Morgan Stanley case highlights e-mail perils By Michael Christie
The $1.45 billion judgment against Morgan Stanley for deceiving billionaire Ronald Perelman over a business deal has a lesson all companies should learn -- keeping e-mails is now a must, experts say.
Banks and broker-dealers are obliged to retain e-mail and instant messaging documents for three years under U.S. Securities and Exchange Commission rules. But similar requirements will apply to all public companies from July 2006 under the Sarbanes-Oxley corporate reform measures.
At the same time, U.S. courts are imposing increasingly harsh punishments on corporations that fail to comply with orders to produce e-mail documents, the experts said.
Where judges once were more likely to accept that incompetence or computer problems might be to blame, they are now apt to rule that noncompliance is an indication a company has something to hide.
"Morgan Stanley is going to be a harbinger," said Bill Lyons, chief executive officer of AXS-One Inc. (AMEX:AXO - news), a provider of records retention software systems.
"I think general counsels around the world are going to look at this as a legal Chernobyl."
Wednesday's $1.45 billion verdict against Morgan Stanley in West Palm Beach, Florida, was the product of just such a negative ruling on e-mail retention, which is also expected to form the backbone of the Wall Street firm's appeal.
Circuit Court Judge Elizabeth Maass, frustrated at Morgan Stanley's repeated failure to provide Perelman's attorneys with e-mails, handed down a pretrial ruling that effectively found the bank had conspired to defraud Perelman when he sold Coleman Co. to appliance maker Sunbeam Corp. in 1998.
Morgan Stanley was working for Sunbeam, which entered bankruptcy in
2001, rendering worthless the shares Perelman had received in part payment for Coleman.In a rare step, Maass switched the burden of proof to Morgan Stanley, and instructed the jury solely to decide whether Perelman had relied on Morgan Stanley.
Morgan Stanley says that ruling denied it a fair trial.
But Eric Rosenberg, a former litigator with Merrill Lynch and now president of e-mail policy consultants LitigationProofing, said Maass was within her rights to rule as she did and could have even taken a more drastic step of issuing a default judgment on the entire case.
Bernie Goulet, regulatory affairs manager for FrontBridge Technologies Inc., agreed while noting judges rarely take such severe measures. Ordering defendants to pay all costs is a more common punishment.
Nevertheless, the days when companies could plead incompetence with regard to e-mail retention are gone.
"Almost every single recent case of substantial size has been ruled in favor of the plaintiff. The attitude that flew in 1995 does not fly in
2005," Goulet said.DOUBLE-EDGED SWORD
Experts said e-mail retention could be a double-edged sword if not accompanied by corresponding training for employees on the legal implications of e-mails they send.
When New York Attorney General Eliot Spitzer investigated the research divisions of Wall Street firms five years ago, he fined Morgan Stanley a little under $10 million for not having a proper e-mail retention policy in place.
Merrill Lynch, however, which did have good backup systems and was able to produce relevant e-mails, had to pay over $100 million because some e-mails contained compromising material.
"I guess I would put it as 'no good deed went unpunished'," said former Merrill Lynch counsel Rosenberg.
Jay Ritter, a professor of finance at the University of Florida, said a danger was that among millions of legitimate e-mails, investigators might find one flippant comment from a low-level manager and take it as reflecting company policy.
"There's a reason why certain people, why lawyers like to talk on the phone rather than have any written record of conversations," Ritter said.
Copyright 2005 Reuters Limited.
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