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

Florida Circuit Court – March 1, 2005

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

eDiscovery: Issue and eDiscovery: Issue and SanctionSanctionColeman 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

BackgroundBackgroundColeman 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

BackgroundBackgroundIn 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 overwrittenCPH 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 OrdereDiscovery: Agreed OrderApril 16, 2004, Court entered an Agreed Order

requiring Morgan Stanley to:1)Search oldest full backup tape for each 36

employees involved in the Sunbeam transaction2)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

3)Produce by May 14, 2004 all nonprivileged e-mails responsive to CPH’s document request

4)Give CPH a privilege log5)Certify its full compliance with the Agreed Order

eDiscovery ProcesseDiscovery ProcessRecovering back up Recovering back up

tapestapes1) Search potential storage locations2) Send to outside vendor, National

Data Conversion, Inc. in this case, to be processed and returned to Morgan Stanley as “SDLT” tapes

3) Morgan Stanley then had to find a way to upload the SDLT tapes into its new e-mail archive

4) Run scripts to transform this data into a searchable form so that it could later be searched for responsive e-mails

eDiscovery: False eDiscovery: False ProductionProductionOn 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 eDiscovery Issue: Missing TapesTapes 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 eDiscovery Data: Another liar?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 Court Findings on Morgan StanleyStanley“Frustrated the Court”“Gross abuse of discovery

obligations”“Grossly negligent”Court determined two failures1)By overwriting emails contrary to

the legal obligation they have spoiled evidence, justifying sanctions

2)Willful disobedience of the Agreed Order justifies sanctions

HoldingsHoldings1) Adverse Inference instruction granted2) Morgan Stanley shall continue to comply with

the Agreed Order3) Court shall read the statement of facts

attached as Exhibit A during whatever evidentiary phase of CPH’s case that it requests

4) CPH can argue that the concealment is evidence of malice or evil intent to prove punitive damages

5) Morgan Stanley bears the burden of proving that they did now know about Sunbeam’s fraud scheme

6) Morgan Stanley shall compensate CPH for costs and fees associated with the motion

7) Morgan Stanley’s motion to compel further discovery is denied

AwardAwardCompensatory

◦$604,334,000◦Purchase Price of stocks

Punitive ◦$850,000,000

Total◦1.58 Billion

Questions?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?