Dig for legal victory

As the legal profession braces itself for a torrent of credit-crunch inspired fraud cases, pressure is mounting for an end to the conspiracy of silence over electronically-stored information, reports E&T.

Be counselled: when the tide of 'credit-crunch' lawsuits washes up on the shores of the UK's legal system, it will shake the profession to its pink-ribboned foundations. The evidence abounds, and the jury is very definitely in: in the UK, former Lord Chancellor Lord Falconer predicts that there is "going to be litigation on a scale that we have not seen before". Already, a helpline set up by the UK's Serious Fraud Office (SFO) reports "hundreds of instances" of City of London fraud coming in by phone and by email.

This is not just an issue for the legal advisors or the corporate diligence tsars; because of the increasingly important role IT has in the running of just about every organisation, the provisioning of the IT infrastructure is bound to be inculcated in any actions. That means IT managers - and maybe even rank and file IT staff - could be called to account for any perceived shortcomings in the systems they administer.

Credit crunch litigation will test the law's paper-based ways to destruction; but their demise has long been coming. The length and expense of commercial trials, whether over contracts, or suits for sexual harassment or wrongful dismissal, is an embarrassment. The cost of suits to protect intellectual property (IP) - the core asset of many companies - is a particular fret.

But now the party's over - allegedly. After the most expensive trial in UK legal history, the BCCI bank's creditors' 10-year legal battle with the Bank of England collapsed in 2005 leaving the lawyers enriched by around £110m, a working party was established to introduce reforms intended to streamline complex litigation; and the English Master of the Rolls has appointed Lord Justice Rupert Jackson to head a committee to review the costs of civil litigation to report by December 2009.

More is at stake than money. For many, legal practices - especially toward IT - put justice itself at risk. By one estimate, more than 90 per cent of the data any organisation generates is so-called electronically stored information (ESI). IP theft is almost certainly more likely to involve the copying of electronic files than the stealing of paper documents.

Ronald van Vuure, sales and marketing director of Zylab UK, says the global economic downturn has doubled inquiries about Zylab's 'e-disclosure' tools. E-disclosure, called 'e-discovery' in the United States of America, is the treatment of ESI in exactly the same way as paper documentation in the discovery process attending civil and criminal trials.

Rule 31.4 of the UK civil procedure rules (CPR) now defines a document as anything of any description in which information is recorded - and that includes ESI. The October 2005 Practice Direction to CPR 31 says documents subject to disclosure include: email and other electronic communications; '.pst' files (Microsoft Outlook personal folder files); word-processed documents; databases; CAD/CAM files; metadata; ditto documents stored on servers and back-up systems; and even "electronic documents that have been 'deleted'."

The legal profession's primary reaction to any form of ESI, however, has always been to print it, and add it to the bundle. Tracey Stretton, legal consultant at legal-technology specialist Kroll Ontrack, speaks of "a conspiracy of silence around this whole issue". One British judge, Senior Master Whitaker of the Queen's Bench Division, spelt it out frankly at a conference in May 2008: lawyers, he said, "are deliberately not looking at electronic documents". He added: "There appears to be a tacit agreement to leave it alone".

Judge Simon Brown of the Birmingham mercantile court told another gathering in April 2009 that he once ordered a law firm to deliver spreadsheets as files rather than paper. He made a £2,500 costs order against the firm for wasted time, adding that he was minded to make the lawyer in question pay the costs personally. The days when solicitors made money photocopying, declared Judge Brown, were almost over.

Emails as evidence

Meanwhile, an emerging cadre of tech-savvy lawyers believes it can use IT document-search tools to offer a quicker, less expensive, and more effective service to litigants than is available from thumbing through successions of pink-ribboned bundles of documents.

"Lawyers are - gradually - being dragged into the modern age," reports Kroll Ontrack's Stretton. "There is a growing awareness in the UK that it is no longer possible to rely on paper documents to tell the whole story in a civil lawsuit."

Awareness is one thing; change is another. If you have to reconstruct what happened five years ago, according to Stretton. "Emails are just a great source of evidence," she says. "Even if people didn't document these things properly you can be sure they were talking about it on email." Email traffic among individuals is objective and verifiable. "That's one way to reduce the size of the haystack."

Recent US and UK case law makes clear that lawyers now have a duty to the Court to ensure that the disclosures they make to the other side include anything relevant, whether it is paper or, more likely, emails, word processor files, or even voice-capture files.

According to Whitaker, lawyers, "need to think about how you can render information down using technology. In London there are firms with in-house IT people able to get things sorted out before parties see the judge."

There is even debate about paperless trials. In February 2008 Mr Justice Aikens's working party on long trials in the commercial court suggested that the only hard copies the parties should produce in a trial should be the bundles likely to be referred to reasonably frequently at trial, "with electronic copies of the remaining documents available in court".

Recent UK cases show how the courts treat lawyers who try to cut ESI corners in regulatory or even civil trials. In Digicel (St Lucia) Ltd vs Cable and Wireless plc in October 2008, a firm was forced to redo much of its disclosure, and to show willing to disclose more. In Abela vs Hammonds, also in 2008, a law firm had not searched or disclosed electronic data because its procedure was to print emails, and then put them on the paper file. Emails had been deleted from servers, and back-up tapes were difficult to restore. The solicitor's computer appeared to contain nothing, and so was destroyed.

The solicitor was fortunate to avoid a wasted costs order - making the lawyer carry the legal costs of the entire hearing. In Hedrich vs Standard Bank London Ltd relevant ESI was not disclosed until part-way through the trial. Again, the solicitor narrowly avoided a wasted costs order.

Two other cases, Chantrey Vellacott vs Convergence Group plc, and a House of Lords Decision in British Railways Board vs Herrington, showed that, if the lawyers do not produce the relevant ESI, the court will conclude they have something to hide, and rule accordingly.

E-discovery well established

In the US, e-disclosure - or 'e-discovery' - is already an established industry. The 2006 change to the Federal Rules of Civil Procedure (FRCP) imposed on defendants and their lawyers a duty to preserve ESI, and produce it on demand.

The change was partly a reaction to problems with the ESI's legal status in such high-profile cases as Laura Zubulake's gender-discrimination suit against UBS Warburg, which resulted in her award of $60m; the 2006 anti-trust case against Morgan Stanley, which turned on its alleged failure to provide tens of thousands of emails related to investigations spanning nearly five years; and the lurid patent case chip-makers Qualcomm brought against rival Broadcom, in which Qualcomm's lawyers concealed some 200,000 pages of emails.

The US system makes freer use of punitive damages than that of the UK. In the UK, says John Meyer, senior manager of accounting firm BDO Stoy Hayward's forensic division, the CPR use 'proportionality': the disclosure needs to be proportionate, measured, and cost-effective. So, in a £100,000 civil case, the court may agree not to enforce disclosure if the cost of retrieving the information is £2m, and if it is unlikely that anything relevant will be found.

In regulatory matters, meanwhile, the bets are off: here, companies face product liability claims, actions concerning the buying and selling of assets, or accusations of insider trading or anticompetitive behaviour. It might be price-fixing, says Stretton, or it might be some cartel behaviour, like last year's fines against British Airways for trying to fix the price of fuel surcharges. Van Vuure's example is price-fixing for milk, where supermarket giants Sainsbury's and Tesco had to disclose information.

In these regulatory cases, Stretton avers, "proportionality goes out the window". The fines imposed by the European commission, the US Security and Exchange Commission or the UK's Office of Fair Trading can be 10 per cent of turnover, "and in Europe that could be for a period of three years," Stretton says.

The best advice is that, if company policy is to reuse storage media after a year, it does nothing wrong in following that policy if there's no likelihood of a suit or prosecution, whether of or by the company. However, the minute a suit or prosecution becomes likely, the company has to suspend that policy (see 'When Legal Trouble Looms', above).

At that point, says Meyer, "We have to retain the information that's pertinent to those cases". In other words, the data-destruction policy has to have a provision that stops the destruction immediately a likely legal problem appears, for example, if an employee complains about sexual harassment.

Stretton says barristers expect the forthcoming litigation to be between institutional investors rather than class actions of disgruntled shareholders taking on a bank. For now, however, their clients are still stunned by what has happened: "They are like rabbits caught in the headlights".

Stretton also suggests that we can "expect to see a lot more fraud" because "companies are thinking that, because the economy is tight, it becomes crucial for people to meet their numbers, achieve their targets, and to keep their revenue looking healthy."

That is when corners are cut, risks are taken, and vulnerabilities open up.

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