coleman (parent) holdings v. morgan stanley & co, inc. florida circuit court – march 1, 2005...
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Coleman (Parent) HoldingsColeman (Parent) Holdingsv.v.Morgan Stanley & Co, Inc.Morgan Stanley & Co, Inc.
Florida Circuit Court – March 1, 2005
Cite as: 2005 WL 679071 (Fla.Cir.Ct.)
eDiscovery: Issue and eDiscovery: Issue and SanctionSanctionColeman 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
BackgroundBackgroundColeman 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
BackgroundBackgroundIn 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 overwrittenCPH 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 OrdereDiscovery: Agreed OrderApril 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 transaction2)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 log5)Certify its full compliance with the Agreed Order
eDiscovery ProcesseDiscovery ProcessRecovering back up Recovering back up
tapestapes1) Search potential storage locations2) 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
eDiscovery: False eDiscovery: False ProductionProductionOn May 14, 2004, Morgan Stanley
produced approximately 1,300 pages of e-mails 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 eDiscovery Issue: Missing TapesTapes 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 eDiscovery Data: Another liar?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 Court Findings on Morgan StanleyStanley“Frustrated the Court”“Gross abuse of discovery
obligations”“Grossly negligent”Court determined two failures1)By overwriting emails contrary to
the legal obligation they have spoiled evidence, justifying sanctions
2)Willful disobedience of the Agreed Order justifies sanctions
HoldingsHoldings1) Adverse Inference instruction granted2) Morgan Stanley shall continue to comply with
the Agreed Order3) Court shall read the statement of facts
attached as Exhibit A during whatever evidentiary phase of CPH’s case that it requests
4) CPH can argue that the concealment is evidence of malice or evil intent to prove punitive damages
5) Morgan Stanley bears the burden of proving that they did now know about Sunbeam’s fraud scheme
6) Morgan Stanley shall compensate CPH for costs and fees associated with the motion
7) Morgan Stanley’s motion to compel further discovery is denied
AwardAwardCompensatory
◦$604,334,000◦Purchase Price of stocks
Punitive ◦$850,000,000
Total◦1.58 Billion
Questions?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?