The recent e-discovery “Protocol” signed by the Department of Justice, the federal courts and the criminal defense bar demonstrates the growing importance of electronic records and e-discovery in financial crime cases. E-discovery has already played a big role in some high-profile financial crime cases, most notably in the massive fraud case of Bernard Madoff and the battle to find and recover assets for victims.
In mid-February 2012, the US Department of Justice, federal courts and criminal defense bar agreed to a groundbreaking new e-discovery “Protocol,” applying certain e-discovery norms to federal criminal cases and spotlighting the vital role of e-discovery in these cases. The Protocol, agreed to on Feb. 13, spells out the first-ever standards for discovery and disclosure of “electronically stored information” (ESI) in federal criminal cases.
The Protocol (read here) underscores the pressing need for counter-financial crime professionals in the private and public sectors to learn and understand e-discovery best practices. Financial crimes, particularly fraud schemes, usually generate huge volumes of ESI. It was inevitable that e-discovery would become a major component of financial crime cases on the criminal and civil sides.
Since the advent of electronic data, nowhere has e-discovery in financial crime been more prominently on display than in the Bernard L. Madoff case and the long quest to recover assets for his victims. Long before the e-discovery Protocol, Madoff was perpetrating his $65 billion Ponzi fraud for 20 years, with specialized databanks and sophisticated computer programs to churn out phony financial records and defraud sophisticated “investors.” Now the remnants of his scheme have been put under the glare of e-discovery and specialized “e-data rooms.”
Intersection of e-discovery and financial crime
No case has put into clearer focus the intersection of e-discovery and financial crime, a situation that will proliferate as financial criminals and counter-financial crime professionals look more to technology and ESI to ply their respective trades.
Irving Picard, the trustee who leads the seemingly endless multinational effort to find and liquidate Madoff’s assets, created “e-data rooms” for the millions of documents the 900 lawsuits and 16,000 parties in 30 countries have produced in the overall case. Data rooms are web-based review platforms that can be accessed by the host and approved third parties. The Madoff data rooms act as a clearinghouse for production requests and as repositories of the electronic records that his historic fraud generated.
Federal agents arrested Madoff on December 11, 2008 for multiple crimes in the long-running Ponzi scheme that generated $45 billion in fictitious profits for his company, Bernard L. Madoff Investment Securities. The Securities Investor Protection Corporation, a government agency that initiated liquidation proceedings, selected attorney Picard, of Baker Hostetler, in New York, as trustee shortly after the arrest. Picard has said his efforts have recovered about $8.6 billion Madoff’s many victims.
“Special masters” aim to teach and expedite discovery
To date, Picard has secured about five million documents in various investigations that his team has conducted or overseen. In November 2010, Picard and his law firm established a first e-discovery room for so-called “avoidance actions,” which seek solely fictitious profits from some of Madoff’s “investors.”
In October 2011, Picard asked US bankruptcy Judge Burton Lifland, in Manhattan, to appoint “special masters” to mediate e-discovery disputes with the targets of his efforts, many of which deal with the confidentiality of records in the e-data rooms and access to them. A special master is a court-selected authority who ensures a court order is compiled with.
Picard obtained the appointment of a special master for each data room. One special master is specifically designated to resolve e-discovery disputes.
Charles Bobinis, a Pittsburgh attorney who serves as e-discovery special master in federal cases, said bankruptcy courts value special masters for their ability to navigate and resolve esoteric discovery issues.
“There tends to be a ‘wheeling and dealing’ culture in these types of case, because if you don’t resolve discovery issues quickly, nobody will get anything,” Bobinis says. “The paramount role of the e-discovery special master is to bring knowledge of this relatively new field to the parties. If you can’t pinpoint what electronic evidence is important, you’re going to blow a lot of money.”
Financial institutions face new hurdles in e-discovery
One of the truisms of financial crime is that nearly all financial criminals require a financial institution to perpetrate, prolong, or protect the crime. As a result, when a financial crime is detected and the unraveling begins by government authorities or the victims, the records of the affected financial institutions come into play.
Therefore, with the new “Protocol” now applicable in federal criminal cases, financial institutions of all types, if they haven’t done so already, will need to study closely the requirements of the new Protocol and of e-discovery best practices in general.
Financial institutions may be unwitting participants in many financial crimes, as in the case of Madoff, but they can now count on much of their data being a critical part of federal criminal proceedings.
Trustee offers safeguards in response to data room objections
The Madoff-Picard experience in creating and managing e –data rooms is instructive for all financial crime cases. In response to objections that the documents placed in the e-data rooms would be accessible by inappropriate parties, Picard isolated certain sensitive material, including records subject to court, marking them all as “Confidential” and extending very limited access to them.
The parties also were given up to 60 days to object to the inclusion of “highly sensitive commercial information” that they feared could end up with competitors. Other safeguards controlled dissemination of confidential material by restricting access to parties formally engaged in discovery with the trustee, and also limiting printing, downloading or saving information in the data room.
As of December 2011, Picard had “resolved the overwhelming majority of objections” to the second data room, and all but two parties had withdrawn their objections.
The Madoff case and Picard’s data-room operations still continue, with no end in sight and with billions still contested. Even so, Madoff’s mega-fraud and Picard’s e-discovery practices have already created a template for financial crime cases and the application of e-discovery principles.
With the new Protocol in place, counter-financial crime professionals have much-needed guidance for e-discovery in fraud cases. However, the obstacles and innovations raised by the Madoff case will most likely continue to test financial crime litigants and defenders for years to come, as their civil-side brethren can already attest.