Morgan Stanley received two favorable rulings this week: one the well-known reversal of the $1.5 Billion Dollar Coleman judgment; and the other an order in an employment case by Arthiur Riel, the former head of Morgan Stanley’s Legal IT department. Riel claims that he was made the scapegoat for the loss in Coleman and fired under pretext. The facts alleged in Riel, especially as they pertain to discovery of the 1600 backup tapes that so disturbed the trial judge in Coleman, are especially interesting.
The big win for Morgan Stanly was the reversal by Third District Court of Appeals in Florida. Morgan Stanley & Co., Inc. v. Coleman (Parent) Holdings Inc., “Morgan Stanley II”, No. CA4D05-2606, Fla. Ct. App., 4th Dist. (March 21, 2007). The decision said nothing at all about e-discovery, and only reversed because two out of three members of the panel felt that Coleman failed to prove damages. There was a strong dissent and so Coleman will now almost certainly move for rehearing and en banc consideration. Then whoever loses that will likely go to the Florida Supreme Court. Although Morgan Stanley is no doubt greatly relieved by this reversal, the story is far from over. Moreover, so far at least, the e-discovery aspects of the lower court’s rulings have not been reversed, or even commented on. ADDENDUM – The rehearings to the Fourth District Court of Appeal did not change their mind. As predicted, Coleman then appealed to the Florida Supreme Court. On December 12, 2007 the Florida Supreme Court denied Coleman (Parent) Holdings, Inc.’s petition for review. Coleman (Parent) Holdings, Inc. v. Morgan Stanley & Co. Inc., No. SC07-1251 (Fla. Dec. 12, 2007). There was never any discussion of e-discovery.
The other new Morgan Stanley decision comes from the suit by Arthur Riel, the former Executive Director of its “Law IT Department.” Riel v. Morgan Stanley, 2007 U.S. Dist. LEXIS 11153 (S.D.N.Y. Feb. 16, 2007). The facts of this case are what make it interesting, and will bear watching as the pared down suit continues. Arthur Riel and his IT team developed a searchable email archive to capture all emails to and from Morgan Stanley from January 1, 2003, forward. He was also asked to add all of Morgan Stanley’s earlier emails to this archive by restoring emails from 39,000 backup tapes. The harvesting of the emails from the tapes was performed by an outside vendor, not Riel’s IT team.
During the course of Riel’s work, he and his team noticed some suspicious emails to and from a few management personnel wherein gifts, including sporting tickets, were offered by company vendors. Although this was not part of his assigned task, Riel pursued an investigation of these email strings, and concluded that they revealed illegal misconduct, including the rigging of a technology contest. In January 2004, Riel anonymously sent copies of the e-mails to Morgan Stanley’s Chief Financial Officer via interoffice mail with a post-it note that read: “Needs investigation.” Apparently Riel was not too adept at maintaining his anonymity because his supervisor later learned that these tips came from him.
A few months later, in April 2004, the Florida court in Coleman [Parent) Holdings, Inc. v. Morgan Stanley & Co., Inc., No. CA 03-5045 AI (Fla. Cir. Ct.), ordered Morgan Stanley to conduct a search of its e-mails dating back to 1988, to produce materials by May 16, 2004, and to certify, in writing, its compliance with the order. In April 2004, the outside vendor harvesting emails from the 39,000 backup tapes became aware of still more backup tapes: a set of 1,423 “DLT” backup tapes found in a warehouse in Brooklyn, and another set of 177 old style 8-millimeter backup tapes. On June 7, 2004, Riel alleges that he sent an email to two Morgan Stanley in-house lawyers notifying them that these additional 1,600 backup tapes had been discovered, and that they could contain pre-2000 emails.
At the direction of the Morgan Stanley in-house counsel, the Riel team performed searches of the email archive. The search did not include the newly discovered 1600 backup tapes as they had not yet been added to the archive. Riel was then called upon to sign a written certification prepared by Morgan Stanley’s in-house attorneys, which certified compliance with the court order to search and produce emails. Riel’s complaint alleges the following concerning this certification:
73. Mr. Riel had no specific information concerning the Coleman Litigation and only general information concerning the search that his Law IT team conducted on the Archive. Nor did Mr. Riel, a non-lawyer, have any understanding of Morgan Stanley’s discovery obligations in the Coleman Litigation. Mr. Riel believed that the Certification operated as a confirmation that Morgan Stanley conducted a search of its Archive and that the responsive materials from that search were forwarded to Morgan Stanley’s lawyers for production.
74. At the time, Mr. Riel had no understanding that he was certifying, in any sense, that all responsive e-mail from any Morgan Stanley source, including older back-up tapes, had been produced.
Still, Riel signed the erroneous court certification on June 23, 2004, and the rest, as they say, is history, leading to the $1.5 Billion Dollar judgment that was just reversed.
After this certification, Riel’s prior action to try to anonymously tip off the illegal conduct came back to bite him. On August 18, 2004, Riel was placed on paid administrative leave while his supervisors investigated the propriety of his reading the content of emails of Morgan Stanley executives while performing his IT tasks. There is no mention of an investigation into the alleged illegal activities the emails supposedly revealed.
Two months later, in October 2004, SEC investigators contacted Riel at home to question him regarding Morgan Stanley’s email retention practices. Riel advised the SEC of the newly discovered 1600 backup tapes. The SEC then provided Morgan Stanley with a “Wells Notice” advising that an action was imminent. Carlson v. Xerox Corp., 392 F. Supp. 2d 267, 279 (D. Conn. 2005). Morgan Stanley responded by blaming Riel and claiming that he never told them about these 1600 tapes. Apparently they never received the emails Riel claims he sent about the newly discovered tapes.
Later that year, on May 16, 2005, the Wall Street Journal published an article entitled, “How Morgan Stanley Botched a Big Case by Fumbling Emails.” This was about the Florida case. Riel claims that Morgan Stanley attempted, in what it said to the Journal, to lay the blame on Riel for problems with the Florida court arising from the handling of e-mails in the document production.
Finally, on September 27, 2005, Morgan Stanley sent Riel a termination letter stating that he was terminated for cause for reading other employees’ e-mails. Riel claims that this deprived him of 1,600 stock units and 5,000 vested stock options worth several hundred thousand dollars.
Riel sued, alleging eight counts including beach of contract, defamation in connection with the Wall Street Journal article, fraud and negligence. Morgan Stanley moved to dismiss all counts except for Count Three. It alleges that Morgan Stanley breached its Executive Incentive Compensation Plan by firing Riel for cause, in bad faith, with the effect of depriving him of stock and options. Morgan Stanley’s motion was granted, and thus this action will continue solely on the breach of contract claim in Count Three. Like the much larger Coleman case, this is a victory for Morgan Stanley, but the saga continues.
Apparently one of the key elements of Riel’s case going forward will be whether Riel in fact sent an email to Morgan Stanley’s attorneys advising them of the 1600 tapes. This should be easily discoverable by the mail archive system that Riel himself established. The metadata of these emails, if in fact they exist, should reveal the truth.