With institutions involved in more lawsuits than ever, bankers should be careful what they write in internal memos, according to a seasoned banking litigator.
Carefully kept files can come back to haunt bankers in court, said Dana F. Eddy, general counsel to West Virginia Gov. Gaston Caperton.
"Most often in litigation, banks fall on their own sword," he said in an interview. "That sword is usually a memorandum."
Mr. Eddy estimates that 85% of what's written down in a bank shouldn't be.
"Banks need to develop a communication protocol," he said. "Nobody thinks they are going to get sued."
Mr. Eddy, who was the associate legal counsel for One Valley Bancorp of West Virginia before going to work for the state last year, has been a frequent speaker at bank compliance conferences for years. But he is giving up his how-to career now that he is working work for Gov. Caperton.
His tips on documentation were included in one of his last speeches at the American Bankers Association's annual regulatory convention in June.
Memo Really Needed?
The first thing a banker should consider before writing a memo, according to Mr. Eddy, is if a written document is really needed. The answer to that question is yes if the message has to reach 300 people or the information needs to be formally recorded.
Since the advent of computers, more people communicate through writing. People forget they can make a phone call or talk to someone in person, he said.
Electronic mail is especially dangerous, because few people realize it is easily retrievable from a hard disk, even if it is deleted. Mr. Eddy said E-mail is often used as evidence in lawsuits.
If it is necessary to write the message, Mr. Eddy advised treating it as a public document that many eyes will see. "You have to write a memorandum as if third parties will be reading it," he said.
Facts usually won't hurt a banker in a lawsuit, but presentation of those facts will, Mr. Eddy said.
Tone Seen as Important
Bankers should make sure that the mood of the memo is positive, even if it's about a disaster. Instead of using words like "problem," use "challenge" or "opportunity," he said.
Mr. Eddy said the most damaging line is: "We have a serious problem that, if not addressed, will result in litigation."
That letter can then be used in court to prove the bank knew about the problem and wasn't doing anything about it, Mr. Eddy said. Even if the bank later tried to rectify the situation, that memo cannot be denied.
Mr. Eddy said his first maxim of litigation is, "Paper covers rock," meaning it outweighs everything.
After writing, the banker should read every document out loud, and then have someone else read it, Mr. Eddy said. His advice is to be brief and get to the point quickly.
Another documentation debate is how much information should be recorded for compliance examiners.
While some bankers are afraid to document too much, for fear of digging their own graves, others think the more the better. Bankers should figure out what examiners require, and then stick to the facts, Mr. Eddy said.
Reasons Behind Rise in Suits
Mr. Eddy said there are two main reasons why more bankers are being sued.
One is the increasing number of lawyers, who might take cases now they wouldn't have 10 years ago. The other, he said, is a more negative perception the public has of banks.
What banks need to do, he said, is train the front-line people how to be more service-oriented.