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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.

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coleman parent holdings v morgan stanley co inc

Coleman (Parent) Holdingsv.Morgan Stanley & Co, Inc.

Florida Circuit Court – March 1, 2005

Cite as: 2005 WL 679071 (Fla.Cir.Ct.)

ediscovery issue and sanction
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
  • 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
  • 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
eDiscovery: Agreed Order
  • April 16, 2004, Court entered an Agreed Order requiring Morgan Stanley to:
  • Search oldest full backup tape for each 36 employees involved in the Sunbeam transaction
  • 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
  • Produce by May 14, 2004 all nonprivileged e-mails responsive to CPH’s document request
  • Give CPH a privilege log
  • Certify its full compliance with the Agreed Order
ediscovery process recovering back up tapes
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
  • Morgan Stanley then had to find a way to upload the SDLT tapes into its new e-mail archive
  • Run scripts to transform this data into a searchable form so that it could later be searched for responsive e-mails
ediscovery false production
eDiscovery: False Production
  • On 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 tapes
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
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
Court Findings on Morgan Stanley
  • “Frustrated the Court”
  • “Gross abuse of discovery obligations”
  • “Grossly negligent”
  • Court determined two failures
  • By overwriting emails contrary to the legal obligation they have spoiled evidence, justifying sanctions
  • Willful disobedience of the Agreed Order justifies sanctions
  • 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
  • Compensatory
    • $604,334,000
    • Purchase Price of stocks
  • Punitive
    • $850,000,000
  • Total
    • 1.58 Billion
  • 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?