E-trail leads straight to court

As innocuous as they may once have seemed, the incriminating nature of emails produced as evidence in US corruption trials has forced executives to rethink the expense of managing delicate electronic documents.

The cost of e-dicovery ­ revealing documents in the run up to a trial ­ may also have chief financial officers worried as evidence emerges that the process can rack up fees in the hundreds of thousands of dollars.There are numerous examples where electronic documents are in evidence. At present, emails involving Enron’s former CEO Jeffrey Skilling are being used by the prosecution at the fraud trial taking place in Houston.

Next month, at the fraud trial of former Computer Associates CEO Sanjay Kumar, the government will produce e-documents related to the infamous 35-day months that CA allegedly worked to ensure the financials met Wall Street expectations.

No less damning for defendants is the inability to produce emails that were destroyed, but should not have been because there was a likelihood of litigation. Take the example of financier Ronald Perelman’s suit against Morgan Stanley, in which he claimed the bank misled him into overpaying when he bought appliance maker, Sunbeam.

As the bank did not produce relevant documents before the trial, the judge awarded the case to Perelman and the jury awarded him $1.45bn (£0.8bn) in damages.
Not surprisingly, the bank is appealing, but Morgan Stanley’s troubles do not end there. Its lack of disclosure drew the attention of watchdogs, the Securities and Exchange Commission and the National Association of Securities Dealers, and it probably faces multimillion dollar fines from both.

Besides the costs associated with litigation, corporate CFOs are beginning to baulk at the actual cost of the e-discovery process. Anecdotally, one case is said to have rattled up e-discovery expenses in eight figures, and researchers say $140,000 is the minimum per suit.

With those kind of fees on tap, it is not surprising that a whole industry has appeared, consisting of dozens of companies that have developed a variety of technologies to either find and analyse documents needed in litigation or, better still, help businesses keep a handle on their electronic documents before a lawsuit is filed.

EDDix, a special research company, estimates the e-discovery industry will generate $2bn in revenues for vendors this year and it has compound growth of 35%.

Many companies, though, are not yet prepared. According to research from Gartner, nearly every civil court case in the developed world now involves e-discovery, but still more than half of IT organisations and in-house legal teams are not geared up to handle requests for electronic evidence.

Even more alarming, 65% of corporations do not include electronic documents in their document retention schemes, according to consultancy Cohasset Associates.
Tech companies have created tools to take a corporate record retention policy and bridge the gap to a process down to the desktop level.

Those tools have the capability to know when documents are created; codify what those documents are related to; and keep those documents from being destroyed in case there is litigation.

Another proactive action that companies can take is to archive their e-documents in such a way that those most likely to be subject to compliance or litigation reporting and disclosure are put in near-line storage and not hidden away on tape drives in a back room somewhere.

With such technology available, companies may have no excuse if they are taken to trial.