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Story URL: http://www.silicon.com/research/specialreports/compliance/0,3800003180,39130615,00.htm

SOX: Email retention is 'a legal Chernobyl'
'Morgan Stanley case is a harbinger'

By Reuters

Published: Monday 23 May 2005

The $1.45bn judgment against Morgan Stanley for deceiving billionaire Ronald Perelman over a business deal has a lesson all companies should learn - keeping emails is now a must, experts say.

Banks and broker-dealers are obliged to retain email and instant messaging documents for three years under US 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, US courts are imposing increasingly harsh punishments on corporations that fail to comply with orders to produce email documents, the experts said.

Where judges were once more likely to accept incompetence or computer problems might be to blame, they are now likely to rule that non-compliance is an indication a company has something to hide.

Bill Lyons, chief executive officer of AXS-One, a provider of records retention software systems, said: "Morgan Stanley is going to be a harbinger."

"I think general counsels around the world are going to look at this as a legal Chernobyl," he said.

Wednesday's $1.45bn verdict against Morgan Stanley in West Palm Beach, was the product of just such a negative ruling on email 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 emails, handed down a pre-trial ruling that effectively found the bank had conspired to defraud Perelman when he sold Coleman to appliance maker Sunbeam 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 email 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 and taking the verdict out of the jury's hands.

Other cases have also resulted in rulings on emails.

Last July, US District Judge Shira Scheindlin found that Swiss bank UBS had willfully destroyed potential email evidence in a sex discrimination case brought by equity saleswoman Laura Zubulake. The judge ordered UBS to pay Zubulake's costs, and a jury later awarded her $29.2m.

Experts said email retention could be a double-edged sword if not accompanied by corresponding training for employees on the legal implications of emails 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 $10m for not having a proper email retention policy in place.

Merrill Lynch, however, which did have good backup systems and was able to produce relevant emails, had to pay over $100m because some emails contained compromising material.

Former Merrill Lynch counsel Rosenberg said: "I guess I would put it as 'no good deed went unpunished'."

Jay Ritter, a professor of finance at the University of Florida, said a danger was that among millions of legitimate emails, 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.