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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.

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

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  1. Coleman (Parent) Holdingsv.Morgan Stanley & Co, Inc. Florida Circuit Court – March 1, 2005 Cite as: 2005 WL 679071 (Fla.Cir.Ct.)

  2. 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

  3. 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

  4. 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

  5. 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

  6. 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

  7. 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

  8. 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

  9. 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

  10. 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

  11. Holdings • 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

  12. Award • Compensatory • $604,334,000 • Purchase Price of stocks • Punitive • $850,000,000 • Total • 1.58 Billion

  13. 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?

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