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

Coleman (Parent) Holdings, Inc. v. Morgan Stanley & Co. March 1, 2005 Amended order on CPH’s motion for adverse inference instruction March 23, 2005 Order on CPH’s renewed motion for entry of default judgment Florida circuit court, 15th Judicial district, Palm beach county

PARTIES • Coleman (Parent) Holdings (CPH) • Owned 82% of Coleman, Inc. stock • Morgan Stanley & Co., Inc. • Investment banking firm • Sunbeam’s investment banker • Coleman was an acquisition target • Sunbeam Corporation • Initiated fraudulent scheme • Overstate Sunbeam’s financial problems • Overstate Sunbeam’s financial prowess • Sell, Sell, Sell Sunbeam

FACTS • 1997-98 • Sunbeam’s fraudulent scheme • Question: the extent of MS’s knowledge of the fraud • CPH sold 82% if its interest in Coleman, Inc. to Sunbeam Corp in exchange for Sunbeam stock • MS was financial advisor to Sunbeam • MS was lead underwriter for $750,000,000 debenture offering that Sunbeam used to finance the cash portion of the deal • Feb. 1999 • MS instructed investment bankers to preserve paper docs concerning the Sunbeam transaction • BUT, MS continued overwriting e-mails after 12 mos. In violation of SEC regulation to keep e-mails in “readily accessible form” for 2 years • Jan. 2003 • MS email archive system in place

FACTS • May 12, 2003 • MS served with complaint and first request for Production of Docs • Complaint—alleged fraudulent misrepresentation, negligent misrepresentation, aiding and abetting fraud, and conspiracy • $485 million in damages sought • Request—all docs connected to the Sunbeam deal • Oct. 29, 2003 • Motion to compel concerning MS e-mails • Nov. 4, 2003 • MS opposed motion to compel—claimed it was to “harass and burden”

FACTS • Feb 10, 2004 • CPH served motion for permission to have 3rd party vendors search MS email systems for restoration • CPH offered to equally split the costs • MS refused • Mar. 19, 2004 • MS counsel objected to requests for electronic records • Claimed request was overbroad • April 9, 2004 • CPH planned to serve motion to compel concerning e-mail, BUT parties reached an accommodate on April 8 • April 16, 2004— “Agreed Order”

“Agreed Order” (April 16, 2004) • Search the oldest full backup tape for each of 36 MS employees involved in the Sunbeam transaction • Review e-mails dated from Feb. 15, 1998 through Apr. 15, 1998 and e-mails containing any of 29 search terms (i.e. “Sunbeam” and “Coleman”) regardless of their date • Produce all non-privileged e-mails responsive to CPH’s document requests by May 14, 2004 • Give CPH a privilege log, AND • Certify its full compliance with the “Agreed Order”

Recovering E-mail from Backup Tapes • Search storage locations • Tapes sent to outside vendor to be processed; data returned to MS in the form of SDLT tapes • MS had to find a way to upload contents of SDLT tapes into new e-mail archive • “staging area”—when SDLT tapes were waiting to be uploaded to the archive • MS ran “scripts” to transform data into a searchable form

FACTS • May 14, 2004 • MS produced 1,300 pages of e-mails • No certification • June 23, 2004 • Certificate of full compliance with “Agreed Order” signed by Arthur Riel (MS manager) • August 2004 • Arthur Riel placed on “administrative leave” • Allison Gorman replaced Riel • Did not address backlog of data in “staging area” • Not informed of litigation until Jan. 2005 (5 mos. later) • October 2004 • Gorman met with MS attorneys, but progress was still lacking (acc. to the Court): • No outside contractor hired to help complete discovery (even though MS certified that discovery was completed on June 23, 2004) • MS lacked technical capacity to upload and search data • Did not give CPH or the Court any notice that certification was false

FACTS • Fall 2004- Jan 2005 • 11/17/04—MS letter to CPH • MS discovered additional e-mail backup tapes since the May 2004 production • Some new tapes have been restored • Re-run searches in compliance with “Agreed Order” • Responsive docs as a result of searches • Production of responsive docs when finalized • 11/18/04 • Additional 8,000 pages of e-mails and attachments produced from the newly discovered tapes • BUT, Gorman testified the MS team did not know how to upload and search the docs in the “staging area” until Jan 2005 • 12/17/04—CPH letter to MS • Asked follow-up questions: • Whether MS restored backup tapes described in 11/17 letter • Why these tapes not located earlier • MS did not answer CPH questions • 12/30/04 • CPH asked when review of tapes would be complete

FACTS • Fall 2004- Jan 2005 • 1/11/05 • MS said restoration is “ongoing” • Restoration of “next set” of backup tapes should be completed by end of Jan. • 1/19/05 • CPH wanted explanation of: • Circumstances surrounding discovery of the new backup tapes • Why backup tapes couldn’t be restored sooner • 1/21/05 • MS letter did not answer CPH questions • Backup was “ongoing” • Cannot predict when restoration will be completed • Cannot predict whether any data will be found

FACTS • Jan. 26, 2005 • CPH filed Motion for Adverse Inference Jury Instruction • MS’s destruction of e-mails and other docs and MS’s noncompliance with “Agreed Order” can give rise to inference that the contents of the missing e-mails would be harmful to MS’s defense • Jan. 2005 • 169 more tapes found that were “misplaced” by NJ storage vendor • MS did not disclose to CPH nor the Court • Feb. 3, 2005 • Court ordered further discovery • Feb 11, 2005 • Flaw in software they wrote prevented MS from locating responsive e-mail attachments • Feb 11-12, 2005 • Saunders (MS exec. dir. in IT division) did a personal search of most obvious areas of MS • After testifying on Feb 10 that a complete search of backup tapes was conducted • Found 200 additional backup tapes stored in places where backup tapes customarily stored

FACTS • Feb 12, 2005 • MS informed Court of additional tapes discovered • Recent production omitted attachments to emails • Feb 13, 2005 • Date-range searches were flawed for email users who had Lotus Notes platform • 7000 additional e-mail messages fell within scope of “Agreed Order” • This problem tainted the May production • Majority of employees who used Lotus Notes were in Investment Banking Division • Feb 14, 2005—evidentiary hearing • MS witnesses: • No witness was familiar with the electronic searches • No witness explained where 8,000 pages had come from (produced in Nov) • MS did not know whether 200 additional tapes discovered on Feb 11-12 contained e-mails • CPH’s Motion for Adverse Inference Instruction • MS’s destruction of emails • MS’s noncompliance with April 16, 2004 “Agreed Order” • CPH’s motion for additional relief • Feb 19, 2005 • Another discovery—73 bankers’ boxes of tapes discovered • 4 DLT tapes will be sent for analysis

FACTS • Feb 28, 2005 • CPH’s motion to compel further discovery regarding MS’s destruction and non-production of emails • Mar 1, 2005 • Order on CPH motion for adverse inference jury instruction for noncompliance with “Agreed Order” • GRANTED • Order on CPH’s motion for additional relief and to compel further discovery • DENIED • Mar 23, 2005 • CPH’s renewed motion for entry of default judgment is GRANTED • Mar 18, 2008 • Final judgment for MS (ordered by 4th District) • Coleman not entitled to damages

Discovery Abuses • MS undisclosed discovery of 1,423 “Brooklyn” tapes prior to May 6, 2004 and discovery of 738 backup tapes in 2002 • Not processed; not included in archive; not searched • Tapes included e-mails dating back to the 90’s • MS claimed to make complete production on May 14, 2004 • Arthur Riel knew the certification he made on June 23, 2004 was false • Presence of unsearched data in “staging area” • Discovery of 169 DLT tapes in Jan 2005 • Discovery of 200 additional tapes in Feb 2005 • Discovery of script errors: • Prevented MS from locating responsive email attachments • Infected the ability to gather emails form Lotus Notes platform users • Most employees who used Lotus Notes were in Investment Banking Division (the division responsible for the Sunbeam transaction)

Adverse Inference Order • Reversed the BOP on the aiding & abetting and conspiracy elements • Included a statement to be read to the jury • MS’s efforts to hide its emails is relevant to both: • Consciousness of guilt, AND • Appropriateness of punitive damages

Court’s reasons why MS failed to provide CPH with info about tapes and when production would be complete: • Candor would have showed: • Lack of good faith effort in searching for backup tapes, AND • Certificate of compliance made June 23, 2004 was false • MS wanted to hide SEC inquiry into email retention practices • MS did not want to reveal the existence of its historical email archive because it would expose MS’s false representations made to the Court

Rules • Rule 26(b)(2) • Addresses difficulties in locating discovery of ESI • Scope of discovery depends on the costs and burdens of particular system • Requires responding party to: • Produce relevant ESI that is reasonably accessible • Identify the sources containing responsive info • If requesting party continues to seek discovery from sources that are not reasonably accessible, then there must be a weighing of the costs/burdens • Parties must confer before brining motion to compel • Rule 26(f)— “Meet and Confer” • Agreements to decide how to proceed with ESI • Fosters communication between parties early in the process • Cf. “Agreed Order” from April 16, 2004 • Rule 33(d) • Party responding to interrogatory with ESI must ensure the interrogating party can locate and identify it “as readily as can the party served” • Responding party must give the interrogating party a “reasonable opportunity to examine, audit, or inspect” info • Key: whether interrogating party can derive the answer from the ESI as readily as the responding party

Rules (cont.) • Rule 34 • (a) • Party producing ESI must translate it into reasonably usable form • Party may request opportunity to test or sample materials sought under the rule • (b) • Party must produce docs as they are kept in the usual course of business • Requires a written response to the production request where responding party indicates the form of the ESI • Rule 37(f) • Absent exceptional circumstances, sanctions cannot be imposed for loss of EST resulting from the routine, good-faith operation of an electronic information system • Whether good faith calls for steps to prevent the loss depends on the circumstances • Factor: whether party reasonably believes that the info on such sources is likely to be discoverable and not available from reasonably accessible sources

eDiscovery Perspective • Meet and Confer would have limited the scope of discovery • MS did not know the locations of all backup tapes and Court heavily penalized them for it • This case occurred before the amendments of the FRCP • Key Players informed to preserve paper, but e-mails continued to be destroyed every 12 mos. • MS Counsel duties: • MS counsel had duty to issue litigation hold when litigation anticipated • MS counsel should have communicated with key players • Gorman did not learn of the litigation until months after replacing Riel

eDiscovery Issues • Document retention policies • Policy: Destruction of emails after 12 mos. • SEC requires retention of emails for 2 years in searchable format • Duty to Preserve • This duty is triggered when a party ANTICIPATES litigation • SEC inquiry triggers duty to preserve emails • Legal Hold • None put in place by MS • Costs • Anticipating litigation would have helped to reduce costs • Data Collection • Data acquisition using targeted methods—narrowing the search • Spoliation of evidence • Destruction of evidence or failure to preserve for another’s use • Sanctions • Sanctions • Adverse inference instruction • Obligation to preserve • ESI destroyed with a culpable state of mind • ESI was relevant

CONCLUSION—Mar. 1 • March 1, 2005 • Lack of candor prevented CPH and Court from being timely informed • Willful and gross abuse of discovery obligations • Failed to timely process data in “staging area” • Failed to notify CPH of backup tapes found prior to June certification • Failure to timely process those raw backup tapes • Negligent • Failure to produce all e-mail attachments • Failure to produce all Lotus Notes e-mails • Grossly negligent • Failure to locate other backup tapes before Feb 12, 2005

CONCLUSION—Mar 1 • March 1, 2005 • MS had affirmative duty to preserve e-mails which arose out of the litigation • Failed to preserve e-mails required by “Agreed Order” • Failed to produce e-mails required by “Agreed Order” • Failures: • Overwriting e-mails after 12 mos. • Failing to conduct proper searches • Providing a false certificate of compliance • Failing to notify CPH when tapes were located • Failing to use reasonable efforts to search the newly discovered tapes • Failing to timely process and search data held in “staging area” • Failing to write software scripts consistent with “Agreed Order” • Failings were done KNOWINGLY, DELIBERATELY, and in BAD FAITH • Severely hindered CPH’s ability to proceed b/c relied on paper trail to make out pfc

CONCLUSION—Mar 1 • March 1, 2005 • 2 types of Failures • Spoliation of Evidence • Overwriting emails every 12 mos. when required to maintain them for 2 years with KNOWLEDGE that legal action was threatened • Sanctions for failing to preserve evidence • Factors for sanctions: • Bad faith of responsible party • Extent of prejudice suffered by other party • What is required to cure the prejudice • Willful violation of “Agreed Order” • Sanctions not meant to be punitive, but to level the playing field • Adverse inference instruction • Burden shifts to MS—reasonable juror could conclude that misconduct demonstrates guilt

CONCLUSION—Mar 1 • March 1, 2005 • Ruling: • Adverse Inference instruction GRANTED • MS should continue to comply with “Agreed Order” until Mar 21, 2005 • Written notification required • Exhibit A—statement of facts shall be read to the jury • Listing of MS’s discovery abuses • CPH allowed to argue MS concealment of role in Sunbeam is evidence of malice (goes to punitive damages) • MS bears burden of proving to the jury that it: • Lacked the knowledge of fraud, AND • Did not aid & abet and conspire with Sunbeam • MS—must compensate CPH for costs of Motion • CPH’s motion to compel further discovery of MS’s e-mails is DENIED

CONCLUSION—Mar 23 • March 23, 2005—order on renewed motion for entry of default judgment • MS deliberately violated discovery orders • Discovery abuses by MS employees and counsel • Prejudice to CPH cannot be cured • Searches cannot be completed before trial • Ruling: • CPH’s renewed motion for entry of default judgment is granted • Exhibit A statement read to the jury • Detailed account of fraudulent scheme • Jury instructed to consider these facts for deciding whether MS sought to conceal offensive conduct (for awarding punitive damages) • CPH entitled to costs of Renewed Motion • MS has no further obligation to adhere to Agreed Order or Order for the Search of additional tapes

QUESTIONS • Sampling. Should MS have sampled the additional backup tapes found after date of production in order to show a good faith attempt at discovery? Would this have changed the outcome on the adverse inference jury instruction? • Note: the additional backup tapes amounted to a terabyte (50,000,000 pages) of ESI • Some tapes were discovered before the initial production date • Scope of Discovery. CPH initially requested “ALL DOCUMENTS connected with the Sunbeam deal.” CPH received 8,000 pages of docs and a few emails in return. Dissatisfied with this production CPH served its motion to compel, ordering MS to produce all relevant e-mails within 10 days. MS opposed claiming that CPH wanted “this Court to order a massive safari into the remote corners of MS’s email backup systems.” Was CPH’s initial request too broad? Was there a better avenue for discovery available? Preservation letter? Meeting with opposing counsel? • Was a broad request an attempt to burden MS? • OR, was a broad request needed in order to find the “smoking gun” email?

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