Email Storage and the Attorney Client Privilege

Work place computers, privacy and the attorney client privilege are starting to create a legal stir, which can have an impact on the brokerage community.

FINRA rules and SEC regulations require brokerage firms to store and preserve all incoming and outgoing emails. The rule has obvious merit, and while implementation was initially an issue, it no longer is, as technology caught up with the rules. Every firm can capture and store emails today.

Underlying the rule is the premise that all information on a company computer belongs to the company. The rule did not have to concern itself with violation of individual privacy rights of the firm's employees; they have none when they use the company computer.

But a recent New Jersey case may change that. In a recent decision, the NJ Appellate Division ruled that employees do have a rights to the personal information on their computer, and more importantly, that the attorney-client privilege protects emails on an employees computer, even if the use of the computer was prohibited by work place rules.

New Jersey attorney Paul Kostro has an excellent analysis of the decision at his NJ Family Law Blog and the analysis applies in all employment situations - including the financial industry.

The case is Stengart v. Loving Care Agency Inc., App. Div. (Fisher, J.A.D.) (A-3506-08T1; APPROVED FOR PUBLICATION; Decided June 26, 2009):

Senate Inquiry into Bear Stearns Deal

BusinessWeek is reporting that Congress is investigating the bailout of Bear Stearns and the Fed's 29 billion dollar guarantee.

While that might be warranted, the usual calls for more regulation, and thus a bigger bureacuracy and more taxpayer dollars, are becoming tiresome.

Protesters Enter Bear Stearns Headquarters -

Well, this is a new one. Twenty-five years on Wall Street, and I don't ever remember a sit-in at a brokerage firm.

According to the article, 60 protesters demonstrated in the lobby of Bear Stearns' building to protest the lack of a federal bailout for homeowners.

I am a bit puzzled by the connection between the Fed's guarantee of Bear Stearns assets and a bailout of homeowners who thought they were being clever in taking interest-only mortgages, or adjustables that they could not afford. But I guess their slogan "Help Main Street Not Wall Street" was a catchy phrase.

The whole thing apparently lasted a half hour.


Protesters enter Bear Stearns headquarters - Yahoo! News

Test Taking Scandal at State Farm

Really. Are the continuing ed requirements so onerous that insurance salesman have to get someone to take the tests for them? FINRA fined and suspended 16 current and former registered representatives of State Farm VP Management Corp. of Bloomington, IL, for misconduct involving FINRA's Continuing Education requirements for registered representatives.

According to the press release, nine of the sanctioned representatives were supervisors who directed or allowed subordinates to take State Farm's "Firm Element" proficiency test for them. One was a supervisor who directed a subordinate to take the test for other registered representatives. Six of the sanctioned representatives completed the Firm Element test for their superiors.

To State Farm's credit, the press release makes it a point to state that the representatives engaged in this misconduct without any authorization from State Farm. State Farm reported the misconduct to FINRA after uncovering test-taking irregularities in one of its regions and conducting a preliminary investigation. State Farm then expanded its internal investigation nationwide and provided FINRA with its findings.

Of course, if it was a small BD involved, the president of the BD would have been suspended, the firm fined and sanctioned for inadequate supervisory procedures. Guaranteed.


The individual representatives received fines ranging from $5,000 to $10,000 and suspensions ranging from 30 days to six months. One representative also was barred as a principal. State Farm VP Management Corp. is engaged in the business of selling mutual funds and variable products.

O'Neal Retires

Merrill Lynch announced the retirement of Stan O'Neal this morning. No shocker there, as the inside bet was a resignation today.

What is interesting is that it is being labeled a resignation, rather than a termination. We will have to wait to see whether he is "retiring" to (a) spend more time with his family, (b) pursue other interests, or (c) relax and work on his golf game, but with a reported $160 million in retirement benefits, we won't worry too much about Mr. O'Neal.

One hundred and sixty million dollars. An executive leads a somewhat sinking ship, the firm loses billions of dollars during his tenure, he is outsted, and he gets $160 million dollars. That is more money than most of this country makes in a lifetime.

Not that we begrudge Mr. O'Neal his bargained-for compensation and retirement benefits, but someone has to re-think these compensation packages.

The story from Reuters, AP, NYT, WSJ

UPDATE: Merrill said that the board had elected Alberto Cribiore, the founder of the private equity firm Brera Capital, and a Merrill director as interim non-executive chairman, and as the head of the search committee for a new CEO. This afternoon O'Neal also resigned as a director of Blackrock.

O'Neal Resignation Expected Today

O'Neal Resignation Expected Today
The WSJ is reporting that O'Neal will announce his resignation today. While he is certainly the one taking the blame for mistakes that are undoubtedly not his, he is certainly not alone.

According to the journal,"[w]ith Mr. O'Neal's ouster, the global credit crunch -- triggered by a steep downturn in the value of subprime mortgages to the least-credit-worthy borrowers -- reaches deep into the executive suite. Damage across Wall Street has topped $27 billion, including $3.4 billion at UBS AG, a Swiss bank whose head of investment banking resigned a month ago. It has also cast further doubt on the future of Citigroup Inc. Chief Executive Charles Prince, whose co-head of investment banking resigned after mortgage-related losses."

The press has been reporting that Mr. O'Neal does not have a severance package in his agreement. That seems very unlikely, but we will have to wait to see how many millions an ousted CEO is worth.

Clean Sweep of the Executive Suite

Stan O'Neal is supposedly meeting at the close with the board of Merrill to negotiate his severance package. According to the media reports, his agreement does not include a package. However, no one expects him to be fired or to resign without a multi-million dollar package.

Interesting comment by an analyst this afternoon on the O'Neill turmoil - the termination of O'Neal is not enough, and the analyst said that what Merrill needs is "a clean sweep of the executive suite."

Ryan Beck Sold to Stifel

We mentioned the rumor at the end of the year, and now the deal has been announced. Stifel has agreed to purchase Ryan Beck for $91 million.

Email Storage and Retrieval Lessons from Morgan Stanley

Email storage and retrieval is a big deal. A very big deal. Whether you are a two man shop or a national wirehouse you must do real-time storage of emails coming into and out of your firm. You must store them correctly and you must be able to retrieve them in a reasonable time period.

Morgan Stanley has become the poster-boy of email retrieval problems. Most will recall that Morgan Stanley lost a case against Ron Pearlman based in large part on its inability to retrieve emails, and was then fined $15 million dollars for email storage issues by the SEC. On the heels of that followed a class action against Morgan Stanley on behalf of arbitration claimants, who are suing because Morgan could not produce emails during their hearings.

At that point in time, last year, email storage and retrieval had cost Morgan Stanley a $1.45 billion jury verdict in favor of Ron Pearlman, a $15 million SEC fine and a class action complaint. Not to mention the impact that the email fiasco had on its ongoing litigation and arbitration matters. I can hear the claimants' attorneys screaming over missing emails and "intentional destruction of evidence" even as I type this.

This is all pretty significant stuff. Email is important, and Morgan has had some significant problems and costs over the issue.

But there is still more. Today we find the announcement "NASD Charges Morgan Stanley DW with Repeatedly Failing to Provide Emails to Arbitration Claimants and Regulators."

The NASD alleges that Morgan falsely represented that its emails had been destroyed in the September 11 Attack - it made that representation, and then found that the emails did in fact exist, on backup tapes and on individual computers. The NASD also alleges that Morgan Stanley later destroyed many of the emails it did possess, by overwriting backup tapes that had been used to restore the emails 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, the complaint alleges, that between September 2001 and March 2005, millions of the emails were destroyed.

NASD’s complaint also alleges that Morgan Stanley violated NASD rules by failing to produce email in its possession in numerous customer arbitration proceedings over the three-and-a-half year period, and by making misrepresentations that it did not have such email in numerous proceedings. The complaint also charges Morgan Stanley with violating NASD rules by failing to produce the email to a number of regulators, including NASD, and by falsely representing that the email had been destroyed.

While we have no direct knowledge of the events, and posted this to demonstrate the perils of not paying attention to email storage and retrieval, it certainly seems that this is overkill. While the Pearlman litigation has no impact on the regulatory concerns, an SEC investigation and a 15 million dollar fine is not an insignificant event.

Now the NASD is coming back again, for the same underlying conduct? I will admit, the false representation allegation causes me some concern, over and above the email issue, but I have seen regulatory agencies label statements that were thought to be true when made, as false representations, and this might just be another instance of an exaggerated pleading.

But another regulatory action over the same conduct? When does it stop? Does the State of Connecticut now commence an action? Then NY, and Utah, followed by Alabama?

Morgan Stanley certainly screwed up email storage and retrieval. They paid the litigation price, and paid a significant fine. Keeping in mind the lost and missing emails are from a time when most firms did not have a clue as to what they were supposed to be doing, if anything, with email correspondence, the timing should be a mitigating factor, and there is no benefit to forcing it to defend itself once again.

The overlapping regulators is a significant concern, one which will be lessened in the future with the NASD/NYSE merger. But the underlying point is - store your emails, in WORM format, when they are sent or received, away from the sender's computer, and make sure you can retrieve them, by author, sender, and keywords.

Merrill Lynch Net Income 3 BILLION Dollars

Here is an understatement - Merrill Lynch 3rd-qtr net income rises sharply. Merrill reported 9 billion dollars in revenue, and 3 BILLION in net income.

Hgh-Tech Worries for Online Brokerage Accounts

Online brokerage account 'incursions' are a concern for the SEC. ZNet is reporting that crooks are hijacking online brokerage accounts using spy-ware and operating from remote locations, sometimes in Eastern Europe.