E-mail Briar Patch

To get a sense of why the Morgan Stanley case might herald a "legal Chernobyl", it is worth considering the case in some detail. To sum up briefly the relevant aspects of a complicated case, early in the case of securities fraud initiated by Ronald Perelman against Morgan Stanley (MS), in which Coleman (Parent) Holdings (CPH) sued MS for aiding and abetting and conspiring with Sunbeam to perpetrate a fraud, CPH began to suspect MS was failing to search vigorously enough for e-mails responsive to its discovery request.

On April 6, 2004, the court entered an Agreed Order that required Morgan Stanley to search its oldest full backup tapes for e-mails subject to certain parameters, and certify compliance. Morgan Stanley certified compliance with the Agreed Order on June 23, 2004. All seemed well until November 17, 2004, when CPH learnt MS had found some backup tapes that had not been searched. Two months later, CPH served a "Motion for Adverse Inference Instruction Due to Morgan Stanley's Destruction of E-mails and Morgan Stanley's Non-compliance with the Court's April 16, 2004 Agreed Order", claiming that Morgan Stanley's violation of the Agreed Order justified an adverse inference against it.

The Florida state judge overseeing the case, Judge Elizabeth Maass, seemingly agreed, ruling that Morgan Stanley "deliberately and contumaciously violated numerous discovery orders", and finding it had hidden information about its violation and coached witnesses to avoid mentioning compliance problems.

The alarming thing about all this from the CIO's point of view is that none of the problems, according to Morgan Stanley, was even remotely intentional. According to a Wall Street Journal story, Morgan Stanley responded to the paper's questions with a written statement claiming all of its recent "discovery problems" stemmed from honest mistakes, such as computer glitches and misplaced backup tapes, and were not attempts to stonewall adversaries.

If those claims are true, the result not only could not have been worse for Morgan Stanley but also highlights the vulnerability of many organizations to the same perils. Because Judge Maass, showing no patience for such defences, issued a partial default judgement against the company, essentially handing an automatic loss to the Wall Street firm, because "the [discovery] abuses have continued unabated", and said she intended to instruct the jury to assume that the firm had helped defraud Perelman.

"The presiding judge in this case essentially directed a verdict against Morgan Stanley for concealing potentially harmful e-mail messages and refusing to cooperate in good faith in the pre-trial discovery process," Rosenberg says.

In the course of the litigation, the role of two IT executives in particular came under scrutiny. As detailed by the Wall Street Journal story, Arthur Riel, then head of Morgan Stanley's technology compliance group, was the one who signed the June 23, 2004 court document certifying he had handed over all e-mails the firm had agreed to produce in the suit.

But two weeks earlier, according to the Wall Street Journal story, Riel had not been so sure. "The storage folks found an additional 1600 backup tapes in a closet," Riel told two Morgan Stanley lawyers, according to a deposition quoted in court papers. MS acknowledged in court that they had not searched the tape for e-mails before Riel signed the document. Riel at the time was overseeing a multimillion dollar project to put almost 300 million e-mails into an easily searchable archive, moving them over from storage on magnetic tapes. Morgan Stanley said Riel, believing the work to be pretty well completed, searched only the new database.

As a result, Riel's certification dated the oldest available tape at January 2000, although he and his team knew by early July 2004 that the newly discovered tapes went back to the late 1990s, the period at issue in the suit. Court documents show Morgan Stanley did not disclose this knowledge until November. According to Riel's attorney, Jeffrey Pigano, that is because Riel believed the certification only covered the archive, his area of responsibility, but not tapes that had not yet been entered into the archive, while a Morgan Stanley spokesperson claimed that in general only a small fraction of its tapes contained e-mail and that it did not know whether the newly discovered tapes did so.

According to the Wall Street Journal story, Riel was placed on administrative leave last August, accused of looking through co-workers' e-mail in violation of company policy in a matter the company claimed was unrelated to the suit. His lawyer called that explanation "materially misleading", and noted Judge Maass had called his client a "whistleblower" in connection with a separate SEC investigation into Morgan Stanley's relationships with third-party vendors.

Whatever the truth of that matter, the Wall Street Journal says Riel's responsibilities were then turned over to Allison Gorman Nachtigal, who testified that the department provided no written instructions in how to search one of its key systems for e-mail, that a software bug caused many searches to be case-sensitive, and that there was a shortage of computer storage space. She later testified she was not told to merge the newly discovered tapes with the department's database, and so put the task near the bottom of "a long list", apparently unaware of the ongoing lawsuit.