Arthur Riel

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Arthur Riel was an Executive Director in the Law IT Department at Morgan Stanley from September 2000 to September 2005. He was the individual who certified at one point that Morgan Stanley's responses to discovery requests were in compliance with an "Agreed Order" that had been previously entered by the court in the infamous Coleman Holdings case. He was subjected to internal investigations, placed on administrative leave for a period of time beginning in August 2004, and then was terminated in September 2005, allegedly for violations of Morgan Stanley policies unrelated to the Coleman Holdings case. He claims that he was deliberately set up to take the fall for Morgan Stanley for the result in that case.

The complaint filed on his behalf January 2006 in the United States District Court for the Southern District of New York in the case of Riel v. Morgan Stanley provides a fascinating "behind the mirror" look at the Ronald Perelman - Morgan Stanley fiasco. As many people know, Morgan Stanley was hit in May 2005 with a $1.45 billion judgment in a lawsuit filed in Palm Beach (Florida) Circuit Court by Coleman Holdings (a company associated with Perelman) after entry of an "adverse inference" order based on what the court found were extreme and repeated discovery abuses by Morgan Stanley. The most prominent of those abuses was the defendant's prolonged failure to provide access to archives of e-mail, claims that it would be extremely burdensome and costly to retrieve old e-mail messages, delays in informing the court and the opposition when new sources of information were uncovered, and providing false certifications to opposing counsel and to the Court. In its famous comment, the court declared "the judicial system cannot function this way" in entering the requested adverse inference order.

The complaint filed in New York provides a detailed step-by-step description of the incidents and occurrences which lay behind Morgan Stanley's litigation strategy in the Coleman Holdings case, from Riel's perspective.

[edit] Allegations in the complaint

According to the allegations made in the complaint:

• Morgan Stanley was served in 2000 and 2001 with two compliance notices by the SEC, citing it for insufficiently maintaining electronic records, particularly e-mail messages. It also received a "Wells notice" in 2002, and later was fined over $1.6 million for failure to comply with SEC regulations in this area.

• Riel was directed to update Morgan Stanley's systems to address these deficiencies.

• Prior to Riel's arrival, Morgan Stanley had followed a "haphazard" system for maintaining old e-mail messages, relying on old backup tapes as the primary repository for this data.

• Riel developed a new electronic system, dubbed the "Archive", that interacted with Morgan Stanley's e-mail system and created an ongoing repository of e-mail messages without the need for additional action. The system included a search function, allowing for quick access on a comprehensive basis. This system was placed into service in January 2003, and covered all messages sent or received from that point forward.

• In the course of creating and testing the Archive, it is alleged, Riel came into possession of information implicating unethical behavior on the part of a Morgan Stanley executive in November 2003. He took some steps to investigate further and, in January 2004, brought that information to the attention of another Morgan Stanley executive. (The steps that he took to investigate this issue would later be used by Morgan Stanley as a basis for taking action against Riel.)

• Morgan Stanley maintained a separate Storage Group within the Institutional IT Division that was responsible for collecting, maintaining and accessing Morgan Stanley's e-mail backup tapes.

• The officials in the Storage Group informed Riel of the existence of some 39,000 separate backup tapes that supposedly contained e-mail messages. Later it developed that the true number was around 35,000.

• Riel was informed in the Spring of 2003 that it would be necessary to incorporate the old e-mail messages into the Archive, to comply with SEC requirements.

• Steps had to be taken to convert these messages so that they could be added to the Archive. A new solution was developed for this project by Riel, working with an outside vendor, under which the information contained on the tapes would be converted, reviewed, deduplicated, and then added to the Archive.

• During this time, the company's attorneys were requesting access to the previous e-mail messages for responses to discovery requests in the Coleman Holdings litigation and in other lawsuits the company was defending.

• In September 2003, it was discovered that many of the 35,000 backup tapes did not, as claimed, include e-mail messages. It was also discovered that about 20% of them had been overwritten, in violation of the SEC citations and despite instructions from Morgan Stanley's Compliance Department that the tapes should not be reused.

• Morgan Stanley had told the SEC in 2002 that a "read error" made about 33% of the tapes unreadable. In late 2003, Riel learned that the read error affected only about 8% of the tapes.

• The orders, motions, and hearings in the Coleman Holdings case were "heating up" by the spring of 2004. At that time, the process of converting the old e-mails contained on backup tapes so that they could be added to the Archive was continuing. It is alleged that:

"Throughout the process, Mr. Riel's Law IT team had no access to, control of or responsibility for the backup tapes or the e-mail data that they contained. Until the Storage Group prepared the pre-2003 e-mails for the Archive, neither Mr. Riel nor his Law IT team could use the Archive to run a search on any e-mail gleaned from the backup tapes."

• In April 2004, Riel was given parameters by the legal department to perform searches of e-mail messages under the "Agreed Order". The complaint alleges that Riel was told that these searches were to be made only of the Archive, and that he did the searches of the Archive as instructed. This would of course cover only messages from and after January 2003. As noted above, Riel says that he did not at any rate have any access to e-mail messages that prdated January 2003.

• In May 2004, Morgan Stanley made its first disclosure of e-mails under the Agreed Order, but did not certify compliance with the Order. The Coleman lawyers were pressing for a compliance certification.

• Sometime that spring, Morgan Stanley discovered the existence of another 1,423 backup tapes (the "Brooklyn tapes") and additional data on 8 mm tapes. Those tapes were sent to the outside vendor for processing.

• Riel notified Morgan Stanley attorneys by e-mail on June 7, 2004 of this discovery.

• Morgan Stanley's lawyers did not disclose this new information to the court or to the Coleman attorneys at that time.

"Upon receiving Mr. Riel's June 7 e-mail, Morgan Stanley's Litigation Department could have taken appropriate steps to supplement its production or advise the Florida Court. Instead, Morgan Stanley chose to create the false impression in the Coleman Litigation that its production was complete."

• Later in June, Morgan Stanley's lawyers prepared a proposed certification. It was first presented to "a junior member" of Riel's department, and then came to Riel's attention. He signed it, but allegedly did not fully understand what it meant:

"Mr. Riel had no specific information concerning the Coleman Litigation and only general information concerning the search that his Law IT team conducted on the Archive. Nor did Mr. Riel, a non-lawyer, have any understanding of Morgan Stanley's discovery obligations in the Coleman Litigation. Mr. Riel believed that the Certification operated as a confirmation that Morgan Stanley conducted a search of its Archive and that the responsive materials from that search were forwarded to Morgan Stanley's lawyers for production. "At the time, Mr. Riel had no understanding that he was certifying, in any sense, that all responsive e-mail from any Morgan Stanley source, including older back-up tapes, had been produced. Neither Mr. Riel nor anyone on his Law IT team could have made any such certification. . . "

• Morgan Stanley's attorneys, it is alleged, were aware that the Storage Group, and not the Law IT team, had sole access to the pre-2003 e-mail messages. They did not disclose this fact to the court. It is alleged that the certification should have been made by a lawyer, not by the Law IT team, and that the lawyers took this step intentionally:

"By casting the production of e-mails as an IT issue, Morgan Stanley's lawyers laid the groundwork for blaming others in the event that their discovery abuses were uncovered."

• In early July 2004, Riel learned that the new tapes did in fact contain e-mail, and notified company lawyers by e-mail and in person.

• This development, the complaint says, presented a quandary for the company's attorneys:

"Mr. Riel's e-mails and his presentation to Morgan Stanley's Law Division placed Morgan Stanley at a crossroads with respect to the Coleman Litigation, and with respect to Mr. Riel. Morgan Stanley could inform Coleman and the Florida Court that there was a significant quantity of additional materials to produce - or it could suppress that information, as well as access to those who knew. Morgan Stanley chose the latter course and attempted to make Mr. Riel its scapegoat."

• Mr. Riel was placed on administrative leave in the summer of 2004, ostensibly for infractions of the company's policies relating to e-mail security. The complaint alleges that the real reason for this action was to "remove[] Mr. Riel from the process by which e-mail was queried and produced - while keeping Mr. Riel and the considerable knowledge that he possessed under Morgan Stanley's control."

• In October 2004, Riel was contacted by the SEC at home. He provided the SEC with information and documentation regarding the discovery of the "Brooklyn tapes" and the information allegedly implicating the Morgan Stanley executive. He apparently did this without informing his employer of his actions.

• In November 2004, the Morgan Stanley lawyers disclosed the existence of the "Brooklyn tapes" to the attorneys for Coleman. Coleman filed its motion for an adverse inference instruction.

• The SEC issued another Wells Notice to Morgan Stanley in January 2005. Morgan Stanley filed a response which disputed much of the information Riel had provided to the agency.

• In its motions and filings in connection with the adverse inference issue, Morgan Stanley tried to discredit Riel and cast the blame for nondisclosure on him:

"Morgan Stanley reacted as it had done in its response to the Wells Notice: by attempting to place blame upon Mr. Riel. Morgan Stanley asserted that Mr. Riel failed to design an Archive that could produce the e-mails in a timely fashion. Morgan Stanley again denied that its in-house lawyers were aware of the additional tapes until late 2004, even though Mr. Riel advised them of the tapes and the e-mail in June 2004 and again in July 2004. Morgan Stanley's in-house attorneys, including Kempf, Cusick, Lee and Doyle, submitted affidavits that the Law Division did not learn of the Brooklyn tapes until November 2004. They falsely asserted to the Florida Court that Mr. Riel knew of these tapes but concealed their existence from Morgan Stanley's Law Division."

• On March 23, 2005, as we know, the Palm Beach court issued its order finding that Morgan Stanley had engaged in an extensive and deliberate effort to evade the discovery process and to keep its e-mail messages out of the hands of the Coleman attorneys. The request for an adverse inference finding - essentially the entry of a default on liability issues - was granted. The jury would be told in the upcoming trial that most of the allegations pleaded by Coleman were to be accepted as true.

• In the course of this opinion, the Court noted that the ongoing project to migrate old e-mail messages to the Archive had been suspended in August 2004, when Riel was placed on administrative leave, and had not resumed until the middle of January 2005.

• The jury rendered its verdict in Florida in May 2005, awarding Coleman Holdings $600 million in compensatory damages and $850 million in punitive damages.

• The campaign against Riel continued, it is alleged. In May, just after the verdict, the Wall Street Journal published a story about the verdict and the e-mail discovery issues based on information fed to it from Morgan Stanley, and this story also placed the blame for the result on Riel.

• In order to avoid unfavorable publicity, Morgan Stanley kept Riel on administrative leave for the summer of 2005. It finally terminated him in September of that year.

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The complaint alleges that the true reason for the termination was Riel's unwillingness to participate in making false statements to the Florida court, and his revelation of unethical behavior on the part of a Morgan Stanley executive.

In the meantime, the appeal of the Palm Beach County verdict continues. Briefs have been filed by both parties. On June 28, 2006, the Fourth District Court of Appeals heard oral arguments, and a decision is expected as early as the latter part of 2006.