

(David Stockman is most famous as the Ronald Reagan’s budget director in the 1980s.)

–-Benjamin Wright

Mr. Wright is an advisor to Messaging Architects, thought leader in enterprise governance and records management.  He also delivers training in cyber defense law at the SANS Institute.

E-Discovery Strategy, Search & Artificial Intelligence

E-mail Archive Policy

In a legal dispute, you want as much of two assets as you can get – evidence and brainpower.  You want evidence to supply facts so you can understand and support your side of the case.  And you want good analysis and judgment so you can assemble the best arguments and make the best decisions about how to manage your case.  

Since e-discovery affects both evidence and brainpower, it is revolutionizing litigation and, more generally, all manner of investigations (whether they be investigations of bribes, kickbacks, corruption, espionage, overcharges, misallocation of funds, abuse of power, breach of trust or any other misconduct). 

Litigation Dynamics

A lawsuit today is not your father’s lawsuit.  The advent of electronic records like e-mail causes the quantity of records potentially relevant to a lawsuit/investigation to swell beyond imagination.  In any dispute, this profusion of records opens vast opportunity to those able to exploit it.  Smart litigants today (a) welcome oceans of records, and (b) seek advanced analytics and artificial intelligence to glean from those oceans the best case.

Lesson From Tyco Scandal

Observe the lesson from the Tyco International scandal (white collar crime). Chief Executive Officer Dennis Kozlowski and Chief Financial Officer Mark Swartz were convicted (under New York law, even though Tyco's headquarters was in New Hampshire) for taking money from the company.  They said the money was authorized compensation, approved by the board of directors, but top decisions at the company were poorly documented. Company leaders did business the old-fashioned way, with voice conversations and handshakes.  Hence the records to support CEO Kozlowski’s and CFO Swartz’s side of the case were thin. Dan Ackman, “Tyco Trial II: Verdict First, Law Second,” Forbes, June 17, 2005.  

But compare the case of Tyco’s General Counsel, Mark Belnick. Like his bosses Kozlowski and Swartz, Belnick went to trial for allegedly stealing money from the company (misappropriation of funds and assets). Yet the jury acquitted him.  The jurors could not find him guilty, even though they “felt he was morally guilty”. Why? The jury was persuaded "Everything that he got was documented through e-mails and memos . . ." Steve Fishman, “The Convert,” New York Magazine, August 2, 2004.

Records Make the Difference in Trial

Wow.  The difference between Kozlowski and Swartz, who are in jail, and Belnick, who is free, was records.  The bosses didn’t have them, but Belnick did.  The existence of those records, and the ability of Belnick’s defense team to assemble them into a credible story was crucial to his case.  Belnick's story is a lesson about the Information Age.  In the age of abundant digital records, advantage goes to the party who can better marshal records.  

[Update:  In another heartening Information Age story, digital records come to the rescue of a falsely accused defendant.  Defendant proves he did not commit murder by drawing on (a) New York City transit authority records showing his whereabouts based on metrocard found in his wallet at time of arrest; (b) timestamped photo showing him cashing payroll check; and (c) records of when he clocked out at work.] 

Success with Electronic Records

I therefore argue enterprises are wise not to fear e-discovery, but rather to embrace it.  They should relish systematic archival of massive records (including new things like Twitter tweets, voicemail-converted-to-text, cell phone text messages, iPhone calendar alarms, BlackBerry mail, smart phone SMS), and seek tools, including artificial intelligence, that enable brilliant searching and sifting through those archives.  They thereby position themselves to capitalize on unexpected or nuanced discoveries within their records.  I’ve published more big-picture observations about e-discovery in this blog. 

Healthcare Internal Control: Retained E-mail & IM Records

Board of Directors Fiduciary Duty

Medicare Compliance & Fraud Investigations

Electronic records such as e-mail do more than satisfy discovery requests in litigation. They serve as a check against mistake, fraud, overcharge, kickbacks, tax evasion, false records, misappropriation of funds-assets and other misconduct. Healthcare institutions need to retain these records to enable investigations of misconduct on the part of administrators or other decision-makers.