Legal Update

Spring 2005

• Avoiding Personal Liability as a Corporate Director: The Lessons of WorldCom and Enron
• Partner Profile: Susan A. Wolf
• The Power of Digital Evidence
• ECJ’s Super Lawyers 2005
• ECJ Announces Three New Partners
• ECJ Welcomes A New Associate

Avoiding Personal Liability as a Corporate Director: The Lessons of WorldCom and Enron

By David B. Coher

"WorldCom's Ex-Directors Pony Up" screamed the Wall Street Journal headline earlier this year. This news followed fresh on the heels of news that 10 former directors of Enron would be required to contribute $13 million of personal wealth towards settling the civil litigation brought by shareholders in the wake of Enron's collapse. As expected, the news of WorldCom directors personally paying a combined $18 million has struck fear in the hearts of many current and former corporate directors across the country. Many directors of large and small corporations wonder if these stories signal the beginning of a ground-swell change in corporate law that will require them to be personally responsible to shareholders for any variety of alleged transgressions.

It is true that restive regulators and scorned shareholders are continuing to look for ways to make corporate directors more accountable. However, corporate directors need not begin jumping ship just yet. The Enron and WorldCom cases are the unique products of marquee corporate names involved in questionable conduct at a time when many are seeking justice for perceived unfair losses. Especially unique to the cases of Enron and WorldCom has been the demand by institutional investors that perceived indolent directors who failed to properly perform on their oversight responsibilities personally contribute to settlement negotiations.

But, what is to keep the same from happening to other corporate directors in the years to come? In short, directors must take steps to ensure that they are properly fulfilling their corporate responsibilities and document these steps. If they do so, they should be protected from having to surrender personal assets. Directors should view the WorldCom and Enron cases not as creating new exposures, but as a reminder to review the terms and performance of their directorships to ensure protection from personal liabilities.

Under federal law, directors personally involved in a shareholder suit are only responsible for their own proportion of fault as determined by the jury. Among others, the Private Securities Litigation Reform Act is designed to protect directors from facing overwhelming damages in such cases. Nonetheless, the law still requires directors to be personally responsible for that portion of fault attributable to their actions. Typically, directors pay to settle these types of cases with the proceeds of the corporation's directors' and officers' insurance policy ("D&O policy").

The Sarbanes-Oxley Act has created sweeping new corporate governance requirements, but has not expanded civil liability for companies or their directors. What it has done has caused insurance companies to be more cautious in issuing D&O policies. Where 10 years ago many insurers were willing to write affordable, virtually limitless D&O policies for corporations, today, many insurers are reluctant to insure a corporation and its directors and officers for the amounts that prudence would require them to maintain.

However, when a corporation does secure a D&O policy, it does not always provide sufficient protection to its directors. If a corporation's liabilities exceed the limits of the D&O policy, there may be no insurance coverage left to provide personal protection to a director. In such a case, while the insurance company may pay the policy limits and walk away from the litigation, the director remains stuck and potentially personally liable.

Alternatively, insurers may rescind coverage if there is evidence that a corporation lied on its insurance application. Additionally, an insurer may rescind coverage if there is evidence that a corporation has committed fraud or other alleged wrongdoing. Many insurance companies are quietly doing just that in an attempt to avoid liabilities from future litigation. Some insurance companies are insisting that a corporation's D&O policies, protecting both the directors and the officers, can be rescinded if financial statement certifications required to be made by corporate officers turn out to be false.

Either way, traditional D&O policies insure the corporation, tying the protection of directors to the corporation maintaining the policy. This can be a nightmare for executives and directors, as the corporation's actions may be wholly unrelated to them and committed without their knowledge.

Directors can avoid these problems by insisting that corporations obtain director-specific insurance policies that protect the director in case of civil litigation personally naming the director. Insurers are starting to sell just such policies that are dedicated to the director and non-rescindable, but for the personal conduct of the director. By purchasing this insurance, corporations may ensure that their director's insurance will not evaporate, unless the director misleads the insurer or turns a blind eye to open fraud.

Another way that corporate directors can protect themselves is by indemnification agreements that provide for the indemnification of the director by the corporation, should the need arise. In this manner, the corporation acts as an insurer for the director so that regardless of an insurance company pulling its coverage, the director remains protected.

Even when a director ensures that he or she holds proper insurance coverage, "the signal is clear," as one insurance executive put it, that corporate directors with oversight responsibilities "better take those responsibilities seriously." That is, beyond securing proper insurance coverage, corporate directors need to ensure that they are performing sufficient oversight. A key way for corporate directors to protect themselves in the face of litigation threats is to document properly the work they perform in their oversight roles. As with most litigation, proper documentation can go a long way towards ensuring a good defense.

For their own protection, it is important that current and former corporate directors review the limits and terms of their corporation's D&O policy to ensure sufficient protection in the case of civil litigation. In addition, it is important that corporate directors take steps to protect themselves and prove that they fulfilled their corporate responsibilities should civil litigation later arise. In both instances, an attorney can be of tremendous help in determining whether there is sufficient insurance protection and in making sure that director is otherwise taking steps to protect himself or herself.

Partner Profile: Susan A. Wolf

Susan A. Wolf is a partner in ECJ's Business Law Department. Her practice includes mergers and acquisitions, corporate finance, secured and unsecured corporate and commercial lending, structuring and administration of limited liability companies, limited and general partnerships and corporations. Her client base includes closely-held family businesses where she often acts as outside general counsel. She also represents high net worth individuals in various capacities, including executive, lender to and/or investor in various businesses, founder, partner or otherwise.

Susan received her Juris Doctorate in 1981 from the University of Michigan Law School and her Bachelor's degree from the University of Michigan in 1978. Prior to joining ECJ, she was a partner in the Corporate Department of Loeb & Loeb LLP. She is a member of the State Bar of California and its Business Law Section.

Susan is actively involved in women's leadership organizations and is on the board of directors at both of her children's schools. Susan lives with her husband of 20 years, attorney David Wolf, who is a sole practitioner. Susan and David have two boys, Brandon, age 14, and Adam, age 11. Brandon is in the 9th grade at Harvard Westlake where he is on the water polo team. Adam is in the 6th grade at the Mirman School. He is a black belt in Tae Kwon Do and is working towards his second degree black belt. In Susan's limited spare time, she enjoys cooking, reading, swimming and vacationing at the beach.

The Power of Digital Evidence

By John M. Houkom

More and more, electronic evidence is being sought and relied upon in standard civil litigation cases. Gone are the days when a box of files would placate the demands of the opposing counsel. Gone, too, are the days when a judge would shrug and dismiss a demand for electronic documents as duplicative and unnecessary. Judges and attorneys now understand the power and necessity of electronic discovery. What is more important is that companies involved in litigation now see the shift towards electronic documents, and the ability to store paper documents electronically. It is a way to reduce litigation costs and a better way to stay on top of the universe of information involved in even the most complex litigation situations.

Demanding the Production of Electronic Documents

Seeking electronic evidence should be a part of any litigation plan, whether it is a simple document request or a fullscale analysis of the other party's computer system.

As computers are integrated into every business, it has become obvious that there is a large amount of information created and stored in an electronic format which can be highly relevant to legal disputes. Indeed, as any Information Technology professional will tell you, more can be learned from a document than what can be seen on the printed page, e.g., the creation date, the name of its editors and the changes made. A printed version would only provide the final text. It can be critically important for your attorneys to seek electronic discovery in litigation in its native, electronic form.

Another example is the ubiquitous use of email in the business world and its relatively casual tone, which means that the email servers of a business can be a virtual treasure trove of admissions, ruminations, drafts and so on. Likewise, the candid descriptions in calendaring and time-note systems can also provide a reliable and unforeseen method for finding the facts. It can also marshal the evidence critical to the timing of events and prove the knowledge of the parties involved.

But how do you get to and organize that information, especially when the key members of a company and its legal team may not even know that it exists? The usual and least expensive method for seeking electronic discovery is to serve a standard document demand seeking documents on certain subjects, and specifically referencing emails, electronic calendars and the like. This is especially effective where there are a relatively small number of individuals involved on the other side of the matter.

On the other hand, if there are many individuals involved on the other side, or if there are questions about the practices or actions of other individual front-line employees, then it is safer and more comprehensive to use a forensic computer specialist to create an image of all or some portion of the other side's computer system. The creation of a forensic image copies the hard drives identically, and allows the specialist to reconstitute certain portions of deleted files. This allows for a key word or other search to look at the universe of electronic data controlled by the other party. Now, the procedure has to be agreed upon by both parties or ordered by a court, and it can cost upwards of ten thousand dollars. For highly critical information in high-stakes litigation, it is more than worth the initial outlay of money to ensure the entire universe of possible files has been considered.

Organizing Electronic Documents Received

Once a group of electronic documents have been delivered to your counsel, there are a few ways to deal with it. The traditional method is to print those documents out to review them, but this will incur printing charges, and may necessitate several times through the documents to organize them for different purposes. The more efficient way of organizing the documents is to load them directly into a document management system (such as Summation), or have them loaded into a system by an outside vendor (such as ECJ client DolphinSearch). Summation is a powerful database program that will allow your attorneys to organize the documents efficiently. An outside vendor may charge a fee, but may be able to give the client additional functionality, like access to the database through the web or other services that cannot be offered through an in-house program. Regardless of where the documents are loaded and stored, they will need to be coded.

Outside firms, such as Dolphin- Search, can also provide new and innovative ways of increasing efficiency. They can automatically eliminate duplicate files and design searches to intelligently filter and segregate specific categories of documents, for example those that are privileged, those that are on standard forms or files that relate to specific subjects. This type of analytical process will make the coding and review of those documents even less time-consuming.

Coding involves going through each document or file, and recording key facts in the database that contains those documents. The types of facts that are commonly coded after documents are originally received are: type of document, number of pages, to, from, other recipients, date, and whatever identifying marks they contain (such as Bates numbers). All of these functions can be performed either by paralegals or the outside vendor, but in any event, they do not need to be performed by attorneys, which can save the client significant money during the organization process.

Once the documents have been initially coded, additional analysis can be done. Reviewing the documents and placing notes in the database is significant. The best feature is that the types of analysis are not limited, and the electronic database is much more flexible and easier to manipulate for the purpose of conducting additional analysis in the future.

The biggest reason receiving, storing and organizing documents in electronic form will save you money in the long run, aside from reducing the need for attorney time to be spent on the organization and analysis of those documents, is that printing and copying costs can be greatly reduced. For example, if the documents are produced only in paper form, it will be necessary to create at least one duplicate set to keep a pristine version. In addition, as the set of documents is reviewed and analyzed, additional subsets will be copied related to specific topics or specific witnesses, sometimes multiple times to be distributed to the attorneys and clients involved in the case. If the documents are produced in electronic form, however, there is no need to make a pristine set, because the original will be stored in the database and everyone can look at it at the same time, even print it out, without the cost of physically copying another set (or four) of the documents. The savings in printing costs can be significant.

Working With Paper Documents

While not all documents related to litigation are created or received electronically (letters from the other side or third parties, invoices, delivery slips and so on are all received from the outside world in a paper form), the reasons for storing documents produced in electronic form on a database also apply to paper documents.

This applies not only to documents received from the producing party, but also to your own documents. Documents you intend to rely on during the course of the litigation, as well as those responsive to any document requests tendered by the other side, should all be placed in a database and coded, regardless of whether they are electronic or paper. Once they are in the database, it is a simple process to review and code them for privilege and then to have the database assign them Bates numbers.

The simple process of mailing your document production to the other side on a few CDs or DVDs, rather than shipping a few banker's boxes full of paper documents can mean dramatic savings.

Other Litigation Documents

There are other ways in which this process saves litigation resources. For example, it is usually an arduous process to create and revise a privilege log by hand. With a database, however, once the privilege and factual coding has been done, the creation of a log is a simple act of searching and exporting the data. Editing will still have to be done, but the process can be greatly accelerated.

Also, the storage of all of the documents in the database will make it easier to present the documents at the time of trial, both by being able to re-number the documents with their exhibit numbers (which must be produced to the other side) and by preparing the documents for their presentation to the jury. Most courts now encourage the presentation of exhibits through the use of projectors and video monitors. It is more interesting to the jury and less cumbersome than using actual, physical documents. In order to present exhibits in this manner, all of the paper documents will need to be converted into electronic form. This process is virtually instantaneous and relatively inexpensive if the documents are already organized in the proper format.

In sum, organizing and storing the information and documents related to litigation can save money and time, but the greatest benefit is the confidence of knowing all of the important documents can be kept and organized in one place, where they can be accessed by anyone who needs them at a moment's notice, and providing a venue whereby the transcripts can also be searched and read by anyone interested.

ECJ's Super Lawyers 2005

As we enter the year 2005, three of our senior partners have made quite an impression within the legal community. Bertram K. Massing, head of ECJ's Business and Corporate Department, Melvin S. Spears, head of ECJ's Taxation Department and Allan B. Cooper, head of ECJ's Litigation Department, were all selected for the second year in a row as "Super Lawyers" as part of the Southern California Super Lawyer Magazine for 2005.

Southern California Super Lawyers is a product of more than six months of polling, surveying and researching attorneys to identify "top legal talent" in more than 50 areas of law. In addition to being included in Los Angeles Magazine's f i r s t annual listing of the top lawyers in the Los Angeles region, this list also appeared in an extensive special advertising section in the February 2005 issue, as well as in a separate publication which is distributed to all active attorneys in Los Angeles and Orange counties.

ECJ Announces Three New Partners

We are pleased to announce that Karina B. Sterman, Heather L. McCloskey and Andres Quintana have been made partners of the firm.

Karina B. Sterman received her J.D. from University of Southern California Law Center. She is in the Litigation and Employment Law Departments, where her areas of practice include representation of employers in all types of employment matters, drafting employee policy manuals, counseling on wage and hour compliance and general business litigation.

Heather L. McCloskey received her J.D. from University of San Diego Law School. She is in the Litigation Department, where her areas of practice include business litigation, intellectual property, securities litigation and unfair competition.

Andres Quintana received his J.D. from the University of California at Berkeley. He is in the Litigation Department, where his areas of practice include general business litigation, environmental litigation, land use litigation, employment litigation and appellate law.

ECJ Welcomes A New Associate

The firm is pleased to welcome its newest associate Lauren J. Katunich.

Lauren J. Katunich received her J.D. from Loyola School of Law in 2003. She is an associate in the Litigation and Employment Law Departments, where her areas of practice include business litigation, employment compliance, defamation and anti-SLAPP.

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