Say what you will about attorneys, and I myself am one of that tribe, but we don’t often run Ponzi schemes. So when it occurs, as happened in 2009, and the law firm itself goes under, know that the finger-pointing and lawsuit-bringing will start, involving any and all potentially responsible parties, however tenuously related to the underlying fraud. Bad and sad, but still not enough to really move the meter on the bad-to-worse continuum.
What shifts the meter are allegations that both the defendant in some of the follow-on litigation to our Ponzi scheme case, and outside counsel, violated the rules of electronic discovery. The fact that in-house counsel was implicated in these allegations—this puts us into the red zone.
Discovery Games: Almost a Blood Sport
Contrary to the plot lines of popular TV courtroom dramas, the outcome of civil litigation in the U.S. can be largely a function of the pre-trial discovery process. Getting the other side to hand over documents and information within their control is something that can make or break a case. There are exceedingly precise and very detailed rules and bodies of law related to the practice of discovery, and they are broken only at peril.
Discovery is not for the weak, and pre-trial discovery involving financial institutions is notoriously complex. Since much of discovery today is done electronically (as that is how we all tend to share and store information), this means that information technology specialists are involved as well, further complicating communication among the responding parties and the law firms representing them.
How Discovery Ran Afoul of the Court
The litigation that concerns us here involves a prominent bank through which the schemer moved funds in his efforts to redistribute wealth from his defrauded investors. Irate, defrauded investors sued the bank when the scheme came to light and all of their money could not be rounded up. During the course of this legal battle, the plaintiffs sought (through “a barrage of filings making accusations of negligence and misconduct”) to hold the bank defendant and its outside counsel in contempt of court due to alleged incorrect assertions made to the court.
According to the court, the dispute over discovery continued to worsen, and some of the lows included:
- The bank’s attorney disclosing certain requested documents—the existence of which had been adamantly denied during trial.
- The production of additional documents, long sought by the plaintiffs, only after they came to light as a result of the ongoing production of documents in another, related matter.
- Outside counsel, implicated in the discovery mess, withdrawing and ceasing to represent the bank defendant.
District courts have “broad discretion” to impose sanctions for discovery violations, and to apportion fault between the attorney and the client and can include both civil and criminal contempt.
In reaching a decision in the discovery dispute, the judge first commented that “for the fault of one mouse click this matter would not be before me.” Rather, she concluded that there had been a pattern of discovery abuses before, during, and after trial, noting that “it is difficult to accept that it was a mere coincidence that the late productions on the eve or during trial contained highly relevant documents.” In finding that sanctions were warranted, the judge held that the plaintiffs had suffered prejudice as the result of some of the perceived failures in the discovery process and also express concern that the bank’s in-house counsel were “conspicuously absent from any involvement in supervising or assisting in the litigation of this matter.”
The court concluded that sanctions were not warranted against individual attorneys but rather against the institutions involved.