Transcript Coleman (Parent) Holdings v. Morgan Stanley & Co, Inc.

Coleman (Parent) Holdings
v.
Morgan Stanley & Co, Inc.
Florida Circuit Court – March 1, 2005
Cite as: 2005 WL 679071 (Fla.Cir.Ct.)
eDiscovery: Issue and Sanction

Coleman Parent Holdings is asking the
court to instruct the jury that Morgan
Stanley’s destruction of e-mails and other
electronic documents and Morgan
Stanley’s noncompliance with the Agreed
Order can give rise to an Adverse
Inference that the contents of the e-mails
would be harmful to Morgan Stanley’s
defense
Background

Coleman Parent Holdings (CPH) sued Morgan Stanley
for fraud in connection with CPH’s sale of its stock in
Coleman, Inc. to Sunbeam Corporation in return for
Sunbeam stock
◦ Transaction took place on March 30, 1998

At the time of the sale of stock between CPH and
Sunbeam, Sunbeam had artificially inflated their stock
◦ They later declared bankruptcy


CPH claims that Morgan Stanley, the investment banker
in the transaction, helped Sunbeam inflate the price of
the stock
CPH wants access to Morgan Stanley’s internal files,
including emails
Background


In 1997, SEC regulation required all e-mails
be retained in readily accessible form for
two years
Morgan Stanley continued its practice of
overwriting emails after 12 months
◦ E-mails could no longer be retrieved once they
were overwritten
CPH sought access to all e-mails related to
this transaction which took place in 1998
 Morgan Stanley’s oversight employee was Mr.
Arthur Riel who was later replaced by Ms.
Allison Gorman

eDiscovery: Agreed Order
April 16, 2004, Court entered an Agreed Order
requiring Morgan Stanley to:
1) Search oldest full backup tape for each 36 employees
involved in the Sunbeam transaction
2) Review emails from February 15, 1998 through April
15, 1998 and emails containing any of 29 specified
search terms like “Sunbeam” or “Coleman” regardless
of their date
3) Produce by May 14, 2004 all nonprivileged e-mails
responsive to CPH’s document request
4) Give CPH a privilege log
5) Certify its full compliance with the Agreed Order

eDiscovery Process
Recovering back up tapes
Search potential storage locations
Send to outside vendor, National Data
Conversion, Inc. in this case, to be
processed and returned to Morgan Stanley
as “SDLT” tapes
3) Morgan Stanley then had to find a way to
upload the SDLT tapes into its new e-mail
archive
4) Run scripts to transform this data into a
searchable form so that it could later be
searched for responsive e-mails
1)
2)
eDiscovery: False Production
On May 14, 2004, Morgan Stanley
produced approximately 1,300 pages of emails but failed to provide the required
certification
 On June 23, 2004, Mr. Riel finally complied
fully with the April 16th Agreed Order and
gave CPH a certificate of full compliance

◦ However, when he executed the certification
letter, he knew it was false
eDiscovery Issue: Missing Tapes

Brooklyn tapes
◦ Found at some point before May 6, 2004 1,423 backup tapes
which had not been processed

Montana
◦ In 2002, found 738 8-millimeter tapes that dated back to 1998
Both sets of tapes never made it to Morgan Stanley’s e-mail
archive
 At this point, Mr. Riel was dismissed for “integrity issues”
Additional Missing Tapes
 January 2005, Morgan Stanley found 169 DLT tapes that had
been misplaced by its New Jersey storage vendor

◦ No specifics were given to CPH or the Court

February 11 and 12, 2005, TWO days before the hearing, a
Morgan Stanley executive director found 200 additional
backup tapes in a closet
eDiscovery Data: Another liar?



Ms. Gorman took over the project, however, she was not able to
search any tapes until January 2005
November 17, 2004, Morgan Stanley sends a letter stating that the
certificate of full compliance was incorrect
November18, 2004, Morgan Stanley produces 8,000 pages of emails
and attachments supposedly from “newly discovered” tapes
◦ “newly discovered” = Brooklyn tapes

If Gorman couldn’t search tapes until January 2005, how could she
produce newly discovered tapes in November 2004?
◦ Morgan Stanley failed to offer any explanation
Additional Gorman Problems
 Determined February 13th that the data-range searches for e-mail
users who had a Lotus Notes platform where flawed
◦ 7,000 additional e-mail messages that appeared to fall within the scope
had yet to be fully reviewed
Court Findings on Morgan Stanley
“Frustrated the Court”
 “Gross abuse of discovery obligations”
 “Grossly negligent”
 Court determined two failures
1) By overwriting emails contrary to the
legal obligation they have spoiled
evidence, justifying sanctions
2) Willful disobedience of the Agreed
Order justifies sanctions

Holdings
1)
2)
3)
4)
5)
6)
7)
Adverse Inference instruction granted
Morgan Stanley shall continue to comply with the Agreed
Order
Court shall read the statement of facts attached as Exhibit
A during whatever evidentiary phase of CPH’s case that it
requests
CPH can argue that the concealment is evidence of malice
or evil intent to prove punitive damages
Morgan Stanley bears the burden of proving that they did
now know about Sunbeam’s fraud scheme
Morgan Stanley shall compensate CPH for costs and fees
associated with the motion
Morgan Stanley’s motion to compel further discovery is
denied
Award

Compensatory
◦ $604,334,000
◦ Purchase Price of stocks

Punitive
◦ $850,000,000

Total
◦ 1.58 Billion
Questions?

What kind of programs should be put in
place for large companies so that backup
tapes are not lost in a storage facility or a
security closet?

Is a punitive damage award of $850
million appropriate against a company?
Are punitive damages even necessary
when it was caused by the lack of care of
only a few?