It is nothing new for seemingly outrageous emails to trigger attention-grabbing claims of wrongdoing. But revelations this past week arguably represent some type of high-water mark, as a cluster of serious allegations were accompanied by a trove of embarrassing excerpts from emails and instant messages. While the latest disclosures provide yet another reminder of the dangers associated with ill-considered use of modern electronic communications technology, they also raise questions about the use that regulators and claimants are attempting to make of the communications.


The regulators’ press releases announcing RBS’s settlement this past week of charges of alleged Libor manipulation drew heavily on excerpts from the bank’s internal electronic communications. The CFTC considered the communications so damning that it included several pages of excerpts in its February 6, 2013 press release announcing RBS’s agreement to the agency $325 million penalty. Among other things, the press release quotes RBS yen traders, aware of other rate-setting banks’ manipulative conduct, as saying that “the jpy libor is a cartel now,” to which another trader commented that “its just amazing how libor fixing can make you that much money.” A later communication quotes a yen trader as saying that there is “pure manipulation going on.” 


The CFTC’s press release quotes other internal communications that appear to show RBS Libor rate submitters and derivatives traders agreeing on where to set that days rate submissions, with the traders offering (seemingly modest) inducements such as “sushi rolls from yesterday” and “there might be a steak in it for ya” and “we’ll send lunch around for the whole desk.” The messages also seem to show the traders interacting with interbroker dealers, asking them to “speak to” the rate submitters at other banks, so that “as a team” the rates come in at the desired level.


A February 6, 2013 Financial Times article detailing many of the RBS emails and entitled “Record of Trader Talk to Haunt RBS,” can be found here.


Similarly, and as I noted in my prior post about the DoJ’s recent civil complaint against S&P, the government’s allegations against the rating agency depend heavily on excerpts drawn from internal emails and other electronic communications. The embarrassingly colorful emails seem to suggest that the rating agency consciously issued unjustifiably high ratings for CDOs to please its customers and to avoid losing market share to rival rating agencies. The email excerpts include the now infamous line on one April 5, 2007 instant message from a securities analyst that “we rate every deal … it could be structured by cows and we would rate it.” The complaint also quotes — at length and in full — one S&P analyst’s 2007 March parody of the Talking Head’s song “Burning Down the House,” entitled “Bringing down the House” and suggesting that subprime mortgage delinquencies were threatening to wreak havoc.


The complaint quotes more serious (and seemingly more damning) messages, including the July 5, 2007 message from a recently hired S&P analyst to an outside investment-banker:


The fact is, there was a lot of internal pressure in S&P to downgrade lost of deals earlier on before this thing started blowing up. But the leadership was concerned about p*ssing off too many clients and jumping the gun ahead of Fitch and Moody’s.


The emails quoted in the complaint also reflect an apparent internal debate about S&P’s rating methodology and whether proposed tightening could prove competitively disadvantageous. The DoJ complaint quotes one internal May 2004 e-mail as saying:


We just lost a huge Mizhuo RMBS deal to Moody’s due to a huge difference in the required credit support level. What we found from the arranger was that our support level was at least 10% higher than Moody’s … this is so significant it could have an impact on future deals. There’s no way we can get back on this one but we need to address this now in preparation for future deals


There were also revelations this past week in the civil litigation that Belgian bank Dexia filed in 2012 against JP Morgan and its affiliates. As detailed in a February 6, 2013 New York Times article entitled “E-Mails Imply JP Morgan Knew Some Mortgage Deals Were Bad” (here), Dexia is relying on a “trove of internal emails and employee interviews” to allege that when JP Morgan uncovered flaws in thousands of home loans, rather than disclosing the problems, the bank simply adjusted the critical reviews,  perpetuating the appearance that the securities into which the mortgages had been bundled were more secure than they might otherwise appear.


Among other things, the Times article quotes a September 2006 internal JP Morgan mortgage loan analysis that determined that “nearly half of the sample pool” was “defective,” meaning that the loans did not meet underwriting standards. The article says that JP Morgan dismissed or altered these and other critical assessments, for example, to show that a smaller number of loans were “defective.” The article cites one specific example in which a 2006 review of mortgages found that over 1,100 mortgages were more than 30 days delinquent, but that the offering document sent to investors showed only 25 loans as delinquent.


In its February 8, 2013 front-page article about Tom Hayes, a derivatives trader known as ‘Rain Man” and who worked, serially, for RBS, UBS and Citigroup, and who is one of the few individuals to be individually prosecuted in connection with the Libor scandal, the Wall Street Journal not only quoted Hayes’s email communications but also reported that Hayes would “change his status on his Facebook page to reflect his daily desires for Libor to move up or down.”


One interesting feature of a number of these communications is that in many instances the individuals involved evinced awareness that they needed to be careful with what they said. For example, the author of the “Burning Down the House” parody, in an email that followed quickly after the first note in which he sent the parody lyrics, told the parody recipient “For obvious professional reasons, please do not forward this song. If you are interested, I can sing it in your cube.” The CFTC’s press release quotes a transcript from a telephone conversation (recorded because it took place on a trading desk), in which a trader and a rate submitter agreed on a rate level to be submitted to the British Banker’s Association (BBA); in the transcript that submitter advises the trader (after refusing to agree to the rate on Bloomberg Chat), that “We’re just not, we’re not allowed those conversations on [instant messages]” because, the rate submitter tells the trader “of the BBA thing” (that is, reports of investigation involving Libor rate setting at the BBA).


There is no doubt that these excerpts from the emails and other electronic communications make a horrible impression and could even cause the various companies involved serious problems. But as damning as some of these emails seem to be, there is also a danger that the impression these messages create is a false one. In an interesting February 7, 2013 essay on Yahoo Finance (here), Henry Blodget (who certainly knows a thing or two about embarrassing emails):


the trouble with email is that sometimes people who aren’t, in fact, breaking rules often vent or joke or react to information in emails–and, in so doing, create a "paper" trail that, later, out of context, makes it look like they have broken rules (or at least done something sleazy). And when these emails come out, they are often seized upon as proof of wrongdoing, before they have actually been evaluated in context. And that gets a lot of companies and employees in hot water, even when the employees didn’t, in fact, break any rules.


Of course, as Blodget notes, the emails do sometimes in fact evidence wrongdoing. The problem is that when seemingly damning email excerpts are blasted into the media, it is very difficult to appreciate the larger context within which the excerpts fit.


By way of illustration, the handful of emails that the DoJ quotes in its S&P complaint was taken from over twenty million pages of e-mails the rating agency produced to the government. As John Cassidy notes in his interesting and balanced analysis of the DoJ’s complaint in a February 5, 2013 New Yorker article, should the S&P case go to trial, the rating agency will have the opportunity to “place the offending communications in context, and to counterbalance them with more exculpatory materials.” Though the emails unquestionably do not read well, “bad publicity doesn’t necessarily equate to a defeat in court.”


I have personal experience with the way that emails can be pulled at random from a mountain of paper and made to look as if they are much more serious and meaningful than they ever were intended to be. For many years, I was the head of a D&O underwriting facility. From time to time, we were involved in coverage litigation, and invariably the claimants’ lawyers seemed to think it was really clever to depose the head of the operation. So being deposed became a regular feature of my job. In many of these depositions, the claimants’ attorneys would pull out emails written in jest or written in haste, and question me about them under oath. There is nothing like having the lens of video camera pointed at your face to take all of the humor out of a gag email.


By now, I think we are all aware of the dangers that email and other forms of electronic communications represent. The messages are written in haste and seem ephemeral. Yet because of the permanence of the electronic storage, they stand as an archival record of thoughts and messages that live on long after the moment has passed.


As I said at the outset of this blog post, it is nothing new for regulators and claimants to have a field day with ill-considered electronic communications, and I think all of us have heard many times about the need for caution when using email and other forms of electronic communication. However, human nature being what it is, and given the nature of electronic communications (which encourages haste as well as imprecise and sometimes even ill-considered expression), it is perhaps inevitable that in a vast archive of electronic messages there will be a handful of unfortunate items.


But though these kinds of unintended blunders can seem inevitable, it is still worth trying to learn from what the regulators and claimants have done with the electronic communications in these cases. These cases underscore the fact that for all of their convenience and ease of use, electronic communications can be very dangerous. In the press of day-to-day business, this danger can be hard to remember. But a useful exercise to try to adopt is to pause and ask yourself, before hitting “send,” how the message would look if it were to fall into the hands of a hostile and aggressive adversary who was looking for ways to try to make you or your company look bad. Were this simple test to be more widely implemented, we would certainly see a marked reduction in, for example, running email jokes about the French maid’s outfit.  


My final thought is this – we all know that many electronic messages are written in haste and sometimes with insufficient care. With full awareness of this attribute of electronic communications, we should hesitate to jump to too many conclusions about the seemingly damaging inferences that could be drawn from email or instant message excerpts. But we should also learn from the inferences that regulators and claimants are trying to draw and try to take that into account in our own communications.


UPDATE: As if to reinforce my point in this post, today’s WSJ has an article entitled "Two Firms, One Trail in Probes on Ratings" (here), that explains why the government is pursuing claims against S&P but not rival rating agency firm Moody’s — it is because Moody’s "took careful steps to avoid creating a trove of potentially embarrasing employee messages like those that came back to haunt S&P."  The article explains that Moody’s analyts "in recent years had limited access to instant-message programs and were directed by executives to discuss sensitive matters face to face." These strictures apparently were put in place following the investigations and scandals initated by then-NY AG Eliot Spitzer.


More About Rule 10b5-1 Plans: As I noted in a recent post, several articles in the Wall Street Journal have raised concerns about the way that some corporate officials are using their Rule 10b5-1 trading plans. The Journal article implied that some officials were using their plans improperly, to try to shield their trades in shares of the company from scrutiny.


In a February 6, 2013 post on the Harvard Law School Forum on Corporate Governance and Financial Regulation entitled “The Best Laid Plans of 10b5-1” (here), Boris Feldman, a partner at the Wilson Sonsini law firm, takes a look at the current controversy surrounding the use of Rule 10b5-1 plans. Among other things, Feldman notes that “Rule 10b5-1 plans are a blessing and a curse: a blessing, because they enable executives to diversify their company holdings in a stable, law-abiding manner; a curse, because they tempt cheaters into hiding their malfeasance in a cloak of invisibility.”


After considering the questions now being raised about the plans, Feldman suggests “some ‘good housekeeping’ features of plan design and implementation that enhance the odds of surviving such scrutiny.” Feldman’s article provides a number of practical suggestions to try to ensure that trading plans are used for the purposes for which they were intended and provide the protection for which the Rule was designed.


More SEC Enforcement Activity Against Private Equity Firms?: According to recent statements from the head of the SEC Asset Management Unit, the agency may be preparing to bring increased numbers of enforcement actions against private equity firms. According to a February 7, 2013 memo from the Weil Gotshal law firm (here), the SEC official, speaking at a recent conference, described the problems in the private equity industry as due to “too many managers chasing too little capital.” The factors the official identified as contributing to a risk of fraud in the industry include “difficulties in valuing illiquid assets and certain incentive structures that are prevalent in the private equity sector.” While noting the more active enforcement role that the agency intends to take, the official also identified the critical steps that management at private equity firms can take to make sure that the firms interests are and remain aligned with those of investors.


Upcoming ABA Seminar on Failed Bank Litigation: On February 21, 2013, the American Bar Association Tort Trial & Insurance Practice Section’s Professionals’ Offices and Directors’ Liability Committee will be sponsoring a teleconference on the topic of “Failed Bank Litigation.” The teleconference, which is scheduled to run from 1:00 pm to 2:30 pm, will be moderated by my good friend Joe Monteleone of the Tressler law firm, and will include a panel of distinguished experts.


The panel will discuss the investigations and litigation that may ensue against failed banks and their directors and officers, and will also address “various types of liability insurance policies and bonds that could be implicated, and how competing claimants and insureds must deal with finite insurance limits.” Further information about the teleconference can be found here.


Today’s Music Video Interlude: Turn the sound down and sit back and enjoy this amazing video of a young boy laying down some astonishing blues vocals. As the guitar shop owner says, “That is smokin’ good.”