Since 2005, Wall Street giant Morgan Stanley has played the lead in
something of an electronic discovery cautionary tale for litigators. And
apparently there may be more lessons to come.
It began when the securities giant was hit with a $1.5 billion judgment
in Coleman Holdings Inc. v. Morgan Stanley & Co., No. CA 03-5045 AI
(March 23, 2005), for failing to produce thousands of backup tapes of
digital documents. Then last May, there was an agreement to pay the U.S.
Securities and Exchange Commission $15 million to settle allegations of
e-mail mishandling pursuant to SEC investigations.
Now NASD, the nation's largest self-regulatory organization for the
securities industry, is accusing the company of not only failing to hand
over millions of e-mail messages to investigators and plaintiffs in
numerous proceedings against the company, but of falsely saying the
documents had been lost in the Sept. 11, 2001, terrorist attack on the
World Trade Center.
"This was an ongoing problem for three and a half years affecting over a
thousand cases," says James Shorris, NASD executive vice president and
head of enforcement. "The firm made the claim they didn't know the
e-mail was restored, but everyone who came back to work on Sept. 17
turned on their computer, and the e-mail was there."
NASD set forth these allegations in a disciplinary complaint filed Dec.
19. The complaint triggers a hearing before a NASD disciplinary panel.
Possible remedies include a fine, censure, suspension or bar from the
securities industry; disgorgement of gains associated with the
violations; and payment of restitution, according to NASD.
Morgan Stanley has yet to respond to the complaint and did not respond
to requests to comment for this story. But in statements to other news
media, it argued the 9/11 attacks did in fact destroy e-mail servers and
archives and that it had cooperated fully with NASD's review.
Shorris says he would be surprised if the charges would be resolved this
year. The company must file its challenge within a month and has the
right to conduct discovery and file pretrial motions, he says.
Regardless of the outcome, Shorris says that Morgan Stanley's track
record with electronic evidence played a role in this latest complaint.
"Certainly what happened in Coleman spurred both us and Morgan Stanley
to take a look at this issue," he says.
Issues surrounding electronic discovery spoliation are nothing
new-recent efforts to clarify preservation duties include new amendments
to the Federal Rules of Civil Procedure. There's also a trend among
businesses to create detailed inventories of digital information so when
hit with a lawsuit or preservation order, a company can preserve and
present evidence and avoid spoliation charges.
Yet the extent to which this has-or will-sink in remains to be seen.
"I've been in this business since 2000, and I still see all sorts of
basic spoliation problems going on that I would've thought wouldn't be
going on anymore," says Daniel Pelc, associate technology counsel with
Fios, an e-discovery consulting firm based in Portland, Ore. "This
[Morgan Stanley] case is troublesome, but unfortunately, this kind of
thing is still happening."
