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BIG DATA, BIG HEADACHES:

E-DISCOVERY DEVELOPMENTS IN CRIMINAL, CIVIL, & REGULATORY INVESTIGATIONS

OFFSHOREALERT CONFERENCE JONATHAN SABLONE, BRIAN T. KELLY, AND MATTHEW T. MCLAUGHLIN

MAY 2016

14th Annual OffshoreAlert Conference (May 1-3, 2016, The Ritz-Carlton, South Beach, Miami Beach, FL)

http://www.offshorealert.com/events.aspx

JONATHAN SABLONE

− Chair of Nixon Peabody’s E-Discovery Group

− Chair of Nixon Peabody’s Private Funds Dispute Team

− Splits time between Boston / New York City

− Extensive trial and appellate experience

− Extensive experience advising clients in complex commercial litigation matters

− Represents limited partnerships, investors and partners in transactional and litigation matters related to limited partnership investment vehicles, including hedge funds

− Regularly counsels large clients regarding data retention, document management, litigation hold protocols and e-discovery issues

100 Summer Street Boston, MA 02110 Phone: 617-345-1342 437 Madison Avenue New York, NY 10022 212-224-6395 [email protected] www.nixonpeabody.com

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100 Summer Street Boston, MA 02110 Phone: 617-345-1065 [email protected] www.nixonpeabody.com

BRIAN T. KELLY

− 25 years of experience as a federal prosecutor in Boston and San Diego

− Former Chief of Public Corruption and Special Prosecutions Unit

− Prosecuted notorious Boston gangster James J. (“Whitey”) Bulger

− Handled some of the most sensitive and complex government investigations:

− RICO, public corruption, bank fraud, money laundering, mail and wire fraud, Foreign Corrupt Practices Act (FCPA)

− Has achieved successful results in running major investigations in well-known, high profile cases involving official misconduct, embezzlement, obstruction of justice, perjury, extortion and homicide

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MATTHEW T. MCLAUGHLIN

− Partner in Nixon Peabody’s Commercial Litigation Group

− Member of Private Funds Dispute Team

− Served as Special Assistant District Attorney in Massachusetts

− Represents private investment partnerships, hedge funds, private equity funds and other alternative investment vehicles in a variety of disputes across the U.S. and frequently work with offshore funds and liquidators

− Represents corporations, as well their executives and directors, in connection with SEC investigations and litigation, FINRA arbitrations, and complex private securities litigation

− Represents companies in domestic commercial and investment disputes as well as in disputes before international arbitral bodies, including most recently ICSID and the Stockholm Chamber of Commerce

100 Summer Street Boston, MA 02110 Phone: 617-345-1065 437 Madison Avenue New York, NY 10022 212-940-3038 [email protected] www.nixonpeabody.com

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TODAY’S TOPICS

—  Basics of United States E-Discovery

—  The Rise of Predictive Coding in U.S. and U.K.

—  Implications of U.S. E-Discovery for Offshore Entities

—  E-Discovery in U.S. Criminal & Regulatory Investigations

—  Questions

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BASICS OF U.S. E-DISCOVERY

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WHY DISCOVER ELECTRONIC INFORMATION?

Explosive growth of digital information

—  In 2006, 191 exabytes or 191 billion gigabytes of digital information was created, captured, and replicated

—  Since 2006 digital information has increased ten fold

—  Approximately 75 billion email messages sent each day

—  100 million text messages sent daily

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VOLUME

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THE KEY ISSUE IS VOLUME

1 megabyte = A short novel

1 gigabyte = Approx. 100,000 e-mails (@ 65 boxes)

—  One year subscription to:

1 terabyte (1,000 gigabytes) =

50,000 trees made into paper

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COMMON FORMS OF DATA

—  Word Processing Documents (MS-Word)

—  E-Mail (MS-Exchange/Outlook)

—  Webmail and Websites

—  Spreadsheets (MS-Excel)

—  Databases (MS-Access, SQL, Oracle)

—  Presentations (Power Point)

—  Pictures and Video (JPG and WMV)

—  Wearable data (Fitbits)

—  Instant Messages (BBM)

—  Voicemails and Text Messages

—  Social Media (Facebook/Twitter)

—  Apps

—  Conference Tools (Google+, Skype, WhatsApp)

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WHY DISCOVER ELECTRONIC INFORMATION?

—  Volume of Electronic Data is Increasing •  95% of new information is stored electronically (most on hard disks) •  Approximately 75 billion email messages sent each day

—  Most Data is Stored Only Electronically •  Less than a third of e-documents are ever printed •  90% of business-critical information is stored within corporate email

systems, up from 33% in 1999 —  Will impact both large and small cases

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EXAMPLE OF WHERE DATA LIVES—CLOUD

—  “Cloud” computing Electric grid of the 21st Century

—  “SaaS”—Software as a Service —  SaaS is a $10 Billion industry and

growing rapidly —  SaaS is here to stay—iCloud —  How does SaaS differ from traditional

software driven applications? •  Global access to data •  Unlimited capacity in theory •  Licenses on demand •  Disaster recovery

—  “Private” Clouds (e.g. Internal Company) •  Secure •  Segregated •  Resembles private network

—  “Public” Clouds (e.g., iTunes Network) •  Intermingled •  Multiple access points •  Shifting geography

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WHERE DOES DATA LIVE—CLOUD

Legal Issues —  Custody, Possession or Control

—  Preservation / Litigation Hold

—  Location of Data, Jurisdiction

—  Ethics

—  Terms Negotiation of Service Level Agreements (SLAs)

Practical Issues

—  Security, Security, Security

•  Security and access is outsourced

—  Customer / Client Perception

•  Amazon, Google, Sony

—  Loss of Control

•  Company loses control of its own data

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METADATA DEFINED

What is Metadata? —  Metadata describe the history, tracking, or management of an electronic

document and include such useful information as file names, users, format, creation and access dates.

—  Williams v. Sprint United Management Co., 230 F.R.D. 640, 643, 2005 U.S. Dist. LEXIS 21966 (D. Kan. 2005)

When Is it Needed? —  It will depend upon the nature of the case

•  For some disputes, ‘printing out the e-mails’ may be enough

•  Increasingly, the face of the e-mail is only a portion of the available information and the case will turn on the metadata

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THE ABILITY TO RETAIN ALL THREE DIMENSIONS OF A DOCUMENT:

—  The “Front” of the Document—The Image •  “What the document looks like” •  Document clarity, font, color & page orientation •  The “Visual Integrity” of the document

—  The “Middle” of the Document—The Text •  “What the document says” •  Need 100% accurate text indexing to make the document content fully searchable

—  The “Back” of the Document—The Meta Data •  Metadata = the “data about the data” •  Examples: bcc’s; email-attachment relationship; date & time last edited, sent and

received; email conversation threads; document file path; file size; etc.

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METADATA IN EMAIL

Frank Smith Sender Name

Sally Franklin Receiver Name

Yes Print Out

No Reply

209.45.65.01 Receiving Server add

198.165.98.1 Sending Server add

X- Attachments: C:\Program\Files\Audit.

Attachment:

Read Read flag:

[email protected] Bcc:

bcc: recipient

Real Sender and Receiver mailboxes

Proof the email was opened

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GETTING MORE THAN WHAT’S ON PAPER January 18, 2001 File Name SoftWard Solutions

Size (Bytes) 20,480Create Date April 10, 1999Create Time 4:04:00 PMFile Type Microsoft Word 97Title Software Problems all

solved at GMACD

SubjectAuthor Geoff TomsManagerCompany Dellum ComputerPrint Date November 12, 2000Print Time 2:06:00 PMLast Saved By Andy JacobsEditing Time (min.) 236

Revs 28Pgs 2Paragraphs 27Lines 67Words 375Characters 2151

Dates

Authors C

hanges 17

EXAMPLE: SELECT METADATA

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EXAMPLE: SELECT METADATA

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THE RISE OF PREDICTIVE CODING IN U.S. AND U.K.

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WHAT IS PREDICTIVE CODING?

—  A computerized system combined with the intelligence provided by a human “expert” which can “predict” results

—  Built upon a well-established framework called Predictive Analytics

—  Predictive Analytics encompasses a variety of techniques from statistics, data mining, conceptual search and game theory, which analyze current and historical facts to make predictions about future events

—  Currently used in actuarial science, financial services, insurance, telecommunications, retail, travel, healthcare, and pharmaceuticals

—  Cost Tipping Point at Roughly 100,000 Documents

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TECHNOLOGY-ASSISTED REVIEW

—  Aka Computer Assisted Review, Automated Review, Non-linear Review, Computer Aided Review, and Predictive Coding

—  Use a mix of people and technology to automatically mark documents in a case corpus as either privileged, responsive, or both

—  Automation of the document review process with input or selections made by case experts

—  Amplification of the efforts of the case experts as they train the system

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HOW DOES IT WORK?

—  Expert makes “yes/no” decisions on sample documents selected and presented by the system

—  The system builds a list of terms in the background as it learns from the expert

—  At some point the system becomes “statistically stable” and can “predict” what the expert will choose

—  The system can then classify or rank the rest of the collection based on the knowledge it now contains from the expert

—  Many workflows can then leverage that classification and/or ranking

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PROCESS: WORKFLOW

Create Random Sample

Document Set

Subjectively Review Sample

Set

Categorize Document Universe

Validate Results

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PROCESS: WORKFLOW

9,068 documents manually reviewed 990,932 documents categorized by

Predictive Coding

QC of 2nd Round (Statistical Sample)

2nd Round of Categorization

Results from Categorization

QC of 1st Round (Statistical Sample)

Seed Set for Human Review

Total Number of Documents

Overturn Report

“QC Round” Overturn Report

“Orange Round”

1,000,000 Documents

317,098 responsive documents prioritized for 2nd pass review

Potential Savings: Over 16K hours of review time

Responsive 298,200

1,533

1,534

5,000 Uncategorized

(for Manual Review)

Validation Criteria Met

Non-Responsive 695,800

1,000 Documents

1,534

Responsive 317,589

Non-Responsive 674,877

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THE PROBLEM WITH KEY WORD SEARCH

Relevant Privileged

Key Word Search Hits

Missed Relevant

Missed Privilege

False Hits

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PREDICTIVE CODING YIELD

Responsive Privileged

Sample Results

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EQUIVIO RELEVANCE

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MOORE V. PUBLICIS GROUPE & MSL GROUP (S.D.N.Y., FEBRUARY 24, 2012)

Da Silva Moore v. Publicis Groupe & MSL Group, 11-cv1279, 2012 WL 607412 (S.D.N.Y., February 24, 2012) (Peck, MJ) —  Likely first federal court opinion regarding “computer-assisted review” or “predictive

coding.”

At issue were fundamental eDiscovery issues common to most cases: who were the appropriate custodians and what constitutes the universe of ESI sources. —  “In my opinion, computer-assisted coding should be used in those cases where it will

help ‘secure the just, speedy, and inexpensive’ (Fed. R. Civ. P. 1) determination of cases in our e-discovery world.… This judicial opinion now recognizes that computer-assisted review is an acceptable way to search for relevant ESI in appropriate cases.” Id. at *1.

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MOORE V. PUBLICIS GROUPE & MSL GROUP (S.D.N.Y., FEBRUARY 24, 2012)

Court rejected challenges to predictive coding’s reliability. —  “[W]hile some lawyers still consider manual review to be the ‘gold standard,’ that is a

myth, as statistics clearly show that computerized searches are at least as accurate, if not more so, than manual review.” Id. at *9. (emphasis supplied)

—  “Computer-assisted review appears to be better than the available alternatives, and thus should be used in appropriate cases.” Id. at *11.

—  “[T]he use of predictive coding was appropriate considering: (1) the parties’ agreement, (2) the vast amount of ESI to be reviewed (over three million documents), (3) the superiority of computer-assisted review to the available alternatives (i.e., linear manual review or keyword searches), (4) the need for cost effectiveness and proportionality under Rule 26(b)(2)(C), and (5) the transparent process proposed by MSL.” Id. at *11.

Ruling Endorsed by District Court (2012 WL 1446534) on April 26, 2012 (over objection)

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LESSONS FROM MOORE

—  No “Guinea Pig” Concern. “Computer-assisted review now can be considered judicially-approved for use in appropriate cases.”

—  Work Smarter. “Computer-assisted review appears to be better than the available alternatives, and thus should be used in appropriate cases.”

—  Go Faster. “Computer-assisted review…should be seriously considered for use in large-data-volume cases where it may save the producing party (or both parties) significant amounts of legal fees in document review.”

—  Don’t Focus on the “Black Box”. “I may be less interested in the science behind the ‘black box’ of the vendor’s software than in whether it produced responsive documents…” “Proof of a valid ‘process,’ including quality control testing, also will be important.”

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INTERNATIONAL SUPPORT FOR PREDICTIVE CODING — UK Pyrrho Investments Ltd v MWB Property (Feb. 16, 2016) —  Held that nothing in the rules/practice directions prohibits predictive coding

—  Cites accuracy and comprehensiveness of results

—  Found that a full manual review of over 3 million documents would be unreasonable

—  Found that predictive coding would also cost less than manual review

—  Amount in controversy was tens of millions of pounds, the estimated cost was proportionate

—  Parties had voluntarily agreed

—  Decision may be of limited precedential value

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IMPLICATIONS OF U.S. E-DISCOVERY FOR OFFSHORE ENTITIES

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E-DISCOVERY IMPLICATIONS FOR OFFSHORE ENTITIES —  Even Offshore Entities Can Be Dragged Into U.S. Discovery

•  Hague Conventions on Service/Evidence •  Personal service of on-shore officer of off-shore limited partner in action involving on-shore fund

may subject limited partner to third-party witness discovery •  If onshore entity has access to cloud storage of offshore entity, argument that such access could

constitute ‘control’ for purposes of requiring discovery production. (In re Glob. Power Equip. Grp. Inc., 418 B.R. 833, 841 (Bankr. D. Del. 2009)).

•  Enforcement agencies may prevent off-shore entity from recovery resulting from onshore prosecution if they refuse to participate in discovery

—  Offshore Entities May Wish to Use U.S. Discovery •  Section 1782(a) “directs judges to provide discovery assistance pursuant to the Federal Rules of

Civil Procedure,” Weber v. Finker, 554 F.3d 1379, 1383 (11th Cir. 2009), so long as the order does not prescribe the practice and procedure of the foreign country or the international tribunal. In re Application of Mesa Power Grp., LLC, 878 F. Supp. 2d 1296, 1302 (S.D. Fla. 2012).

•  The location of online storage servers may be irrelevant because the U.S. party will be deemed to have “possession, custody, or control” of the materials pursuant to Fed. R. Civ. P. 34.

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E-DISCOVERY IN U.S. CRIMINAL & REGULATORY INVESTIGATIONS

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EXAMPLES OF US OFFSHORE CRIMINAL INVESTIGATIONS —  Pursuit of U.S. Investigation Through Legal Assistance Agreements

•  Asset Tracing - James J. “Whitey” Bulger had safe deposit boxes in London -  Access was permitted because of U.S. Mutual Legal Assistance Treaty with U.K.

•  US has bilateral executive agreements on forfeiture cooperation with British Virgin Islands, Cayman Islands

•  US Treasury’s FinCEN has a Memorandum of Understanding (MOU) to facilitate the exchange of information with Cayman Islands

•  Departments of Justice, State, and Treasury have aggressively sought to encourage foreign governments to cooperate in joint investigations of narcotics trafficking and money laundering, offering the possibility of sharing in forfeited assets: -  Permanent bilateral forfeited asset sharing agreements are in place with British Virgin Islands,

Cayman Islands

—  Domestic Warrants for Arrest •  International warrant subjects can be apprehended at U.S. ports of entry

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EXAMPLES OF US OFFSHORE INVESTIGATION: FCPA

Foreign Corrupt Practices Act: Anti-Bribery Provisions —  U.S. companies and citizens, or anyone acting within the territory of the U.S., cannot:

•  (i) directly or indirectly

•  (ii) corruptly offer, pay, promise to pay or authorize a payment of

•  (iii) “anything of value”

•  (iv) to a “foreign official”

•  (v) for the purpose of obtaining or retaining business or securing any improper business advantage.

—  Example: Off-Shore Entity with U.S. Office or conducting business in U.S.

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EXAMPLES OF US OFFSHORE INVESTIGATION: FCPA

Foreign Corrupt Practices Act: Accounting Provisions —  Apply to “issuers” only.

—  Must maintain books and records, which in “reasonable detail,” accurately and fairly reflect the transactions and dispositions of assets.

•  The “issuer’s records should reflect transactions in conformity with accepted methods of recording economic events and effectively prevent off-the-books slush funds and payments of bribes.”

•  “Reasonable detail” = the level of detail that would “satisfy prudent officials in the conduct of their own affairs”

—  No “materiality” threshold

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CRIMINAL & REGULATORY INVESTIGATION E-DISCOVERY

—  Both Civil and Criminal Agency Investigations Rely on E-Discovery •  US DOJ, USAOs, SEC, FINRA, IRS, FBI, FTC •  Metadata crucial source in investigations involving allegations of falsified records

—  Special Considerations for E-Discovery in Criminal Investigations •  Scope of ESI can impact settlement negotiations (costs, breadth, timeline) •  Spoliation Can Turn into Criminal Obstruction (18 USC. 1512) •  Causes Complex Issues – When Does Preservation Obligation Begin? •  Results of Internal Investigations as Discoverable? •  Participation in collection and production can increase cooperation factors at sentencing; but defendants

have 5th Amendment right against being compelled to provide password disclosure •  Resistance may result in government appealing to All Writs Act: -  Apple / San Bernadino case - In the Matter of the Search of an Apple iPhone Seized During the

Execution of a Search Warrant on a Black Lexus IS300, California License Plate 35KGD203, C.D. Cal., No. 16-00010

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—  Agencies routinely use predictive coding on produced materials

—  Agencies have preferred ESI protocol orders for use in federal court

—  Agencies have individualized “Production Specifications”

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CRIMINAL & REGULATORY INVESTIGATION E-DISCOVERY

CRIMINAL & REGULATORY INVESTIGATION E-DISCOVERY —  Tips for E-Discovery Productions in Criminal and Regulatory Investigations

•  Understand Data Retention Policy to prevent spoliation accusations •  Understand Information Management Plan to make proportionality arguments on costs, etc. •  Expect compressed timelines for production •  Increased use of ‘quick-peek’ agreements •  Get Fed. R. Evid. 502(d) Order in enforcement action •  Consider TAR by both producing and receiving parties •  Plan for data privacy issues, including EU protections and HIPPA

—  Seizures of Computers •  Complicates Privilege Review •  Probable Cause and Implications of “Plain View” Doctrine in E-Discovery

-  U.S. v Ganias, 755 F.3d 125 (2d Cir. 2014) (government copied computer hard drives and kept them for years as a source of subsequent evidence)

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CRIMINAL & REGULATORY INVESTIGATION E-DISCOVERY —  Search Warrants and Computers

•  Comprehensive Drug Testing is key Ninth Circuit case from 2009; involved the search of computers of drug testing lab computers in BALCO baseball steroid steroid scandal investigation; investigators relied on ‘plain view’ doctrine to uncover other conduct found during search of computers.

•  Ninth Circuit provided guidelines and best practices for warrants seeking ESI: -  Issuing magistrates should require a waiver of plain view doctrine by government in ESI cases -  Warrant applications should outline prior efforts to seize that information in other judicial fora. -  Warrants must disclose the actual risks of destruction of information -  Search protocol should be limited to information governed by probable cause determination -  Advocates use of ‘taint teams’ to segregate non-responsive materials -  Non-responsive data should be destroyed at conclusion of the investigation and report should

be made to the court

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CRIMINAL & REGULATORY INVESTIGATION E-DISCOVERY —  Parallel Proceeding Considerations

•  SEC and the USAO are allowed to share information, but the SEC “must pursue evidence in the good-faith pursuit of its own interests, and not merely to advance a prosecution.” U.S. v. Harris (N.D. Ga. Dec. 1, 2010) at *8.

•  SEC has no affirmative duty to inform a witness during a civil proceeding that the witness also is subject to a criminal proceeding, the SEC cannot “intentionally mislead” a witness about a possible criminal investigation. Id. at *13

•  Order of Proceeding Can Effect Strategy -  Civil action usually comes first, but parties must assume documents will be shared with criminal

authorities, and must be sure to assert Fifth Amendment Rights as needed. •  Civil enforcement action allows broad discovery, allows civil asset freeze standards.

-  Criminal action will defer to Civil Rules on production issues because of lacuna in criminal rules -  Complicates attorney-client privilege review of collection – individual defendant may be under

investigation, but documents that could affect culpability could be held by company as attorney-client privileged (advice of counsel defense, etc.), but corporation cannot claim Fifth Amendment

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QUESTIONS?

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This presentation contains images used under license. Retransmission, republication, redistribution, and downloading of this presentation, including any of the images as stand-alone files, is prohibited. This presentation may be considered advertising under certain rules of professional conduct. The content should not be construed as legal advice, and readers should not act upon information in this publication without professional counsel. ©2016. Nixon Peabody LLP. All rights reserved.

THANK YOU Jonathan Sablone T 617-345-1342 [email protected]

Brian T. Kelly T 617-345-1065 [email protected]

Matthew T. McLaughlin T 617-345-6154 [email protected]

Nixon Peabody LLP 100 Summer Street Boston, MA 02110-2131 437 Madison Avenue New York, NY 10022

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