SAC Capital: Caught in the Act

According to the Wall Street Journal, two former hedge-fund managers from SAC Capital Advisors have been acting quite suspiciously lately – one even took his computer drives apart with pliers and deposited the left-overs in four different garbage trucks around NYC. In testimony, the offending manager, Donald Longueuil, explained in very colorful language that, “It’s all f—in’ ripped apart. Everything’s gone.”

That is one way to enact a retention policy.

Mr. Longueuil had been reacting to this WSJ article about a federal probe into insider trading. Now, there’s no way to tell how SAC Capital manages their electronic data, but I am sure that no compliance officer is happy when someone is ripping up hard drives by piece.

“When people frantically begin shredding sensitive documents and deleting computer files and smashing flash drives and chasing garbage trucks at 2 a.m. … it is not because they have been operating legitimately,” said Manhattan U.S. Attorney Preet Bharara.

This is a prototypical case of why companies cannot allow end-users to manage the retention of their data – they are allowed to break the law and destroy the evidence. Prosecutors will not be kind to such a poorly governed company. Already the government has been broadening the scope of the investigation into SAC and its partners.

In this case specifically, SAC Capital could have benefitted from e-mail and file archiving to ensure that they keep a copy of all business-relevant data from their computers. With this information they could have proven Mr. Longueuil to be an isolated manager who went off the reservation. Instead, they will be at the center of an expanded federal investigation.

Sarah Palin Needs E-mail Archiving

Over 2 Years and Waiting

Alaska now has only a few months to release 25,000 pages of e-mails from former half-term Governor Sarah Palin and her administration.  So far, Alaska has taken over 986 days to collect and review records from the Palin administration that was in office for only 966 days, or just over 2.5 years.

The Delays with Finding E-mails

Alaska attorney general John Burns granted the 15^th requested extension, but assured everyone that the new deadline is “firm.” He explained the reason for the delays:  “The Governor’s Office has responded to several other very broad requests for Governor Palin’s emails, including eight requests that required review of over 25,000 pages. Due to limitations of the state’s email system, just collecting the email records responsive to those requests took several months.” [Emphasis added]

In addition to the incredible number of delays and extensions (15 extensions may be a record for FOIA requests), the governor’s office is asking those that request the records to pay for their production.  And the price isn’t trivial.  According to MSNBC, it will cost over $15 million dollars to get the documents.  Here is their breakdown:

Let’s look at a typical request. When the Associated Press asked for all state e-mails sent to the governor’s husband, Todd Palin, her office said it would take up to six hours of a programmer’s time to assemble the e-mail of just a single state employee, then another two hours for “security” checks, and finally five hours to search the e-mail for whatever word or topic the requestor is seeking. At $73.87 an hour, that’s $960.31 for a single e-mail account. And there are 16,000 full-time state employees. The cost quoted to the AP: $15,364,960. (And that’s not including the copying costs since they apparently have to print all documents in hard copy, review and then copy them for production).

This is appalling and frankly way out of line with typical e-discovery costs.  In fact, I am sure that the judges and e-discovery experts who drafted the Judge’s Guide to Cost-Effective E-Discovery would reject these cost estimates out of hand.  Alaska and other state governments should already be prepared to answer similar Freedom of Information Act (FOIA) requests in a responsible and timely manner. To take over 2 years and charging millions of dollars undermines the concept of a transparent government. And if it is true that the delays are brought on by the state’s inefficient IT infrastructure, then they need to talk to ZL.

ZL’s Unified Archive as the Solution

Using ZL’s Unified Archive, Alaska (or any other government agency) can search, find, and review e-mails from one platform in minutes.   Citizens and journalist will no longer have to wait years or be charged millions for access to information that should be readily available to them. They will be better able to hold their state governments accountable. And a government accountable to its citizens will benefit everyone.

2010: A Year In Review

In 2010 we have seen many exciting changes to the e-discovery landscape. Metadata and social media have now become standards to be included in discovery requests. Litigation continued to rise in a lagging economy and the sanctions relating to e-discovery violations grew as courts increased awareness. The use of e-discovery tools have been extended for both regulatory compliance and internal investigation functions as well.

In response, corporations have begun to look into new ways to approach the e-discovery problem. First, they have reached out to create internal or external clouds for e-discovery. They have also incorporated archiving into their e-discovery process, a move which intimates the continuing trend of moving discovery in-house.

In 2011 we see similar trends coming to the fore. The incorporation of more data sources (including structured databases), coupled with more advanced analytics and outsourcing to the cloud for space and processing power will ensure that the year ahead will be a dynamic one. For a full 2011 projection check out ZL Technologies' 12 Important E-Discovery Trends for 2011 and Beyond published by eweek.com.  

FRCP Rule 26 Changes

Visit this site for the latest changes on FRCP Rule 26 regarding e-discovery. Here are a couple of the highlights from the article:

Instead, under proposed amendments to Rule 26, those communications would come under the protection of the work-product doctrine. The amendments would prohibit discovery of draft expert reports and limit discovery of attorney-expert communications. Still allowed would be full discovery of the expert's opinions and of the facts or data used to support them....

...The proposed rule retains the three categories of attorney-expert communications that are excluded from the work-product protection under the existing rule:

1. Communications pertaining to the expert's compensation.
2. Facts or data that the attorney provided and the expert considered in forming opinions.
3. Assumptions that the attorney provided and that the expert relied on.

In another change, the proposed rule would alter the procedure for witnesses who will provide expert testimony but who were not specifically retained to provide expert testimony. Treating physicians and government accident investigators are examples of this category of expert.

NewsFlash: e-Discovery Sanctions on the Rise

Okay, so maybe it isn’t shocking to learn that E-Discovery sanctions have risen every year in the past 10 years.  But it is surprising to find that the rise has been so great and that it continues regardless of aggressive attorney educational efforts and maturing technological solutions. 

If you haven’t already seen it, last month the folks at legalworkshop.org published a thorough analysis of e-discovery violations throughout the past 29 years (yes, there was an e-discovery case in 1981). You can find the original post here.  According to the authors “ESI has played a more predominant role in pretrial discovery; producing parties have struggled to comply with ever-expanding and increasingly complex responsibilities. The liberal scope of discovery in federal courts, when coupled with ESI’s defining characteristics—high volume, broad dispersal, and dynamic nature—also confounds efforts to conduct discovery effectively and economically.”

We continue to see this played out in the courts and in the marketplace. The ruling in Qualcomm Inc. v. Broadcom Corp concluded that Qualcomm and its counsel failed to produce more than 200,000 pages of relevant electronic documents and was ordered to pay $8.5 million in legal fees. In the Victor Stanley v. Creative Pipe decision, intentional e-discovery mishaps nearly led to jail time and cost over $300,000 in sanctions.

A quick analysis of the data shows that written rulings on E-Discovery almost tripled between 2003 and 2004 – with a steady increase in each consecutive year and culminating in 2009 with 111 total rulings, 46 sanctions awarded and 12 adverse jury instruction sanctions. The rise of adverse jury instruction sanctions should be of particular concern for  defendants since it was found that the sanctions disproportionally affect them.  Indeed, since 2005, the courts have seen between a 1:5 to 1:3 ratio of plaintiff sanctions to defendants’.

With sanctions being given out at historic rates, it behooves legal counsels to take advantage of timely educational opportunities.  For example, ZL is hosting a webinar next week, December 14^th, on Ethics in E-Discovery (sign up here) and another on 1/11 and 1/25 in January.  For more information click here. 

In addition, in-house attorneys should re-evaluate their e-discovery software to see if it can scale to match the incredible influx of documents and includes air-tight audit trails to prove the defensibility of all actions taken.  By combining education and the tools to properly address e-discovery, ZL aims to help all of our customers develop an unquestionably defensible e-discovery process.

Government Rewarding Whistleblowers and Effective Whistleblower Policies

A little publicized provision in the new Dodd–Frank Wall Street Reform and Consumer Protection Act, “…requires the Commission to pay an award…to eligible whistleblowers who voluntarily provide the Commission with original information about a violation of the federal securities laws that leads to the successful enforcement of a covered judicial or administrative action…” 

In the end, the provision allows the commission to pay between 10 to 30 percent of any recovery over $1 million to whistleblowers who give original information of fraud. As the Wall Street Journal’s Law Blog points out, “It opens companies up to more scrutiny from the SEC, and will likely raise costs.”

Corporate compliance systems will be under increased scrutiny internally, as employees are given incentive to tell on their employers, and externally, from the SEC itself. It is of importance to develop a system to quickly conduct internal investigations and to develop a set of whistleblower policies conducive to such an environment.

An effective whistle blower policy will:

·         prohibit employees from interfering with the right of another employee to blow the whistle

·         prohibit employees from retaliating against an employee for having made a protected disclosure or for having refused an illegal order

·         provide a procedure for raising a concern to the corporate legal department

·         provide a procedure for filing and addressing complaints of retaliation for whistleblowing

Once these policies have been enforced, it is then vital to implement a robust investigation process – a process which manages internal reports of fraud and investigations directed by the SEC itself. The ability to quickly launch a thorough investigation, to identify areas of risk or to take action against open cases, becomes increasingly important as scrutiny increases. The Dodd-Frank bill pushes to light the mandate to create an environment of corporate transparency – an order now directly from Washington.

Investigations can take months to complete - disparate data sources and an incomplete data map can make collection a logistical nightmare. By deploying ZL Technologies’ Unified Archive, enterprises can manage and search through all of their unstructured data (including email and file shares) from one platform. This cuts down collection from days or weeks to seconds. With the Unified Archive, responding to an allegation of misconduct has never been simpler.

The Extended Functions of E-Discovery: Litigation Support, Regulatory Compliance, and Internal Investigations

E-discovery solutions have naturally been classified as litigation support, and in this post I'll go over why this area continues to be of growing concern. In another section, I will cover why the same solutions which provide litigation support can also help to solve internal investigations as well. 

First, rising litigation highlights the importance of e-Discovery. In Fulbright's most recent survey litigation survey, over 90% of U.S. and U.K. respondents expecting legal disputes to increase or remain the same:  

…93% of U.S. and 97% of U.K. respondents expecting legal disputes to increase or remain the same this coming year. This expectation comes during a year when 87% of U.S. respondents faced new litigation in the past year (up from 83% last year) and 53% of all respondents initiated a suit in the past year (up from 48% overall last year)....In the U.S. – and for large-caps in particular – intellectual property and patent litigation are also high on respondents’ radars. 

And, according to the same study, "More regulators have been investigating a greater variety of companies, from small to large and across sectors – particularly banking, health care and energy." Rampant regulatory changes and stricter enforcement seem to have increased the need for the ability to find documents within an enterprise.

Like most things, cost produces the constraints which this process work around. Bringing discovery in-house reduces the cost at an astonishing rate. Patrick Oot, a member of the Law Technology News Editorial Advisory Board, is director of electronic discovery and senior litigation counsel at Verizon, based in Washington, D.C. says:

In July 2008, our EDD team completed a business case that presented an opportunity for Verizon to save about $4 million in legal expenses in one year by establishing an in-house system, with support staff, infrastructure and software for internal data processing, hosting and review. We believe that over the next three years, this business case will yield up to potential 395 percent return on investment.

Following this example, both NBC and Microsoft have moved their discovery internally. At NBC, Jonathan Chow -Chief Information Security Officer (CISO) - heads the IT implementation and explained to ComputerWorld that, as with many corporations, the information security department includes e-discovery as a key responsibility for litigation support, M&A activities, and internal investigations. The move in-house allows NBC to administer searches and investigations internally without the dubious cost of hiring outside vendors.

E-discovery Used Internally

E-discovery solutions have traditionally only been seen as a litigation support tool. But no longer. Today, savvy businesses are using the same tools to solve internal investigations, regulatory compliance and records management issues. 

The use of e-discovery tools in internal investigations remains vital for international corporations as well as domestic outfits. All major companies need the ability to search electronically stored information ( ESI) to complete internal investigations that may be generated by HR or corporate security. No matter the regulatory environment, personnel misconduct and fraud detection must be of vital importance for any company - and a particular worry for CISOs, Chief Security Officers, General Counsels, and CEOs. Unauthorized access to sell or manipulate data and sexual harassment or other inappropriate communication has become all too common, and internal investigations have become ever more important as a result.

Compliance with government regulations remains of great importance to industries such as financial services and healthcare as well as the broader set of publically listed companies. NASD, SEC, and HIPAA govern strict regulations on the retention of e-mail and other ESI. As a part of information management and security, e-discovery tools like ZL’s Unifed Archive can manage the retention (or destruction) schedules for ESI based on a granular set of rules. If a company’s ESI were sand in a box, ZL’s proactive e-discovery tool is a very speedy fine-toothed comb.

As the application of e-discovery tools expand, many companies find that classifying them purely as litigation support can be a misnomer. The discovery function serves both litigation support and internal investigations due to the increasing need to hold employees accountable to company policies. No matter the name, the ability to search through a company's ESI remains a pillar of responsible corporate governance.