It has been quite a while since we have covered a grand mal discovery screw-up here at Above the Law. For a while, we almost started to believe the legal industry as a whole had finally caught up to technology — or at least had figured out how to keep major mistakes under the radar.
Well, our dry spell has ended. As we mentioned yesterday in Non-Sequiturs, the California office of a Biglaw firm handling some high-profile litigation for Goldman Sachs accidentally released an unredacted version of some files that the firm and its clients have spent years trying to keep secret.
Keep reading to learn more about the case and see which firm reportedly disseminated evidence of the bank’s “naked” short selling…
Goldman Sachs and Merrill Lynch, as well as other banks no longer involved in the case, got sued by Overstock.com in 2007. The company said the banks caused its stock to fall through the practice of “naked” short selling. A California judge dismissed the suit, ruling that not enough of the alleged wrongdoing happened in the state. The Economist picks it up from there:
That was how things stood until the end of last week, when the defendants’ lawyers sent their opposition to a plaintiffs’ motion to the other parties in the case. One of the exhibits attached to this, presumably inadvertently, was an unredacted version of an earlier filing by Overstock, opposing the defendants’ motion to seal papers. Within this exhibit is an intriguing six-page section, “Facts Defendants Improperly Seek to Seal” (pages 14-20 of this), containing excerpts of e-mails written by Goldman and Merrill employees.
The responsible lawyer is alleged to be Joseph Floren, a partner at Morgan Lewis. I have to admit, I’m a bit surprised the supposed fall guy here is a partner, not some nameless associate or contract attorney sitting somewhere in an underground dungeon. Or hell, even a hapless secretary.
(Of course, it’s certainly possible that some other member of the Morgan Lewis team bears some responsibility for the snafu. We reached out to Morgan Lewis, but the firm declined to comment.)
The craziest thing about Floren’s apparent mistake is that although the information is damning — or at least embarrassing — enough on its own, Goldman and its attorneys have spent a significant amount of time (and presumably money) specifically attempting to keep the files sealed.
Several media outlets (including Bloomberg, the Economist, and Rolling Stone) actually fought alongside Overstock in court, trying to obtain unredacted copies of the files. And then, boom like that, the firm did it for them — for free.
Now, however, through the magic of this unredacted document, the public will be able to see for itself what the banks’ attitudes are not just toward the “mythical” practice of naked short selling (hint: they volubly confess to the activity, in writing), but toward regulations and laws in general.
“Fuck the compliance area – procedures, schmecedures,” chirps Peter Melz, former president of Merrill Lynch Professional Clearing Corp. (a.k.a. Merrill Pro), when a subordinate worries about the company failing to comply with the rules governing short sales.
We also find out here how Wall Street professionals manipulated public opinion by buying off and/or intimidating experts in their respective fields. In one email made public in this document, a lobbyist for SIFMA, the Securities Industry and Financial Markets Association, tells a Goldman executive how to engage an expert who otherwise would go work for “our more powerful enemies,” i.e. would work with Overstock on the company’s lawsuit.
In fairness, the “f*** compliance” line was allegedly a joke. But still. For people (like me) who are not familiar with naked shortselling, Taibbi gives us a quick primer:
[N]aked short selling, in essence, is selling stock you do not have. If you don’t have to actually locate and borrow stock before you short it, you’re creating an artificial supply of stock shares.
From the legal technology side, it would be interesting to know how exactly this mistake was made. I imagine Floren (or someone working for or with him) simply attached the unredacted version to the email instead of the redacted one by mistake. The lesson here is so simple, most of us probably don’t follow it: NAME YOUR COMPUTER FILES CLEARLY.
I’m sure a lot of people are wondering what will happen next to Floren. At least one blogger seems to think he deserves whatever’s coming to him. The DeepCapture blog has an interesting anecdote about Mr. Floren’s personality (UPDATE 5/18 (1:55 PM): as a commenter pointed out, it’s worth mentioning that this blog was written by Patrick Byrne, the CEO of Overstock):
The first time I heard Joe Floren speak I was standing behind him in an elevator in his law firm’s San Francisco office tower as another lawyer informed him that the subpoena Joe Floren had served the previous day on a colleague of mine had reached her in the hospital, after a difficult delivery of her first child, while she was breastfeeding for the first time.
“Really? That’s beautiful. I love it!” He replied with glee.
I will just let that speak for itself.
But back to the matter at hand: fundamentals, people! Ain’t no point in fancy electronic discovery software or hordes of document review attorneys when the people closer to the top of the food chain still have trouble fielding a routine grounder.
Accidentally Released – and Incredibly Embarrassing – Documents Show How Goldman et al Engaged in ‘Naked Short Selling’ [Rolling Stone]
Joe Floren Screws the Pooch [DeepCapture]
An enlightening mistake [Economist]
Overstock.com v. Morgan Stanley & Co.; Plaintiffs’ Consolidated Opposition to Defendants Motions To Seal Summary Judgment Papers [Superior Court of the State of California]