JPM-Insurer Case May Set<@SM>Precedent for E-Mail Risk

E-mail, which has become increasingly important in investigations by government agencies, is evolving into what some say is prosecutors' most vital source of evidence about the motives of executives and the workings of an organization.

New York Attorney General Eliot Spitzer has used the public release of company e-mail - and the threat of introducing it in court - to great effect this year. Mr. Spitzer got a $100 million settlement from Merrill Lynch & Co. in the spring, soon after newspapers published internal e-mails in which the firm's analysts had disparaged certain stocks they had endorsed to investors. Mr. Spitzer has gone after other major securities firms with similar e-mails.

In what lawyers are calling a pivotal case, J.P. Morgan Chase & Co. is suing 11 insurance companies to recover $1 billion in surety bonds it bought to back trades with Enron Corp. The insurers are refusing to pay up; they cite internal bank e-mails that refer to the transactions as "disguised loans."

According to Jim Cox, a law professor at Duke University, a loss for Morgan Chase would set an important precedent.

"This would be one of the early cases of using e-mails for the purposes of interpreting the scope of a contract," Mr. Cox said. "It would be important because it would allow e-mail to show the probable intent of the drafters."

Whatever happens in the case, companies will now view e-mail differently - something lawyers say should have happened years ago. Among the other painful examples:

  • A 24-year-old employee of the investment firm Carlyle Group in South Korea is fired after just a few weeks on the job when his sordid e-mail to friends is circulated worldwide.
  • A White House staff member mistakenly sends some Democrats an e-mail calling Sen. Robert Byrd, D-W.Va., a "doddering old" and "senile" lawmaker.
  • Jack Grubman, an analyst at Salomon Smith Barney, sends an e-mail to a business contact that discusses his efforts to get Citigroup Inc. chief Sanford I. Weill to support his twins' applications to a pricey Manhattan preschool.

It may be easy to snicker at such gaffs, but many lawyers and consultants say they reflect a widespread misunderstanding about e-mail. Many people consider it an extended form of conversation, but in strict legal terms an e-mail it is a document as admissible in court as a letter or memorandum."It is always amazing to lawyers how clients fail to appreciate that e-mail is not in fact private," said Lynn A. Stout, a law professor at UCLA School of Law. "It's a fascinating cultural phenomenon."
Like a letter or some other document, an e-mail - even a deleted one - can exist for many years, Ms. Stout said.

Richard C. Szuch, a securities defense attorney and partner at the Roseland, N.J., law firm of Lowenstein Sandler PC, said ignorance of this fact has become a boon for regulators. "It appears that people within the industry are a little behind what the lawyers are thinking," Mr. Szuch said.

"Smoking gun" e-mails, which have helped make or break harassment cases, now seem likely to play the same role in cases involving other issues. In addition to Mr. Spitzer's campaign, several investment banks agreed last week to pay fines to securities regulators for failing to retain e-mail records.

"You're going to see a number of cases that involve smoking guns hidden in electronic communications," Mr. Szuch said.

Given the level of scrutiny on Wall Street, many recent law school graduates could spend their first two years on the job reading corporate e-mails, one securities lawyer said.

People communicating by electronic message tend not to be as cautious as they would be in conventional correspondence, Mr. Szuch said. Because it is more casual, writers usually express themselves more freely.

E-mail is a kind of recorded conversation - which has got securities traders into trouble before. Bankers Trust New York Corp. learned that in the mid-1990s, after taped conversations were made public of its traders boasting that they had bilked a client on a complicated derivatives trade.

But while unrecorded conversation is hard to use as evidence, e-mail is "concrete; there's no disputing what it says," said Adam Pritchard, a securities law professor at the University of Michigan.

J. Boyd Page, a partner with Page Gard Smiley & Bishop in Atlanta, said e-mail has "become one of the most important aspects of evidence to determine what is going on inside an organization." It reveals people's "thoughts and their true intents."

Mr. Szuch at Lowenstein Sandler predicted that most financial services companies will soon have e-mail training for employees, much like their seminars on avoiding sexual harassment. It would include the mantra that all business communications must be written in a professional manner - regardless of the medium, he said.

Several lawyers said that, particularly in the brokerage industry, employees could expect to receive monthly reminders not to write anything in an e-mail that they would not want read in court.

Cliff Brandeis, a partner at Zukerman Gore & Brandeis in New York, said it advises clients that e-mail is tantamount to public disclosure. He said that he is already seeing a move away from it and noted that his fax machine has been much busier lately.

"I believe that the volume of business e-mails will drop dramatically," Mr. Brandeis said.

Mr. Pritchard at the University of Michigan said that because personal e-mail is used conversationally, corporations would find it difficult to change workers' habits 100% of the time.

Ms. Stout at UCLA said it might not be so bad for people slip up from time to time. "With training and frequent reminders you can at least temper the human impulse toward stupidity," she said. "But I don't think it will ever go away entirely, and thank goodness - because it's only when criminals make mistakes that they can be caught."

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