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: