Update of Two Prior Sanctions Blogs: Qualcomm and Morgan Stanley

This entry provides an update to two prior blogs concerning e-discovery sanctions: the Qualcomm attorney sanctions case, and the Morgan Stanley 9/11 disaster email case.



The first sequel pertains to the blog of August 18, 2007, Heavy Sanctions Loom Against Attorneys for e-Discovery and other “Aggravated Litigation Abuses”.  Here I recounted the e-discovery “horror story” of the Qualcomm Inc. v. Broadcom Corp. patent case.  It involved a series of abuses culminating in an Order to Show Cause directed against Qualcomm’s attorneys as to why certain very harsh sanctions should not be entered against them. The Show Cause hearing date was originally set for August 29, 2007; upon a motion by the 14+ lawyers facing sanctions, it was postponed until October 12, 2007.

The attorneys accused of wrong doing are from two prominent law firms, Day Casebeer, a small IP boutique firm in Cupertino California, and Heller Ehrman, a 700 attorney firm founded in 1890 in San Francisco.  They advised the court that they could not defend themselves without revealing attorney client-privileges, and Qualcomm refused to waive the privilege. They asked the court for permission to reveal secret, privileged communications with Qualcomm under the “self-defense” exception. Their motion states that they have “very compelling exonerating evidence,” but it involves privileged communications. Apparently they plan to defend themselves by blaming the misconduct on their client. 

On September 28, 2007, Magistrate Judge Barbara Major heard oral argument on the privilege issues and ruled from the bench as to what the attorneys could and could not do to defend themselves. She held that the self-defense exception to the attorney-client privilege did not apply. This means the former Qualcomm attorneys cannot reveal their secret communications with Qualcomm.  But, Magistrate Major also held that the work product privilege could be waived without the client’s consent. According to the Law.com report, this means that “attorneys can describe how various duties in the case were allocated, and possibly other insights.”  Magistrate Major also stated that if the information the attorneys can provide does not fully explain how the discovery abuses occurred, and Qualcomm still refuses to waive the privilege, then she will consider imposing sanctions against Qualcomm itself.

This situation is highly reminiscent of another recent case, Exact Software v. Infocon, 479 F.Supp.2d 702 (N.D. Ohio, Dec. 5, 2006), that I blogged about in Sanctions for e-Discovery Abuses – Is the Attorney to Blame?  In Exact Software, the court decided that sanctions were appropriate, but could not decide whether to impose sanctions against the plaintiff, or the plaintiff’s attorneys. The attorneys blamed the client, and the client, through its new attorneys, blamed the prior attorneys.

Is the “blame-game” the new litigation sport of e-discovery? If so, it is not a game anyone can win.  No matter what the final outcome, the message of these cases to the legal community is clear.  Your duties as an officer of the court, to be honest and truthful to the court and follow the rules of procedure, must be fulfilled. This duty trumps the duty to zealously represent your client. If a client requires you to depart from that duty, then you must decline, and, if necessary, withdraw from representation. There is no special exception allowed for complicated e-discovery issues. If you do not know what is going on, you had better figure it out. The integrity of the justice system is at stake, and so too is your reputation and career.

Morgan Stanley


The second sequel of interest pertains to the blog of January 19, 2007, E-Mail Woes Hit Morgan Stanley Again. In this blog, I reported that a disciplinary proceeding had been commenced against Morgan Stanley for allegedly failing to produce any pre-9/11 e-mails to regulators and investor plaintiffs.  For years, Morgan Stanley claimed that the Sept. 11, 2001, terrorist attacks on New York’s World Trade Center had destroyed all of its pre-9/11 email.  That is the response they gave in hundreds of arbitration and other proceedings when claimants against Morgan Stanley sought pre-9/11 emails. NASD alleged that this was a lie, that even though their main servers were destroyed in the 9/11 attacks, they had backup tapes and other copies, and millions of the pre-9/11 emails were restored from the tapes, but still never produced. Many people were outraged by this alleged misuse of a national tragedy as a “dog-ate-my-homework” type of excuse to hide evidence.

On September 27, 2007, NASD announced a settlement wherein the disciplinary action was resolved by Morgan Stanley paying $12,500,000. The NASD has, by the way, changed its name since this proceeding was commenced and is now called FINRA, which stands for the Financial Industry Regulatory Authority. FINRA came about through the consolidation of NASD and NYSE Member Regulation. It is now the largest non-governmental regulator for all securities firms doing business in the United States.

According to FINRA’s Press Release:

In settling this matter, Morgan Stanley neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

The FINRA press release summarized the findings that Morgan Stanley, a/k/a “MSDW,” consented to as follows:

FINRA found that MSDW failed to provide pre-9/11 emails to claimants in numerous arbitration proceedings and in response to three regulatory inquiries during the period from October 2001 through March 2005. FINRA found that MSDW made statements in numerous arbitration proceedings and to the former NASD, New York Stock Exchange Regulation and the Massachusetts Securities Division that those emails had been destroyed. Those statements were not true. In fact, MSDW possessed millions of pre-9/11 emails that had been restored to the firm’s system shortly after Sept. 11, 2001 using backup tapes. Many other emails were maintained on individual users’ computers and had not been affected by the events of 9/11. Among the matters where MSDW failed to produce e-mail was an NASD investigation that resulted in an August 2005 settlement with the firm.

FINRA also found that MSDW later destroyed many of the pre-9/11 emails it did possess. The firm did so in two ways – by overwriting backup tapes that had been used to restore the emails from 11 of its 12 servers to the firm’s system, and by allowing users of the firm’s email system to permanently delete the emails over an extended period of time. As a result, between September 2001 and March 2005, MSDW deleted millions of pre-9/11 emails from the firm’s systems.

In addition, FINRA found that MSDW failed to provide updates to the firm’s supervisory manual for branch office managers to claimants in numerous arbitration proceedings over a period of years. The Branch Manager’s Manual was issued in 1994 and was subsequently supplemented with numerous updates. FINRA found, however, that MSDW repeatedly failed to provide updates to the manual in discovery in numerous arbitration proceedings from late 1999 through the end of 2005.

Under the settlement, a $9.5 million fund will be established by Morgan Stanley to pay certain arbitration claimants.  Another $3 million will be paid to FINRA as a fine. Further, FINRA announced that certain future remedial measures are part of the settlement:

Also as part of the settlement announced today, Morgan Stanley is required – again, at its own expense – to retain an independent consultant acceptable to FINRA to review the firm’s procedures for complying with discovery requirements in arbitration proceedings relating to the firm’s retail brokerage operations. The firm will be required to implement the independent consultant’s recommendations for improving those procedures, or alternative improvements acceptable to the independent consultant.

According to the Bloomberg reports of this settlement, Morgan Stanley issued the following emailed statement on its behalf:

We are pleased to have reached an agreement with FINRA to resolve these legacy legal matters and put them behind the firm.

This is not the first time the government has sanctioned Morgan Stanley for mishandling electronic messages.  Last year, it paid a record $15 million to settle an SEC probe of deficient e-mail preservation. Before that, in 2002, the SEC and other regulators faulted the New York-based firm (and others) for destroying emails and backup tapes, and Morgan Stanley was fined $1.65 million. 

It is very interesting to note that FINRA’s investigation did not find proof of intentional wrongdoing, but rather incompetence on a grand scale.  As usual, there was a complete disconnect between IT and legal. Susan Merrill, FINRA’s chief of enforcement, said in an interview with Reuters:

The failure to produce e-mails was a huge problem.   . . .   We didn’t find evidence that Morgan Stanley intended to hold back e-mails, but it was a case of one hand not knowing what the other was doing.

Susan Merrill also said that FINRA is “focused” on e-mail retention practices, not only at Morgan Stanley, but with other brokerages where it is also a problem.

5 Responses to Update of Two Prior Sanctions Blogs: Qualcomm and Morgan Stanley

  1. Idetrorce says:

    very interesting, but I don’t agree with you

  2. […] The 48 page Sanctions Order dated January 7, 2008, by Magistrate Judge Barbara L. Major does a good job of summarizing the truly incredible litigation misconduct by Qualcomm and its attorneys. Order Granting in Part and Denying in Part Defendant’s Motion for Sanctions and Sanctioning Qualcomm, Incorporated and Individual Lawyers. Most of the malfeasance discussed there had already been described by the trial Judge, Rudi M. Brewster, in his Order on Remedy for Finding of Waiver of August 6, 2007, Qualcomm Inc. v. Broadcom Corp., No. 05-CV-1958-B(BLM) Doc. 593 (S.D. Cal. Aug. 6, 2007). I summarized this order and other prior activity in this case in my two prior blogs: Heavy Sanctions Loom Against Attorneys for e-Discovery and other “Aggravated Litigation Abuses” and Qualcomm Update.   […]

  3. […] “Monumental Discovery Violations” Provokes Only Wimpy Sanctions; and before that, Update of Two Prior Sanctions Blogs: Qualcomm and Morgan Stanley, and Heavy Sanctions Loom Against Attorneys for e-Discovery and other “Aggravated Litigation […]

  4. […] Update of Two Prior Sanctions Blogs: Qualcomm and Morgan Stanley, […]

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