COLEMAN (PARENT) HOLDINGS, INC., Plaintiff(s), v. MORGAN STANLEY & CO., INC., Defendant(s) No. CA 03-5045 AI Florida Circuit Court, Fifteenth Judicial Circuit, Palm Beach County March 23, 2005 Maass, Elizabeth T., Judge ORDER ON CPH'S RENEWED MOTION FOR ENTRY OF DEFAULT JUDGMENT *1 THIS CAUSE came before the Court March 14 and 15, 2005, on CPH's Renewed Motion for Entry of Default Judgment, with both parties well represented by counsel. Coleman (Parent) Holdings, Inc. (“CPH”), has sued Morgan Stanley & Co., Inc. (“MS & Co.”), for aiding and abetting and conspiring with Sunbeam to perpetrate a fraud. Early in the case, CPH was concerned that MS & Co. was not thoroughly looking for emails responsive to its discovery requests. On April 16, 2004, the Court entered an Agreed Order (“Agreed Order”) that required MS & Co. to search its oldest full backup tapes for emails subject to certain parameters and certify compliance. MS & Co. certified compliance with the Agreed Order on June 23, 2004. On November 17, 2004, CPH learned that MS & Co. had found some backup tapes that had not been searched. On January 26, 2005 it served its Motion for Adverse Inference Instruction Due to Morgan Stanley's Destruction of E-Mails and Morgan Stanley's Noncompliance with the Court's April 16, 2004 Agreed Order (“Adverse Inference Motion”), claiming that MS & Co.'s violation of the Agreed Order, coupled with its systemic overwriting of emails after 12 months, justified an adverse inference against it. The Court ordered certain limited discovery. Responses to that discovery prompted CPH to orally amend its Adverse Inference Motion to seek more severe sanctions. The Court held an evidentiary hearing on the Adverse Inference Motion on February 14, 2005. On March 1, 2005 it issued its Amended Order on Coleman (Parent) Holdings Inc.'s Motion for Adverse Inference Instruction Due to Morgan Stanley's Destruction of E-Mails and Morgan Stanley's Noncompliance with the Court's April 16, 2004 Agreed Order (“Adverse Inference Order”). In its current Motion, CPH argues that it has since learned that the discovery abuses addressed in the Adverse Inference Motion and Order represent only a sampling of discovery abuses perpetrated by MS & Co. and that the abuses have continued, unabated. It claims that these abuses, when taken as a whole, infect the entire case. To understand CPH's argument, it is necessary to go back to the beginning. This case arises out of an acquisition transaction that was negotiated and consummated in late 1997 and early 1998, in which CPH sold its 82% interest in the Coleman Company, Inc., to Sunbeam Corporation. MS & Co. served as financial advisor to Sunbeam for parts of the acquisition transaction and served as the lead underwriter for a $750,000,000.00 debenture offering that Sunbeam used to finance the cash portion of the deal. CPH's Complaint[1] alleged claims against MS & Co. arising from this transaction for fraudulent misrepresentation, negligent misrepresentation, aiding and abetting fraud, and conspiracy, and sought damages of at least $485 million. On May 12, 2003, MS & Co. was served with the Complaint and CPH's First Request for Production of Documents (“Request”). The Request sought, in essence, all documents connected with the Sunbeam deal. “Documents” was broadly defined, and specifically included items electronically stored. Concerned that, out of more than 8,000 pages of documents produced, it had received only a handful of emails, CPH on October 29, 2003, served its Motion to Compel Concerning E-Mails. That motion sought an order requiring MS & Co. to make a full investigation for email messages, including a search of magnetic tapes and hard drives; produce within 10 days all emails located; and produce a Rule 1.310 witness within 20 days “to describe the search that was conducted, identify any gaps in Morgan Stanley's production, and explain the reasons for any gaps.” *2 In its Opposition to Coleman (Parent) Holdings, Inc.'s Motion to Compel served November 4, 2003, MS & Co. argued that CPH wanted “this Court to order a massive safari into the remote corners of MS & Co.'s email backup systems” and represented that “(t)he restoration efforts demanded by CPH would cost at least hundreds of thousands of dollars and require several months to complete (emphasis in original). MS & Co. argued that CPH's “true” motive was to “harass and burden MS & Co. with unnecessary and costly discovery demands and attempt to smear MS & Co. with out-of-context recitations from other proceedings” because “CPH concedes that MS & Co. is only able to restore email from backup tapes from January 2000 and later-more than a year and a half after the events that allegedly gave rise to CPH's claims,” (emphasis in original). CPH's “concession” was based on representations like the kind made to it by MS & Co.'s counsel in a March 11, 2004 letter that suggested “(t)he burden on Morgan Stanley from ... a wholesale restoration [of email back up tapes], both in terms of dollars and manpower would be enormous. Regardless of who performs the initial restoration, it would require hundreds (perhaps thousands) of attorney-hours to review millions of irrelevant and non-responsive e-mails ...”[2] In response to CPH's Motion to Compel, the parties agreed to reciprocal corporate depositions on the email issue. CPH deposed Robert Saunders on February 10, 2004.[3] After completion of the corporate representative depositions, and unable to obtain MS & Co.'s agreement to a mutual email restoration protocol, CPH served its Motion for Permission to have Third Party Retrieve Morgan Stanley E-Mail and Other Responsive Documents, proposing that a third party vendor be given access to both parties' email systems for restoration at each party's expense. At the hearing on that Motion, CPH offered to split the expenses evenly. MS & Co. refused. MS & Co.'s continued assertions that the email searches could be conducted only at enormous cost and would be fruitless because there were not backup tapes with email from 1997 and 1998 were confirmed to the Court by MS & Co.'s counsel, Thomas Clare of Kirkland & Ellis, at a hearing held March 19, 2004: Mr. Scarola: Electronic records of e-mails that have been exchanged. The Court: Do we agree that there has been such a request outstanding? Mr. Clare: There has been a request outstanding. The Court: And have you all objected? Mr. Clare: From the beginning. The Court: And what's the basis of the objection? Mr. Clare: We objected to the breadth of the request that they're making. And to answer Your Honor's question directly-and the burden that is associated with it-that given the particular e-mail back-up tapes that are in existence five, six years after the fact of these transactions, that the scope of the e-mail request that they are seeking is improperly and unduly burdensome given the enormous costs that would be required, given the fact that the time period for which we have back-up tapes post dates the events by several years. *3 Unable to resolve the email issue, on April 9, 2004, CPH served its Motion to Compel Concerning E-Mails and Other Electronic Documents. On the eve of the hearing on CPH's Motion to Compel, the parties reached an accommodation, and on April 16, 2004 the Court entered the Agreed Order. Under the Agreed Order, MS & Co. was required to (1) search the oldest full backup tape for each of 36 MS & Co. employees involved in the Sunbeam transaction; (2) review emails dated from February 15, 1998, through April 15, 1998, and emails containing any of 29 specified search terms such as “Sunbeam” and “Coleman” regardless of their date; (3) produce by May 14, 2004, all nonprivileged emails responsive to CPH's document requests; (4) give CPH a privilege log; and (5) certify its full compliance with the Agreed Order. As required by the Agreed Order, MS & Co. produced about 1,300 pages of emails on May 14, 2004. It did not, however, certify compliance with the Agreed Order. After prompting by CPH, on June 23, 2004, MS & Co. served a certificate of compliance signed by Arthur Riel, an Executive Director and manager of its Law/Compliance IT Group.[4] CPH got its first indication that the Agreed Order may have been violated in the late fall of 2004. On November 17, 2004, Clare wrote Michael Brody of Jenner & Block, CPH's outside counsel, that MS & Co. had “discovered additional e-mail backup tapes ...”; that “(t)he data on some of [the] newly discovered tapes has been restored;” that “we have re-run the searches described in [the Agreed Order]”; that “some responsive e-mails have been located as a result of that process”; and that “(w)e will produce the responsive documents to you as soon as the production is finalized.” On December 14, 2004, Brody wrote Clare back: in [your November 17, 2004 letter], you state that Morgan Stanley located additional email backup tapes, and that you would be producing documents soon. Within two days of that letter, you produced some emails to us. In your November 17, 2004 letter, however, you also indicated that “some of the backup tapes are still being restored.” Have those backup tapes been restored? Have you found additional responsive emails? If so, when will Morgan Stanley produce those emails? How is it that the tapes were only recently located? On December 17, 2004, Clare wrote back, telling Brody “(n)o additional responsive e-mails have been located since our November production.”[5] Brody wrote back to Clare December 30, 2004, noting the deficiencies in Clare's correspondence: You do not inform us whether the review of the recently-located backup tapes still is ongoing. Please confirm that all email backup tapes from the relevant time period have been reviewed and all responsive emails have been produced. If the review still is proceeding, please let us know when the review will be completed. Clare wrote back on January 11, 2005, telling Brody that the “restoration of e-mail backup tapes is ongoing. Restoration of the next set of backup tapes is estimated to be completed at the end of January. We intend to re-run the searches described in the agreed order at that time.” *4 Concerned about Clare's lack of candor, on January 19, 2005 Brody wrote again: I write in response to your January 11, 2005 letter concerning e-mails back-up tapes. Unfortunately, your letter raises more questions than it answers. As I requested in my December 14, 2004 letter, please explain the circumstances under which Morgan Stanley located these backup tapes and advise us of the date on which the tapes were located. Further, please explain your statement that “the next set of backup tapes” is scheduled to be restored “at the end of January.” How many tapes will be restored by the end of January? When exactly in January will Morgan Stanley complete the process of restoring and searching these tapes for responsive documents? Are there other backup tapes that are not yet in the process of being restored? If so, please advise us of (a) the number of tapes that are not yet in the process of being restored; (b) the time period of the data contained on those tapes; and (c) Morgan Stanley's timetable for restoring and searching those tapes. In addition, please explain why those tapes are not yet in the process of being restored. Please also explain why Morgan Stanley cannot complete the restoration and searching of all remaining backup tapes before “the end of January.” As you know, our trial is scheduled to begin on February 22, 2005. We look forward your complete response to these questions no later than January 21, 2005 so that we can bring this matter to the Court's attention, if necessary. Conforming to what was by now his usual stonewall tactic, Clare responded by letter dated January 21, 2005: I write in response to your January 19, 2005 letter regarding Morgan Stanley's production of e-mails restored from backup tapes. Morgan Stanley completed its initial production of restored e-mail messages on May 14, 2005. The May 2004 production was conducted in accordance with the agreed-upon order governing, and the searches that resulted in that production encompassed data from all of the backup tapes known to exist at the time. Subsequent to the May 2004 production, additional tapes were found in various locations at Morgan Stanley. The discovered tapes were not clearly labeled as to their contents, were not found in locations where e-mail backup tapes customarily were stored, and many of the tapes were in a different format than other e-mail backup tapes. In November 2004, once it was determined at least some of the discovered tapes contained recoverable e-mail data, Morgan Stanley re-ran the searches described in the agreed-upon order. Those searches resulted in Morgan Stanley's November 2004 production. Morgan Stanley's efforts to restore the backup tapes discovered after the May 2004 production are ongoing. It is a time-consuming and painstaking process and, given the absence of clear labels or other index information for the backup tapes, there is no way for Morgan Stanley to know or accurately predict the type or time period of data that might be recovered from tapes that have yet to be restored. While Morgan Stanley cannot accurately estimate when all of the tapes will be restored or whether any recoverable data will be found on the remaining tapes, we understand from Morgan Stanley that, when the agreed-upon searches are run again at the end of January, those searches will include approximately one terabyte of additional data restored since the prior production. *5 On January 26, 2005, CPH served its Adverse Inference Motion, seeking sanctions based on MS & Co.'s disclosure of the newly found tapes. Hearing was scheduled for February 14, 2005. In preparation for that hearing, on February 3, 2005 the Court ordered MS & Co. to produce by noon on February 8, 2005 “(i) all documents to be referred to or relied on by any of the witnesses in his or her testimony; and (ii) all documents within MS & Co.'s care, custody, or control, addressing or related to the additional email backup tapes, including matters relating to the time or manner in which they were discovered; by whom they were discovered; who else learned of their discovery and when; and the manner and timetable by which they were be restored and made searchable, including any correspondence to or from outside or prospective outside vendors.” The Adverse Inference Order outlined the discovery abuses shown at the February 14, hearing. They included MS & Co.'s undisclosed discovery of the 1,423 “Brooklyn” tapes no later than May of 2004; the undisclosed discovery of the 738 8-millimeter backup tapes in 2002; the presence of unsearched data in the staging area; the discovery of 169 DLT tapes in January 2005; the discovery of more than 200 additional tapes on February 11 and 12, 2005; the discovery of a script error that had prevented MS & Co. from locating responsive email attachments; and discovery of another script error that had infected the ability to gather emails from Lotus Notes platform users. In response to these deficiencies, the Court issued the Adverse Inference Order. That Order reversed the burden of proof on the aiding and abetting and conspiracy elements and included a statement of evidence of MS & Co.'s efforts to hide its emails to be read to the jury, as relevant to both its consciousness of guilt and the appropriateness of punitive damages. It specifically provided that “MS & Co. shall continue to use its best efforts to comply with the April 16, 2004 Agreed Order and ... February 4, 2005 Order on Coleman (Parent) Holdings Inc.'s ore tenus Motion to Participate in Search of Additional E-Mail Back Up Tapes or Appoint Third Party to Conduct Search.”[6] It is now clear why MS & Co. was so unwilling to provide CPH with basic information about how and when the tapes were found or when production would be complete. First, candor would have required MS & Co. to admit that it had not done a good faith search for the oldest full backup tapes, and that Riel's certificate of compliance was false. Some unsearched tapes had been found by 2002; others had been found no later than May, 2004. Together, over 2,000 tapes had been found which were not searched prior to the May production. It is untrue that the tapes were “not in locations where e-mail backup tapes customarily were stored.” Second, MS & Co. desperately wanted to hide an active SEC inquiry into its email retention practices.[7][8][9][10] Finally, MS & Co. did not want to admit the existence of the historical email archive, which would expose the false representations it had made to the Court and used to induce CPH to agree to entry of the Agreed Order.[11][12] *6 MS & Co.'s wrongful conduct has continued unabated.[13] Since the February 14, 2005, hearing, it has come to light that: • Only two whole and four partial tapes from the Brooklyn tapes had been migrated to the archive and were thus searched for the November, 2004, production. MS & Co. sought to hide this information to create the impression that all the produced documents came from the Brooklyn tapes, rather than reveal that the production came from material that had migrated from the staging area to the archive since the May, 2004, production or some other, as yet undisclosed, source.[14] • Contrary to MS & Co.'s counsel's November 17, 2004, letter to CPH, none of the November, 2004 production came from the “newly found” tapes. MS & Co. carefully crafted its responses to inquiries about the November, 2004, production to avoid both disclosure of the existence of the archive and outright lying. • The scripts MS & Co. used to process emails into its archive caused the bodies of some messages to be truncated. MS & Co. discovered this problem on February 13, 2005, but did not tell the Court about it until March 14, 2005. • A migration issue caused about 5% of email harvested by NDCI from the backup tapes not to be captured in the archive, based on testing of a representative sample of tapes. MS & Co. told the SEC about this problem on February 24, 2005, but failed to tell CPH or the Court. • As of June 7, 2004, only 120 out of 143 SDLT tapes had been processed into the archive. • An analysis requested by the SEC showed that, based on a representative sample, 10% of backup tapes were overwritten after January, 2001. • A software error caused blind carbon copies not to be captured in the archive process. MS & Co. told the SEC about this problem on February 24, 2005. MS & Co. did not tell CPH or the Court. • A software error caused the searches to be hyper case-sensitive, resulting in a failure to capture all emails. MS & Co. knew of the problem as of December, 2004, but did not tell CPH or the Court. The problem was not purportedly fixed until March, 2005. • A script error caused the archive to have problems pulling group email in Lotus Notes. • MS & Co. provided sworn testimony at the February 14, 2005, hearing that it had located 600 gigabytes of data, while contemporaneously telling the SEC it had located a terabyte of data. A gigabyte represents 20,000 to 100,000 pages. Incredibly, MS & Co.'s witness on this point, Allison Gorman, testified on March 14, 2005, that it was simply a “terminology” issue that she did not choose to correct because it could cause “confusion.” • CPH requested MS & Co. to produce responses it had made to third-parties in civil, criminal, or administrative proceedings describing limitations on MS & Co.'s ability to produce emails and all notices in such proceedings that MS & Co. had newly discovered backup tapes containing email. MS & Co. objected, arguing that there were over 300 separate proceedings, involving over 70 outside law firms, and that the cost of compliance would be too great. On March 2, 2005, the Court ordered the production, after shortening the time period involved, and required production within 12 hours after counsel's review of each item for responsiveness but, in any event, within 10 days. At the time MS & Co. objected to CPH's request as unduly burdensome, it knew of its Well submission to the SEC made on February 10, 2005. Kirkland and Ellis, co-counsel here, was co-counsel for MS & Co. in that SEC proceeding. Consequently, it appears MS & Co.'s real concern was not that expressed to the Court, but was based on its realization that compliance would reveal the existence of the SEC inquiry into its email retention policy and MS & Co.'s efforts to keep the existence of that investigation secret. MS & Co. violated the Court's March 2, 2005, Order on Morgan Stanley's Responses and Objections to Coleman (Parent) Holdings Inc.'s Notice to Produce at Hearing requiring it to disclose items responsive to CPH's Request for Production within 12 hours of review for responsiveness by waiting days, not hours, to produce the Wells submission. *7 • MS & Co.'s failure to produce or log the SEC documents violated the Court's February 3, 2005, Order.[15] • James Doyle's, the Executive Director of MS & Co.'s Law Division, declaration that he did not learn of additional unsearched backup tapes until the end of October, 2004, was intended to mislead CPH and the Court. Obviously, MS & Co. sought to create the implication in the declaration that no one in the Law Division knew of the backup tapes before then. Instead, both Soo-Mi Lee, Doyle's associate, and James Cusick, Doyle's superior, knew of the tapes no later than June 7, 2004. • In-house counsel for MS & Co. knew as of June 7, 2004, that nearly a third of the restored backup tapes did not contain email, implying they may have been recycled in violation of the December 3, 2002 Cease and Desist Order. They did not tell CPH or the Court. • MS & Co.'s searches looked for only two types of emails. There are other types of emails that were not included in the searches. CPH did not learn of this deficiency until March 13, 2005. • MS & Co. improperly failed to produce 125 documents required to be produced by the Court's February 3, 2005, Order Specially Setting Hearing which required limited discovery be made in connection with the February 14, 2005, hearing on the Adverse Inference Motion. • MS & Co. improperly withheld 13 documents required to be produced by the Court's March 4, 2005, Order on Plaintiff's ore tenus Motion to Compel Additional Production. • An additional 282 tapes were found on February 23 and 25, 2005; CPH was not told of the discovery until March 13, 2005. • An additional 3,536 tapes were discovered on February 23, 2005, in a security room. • An additional 2,718 tapes were found at Recall, MS & Co.'s third party off-site storage vendor, on March 3, 2005. • An additional 389 tapes were found March 2 through March 5, 2005. CPH was not told until March 13, 2005. • On March 4, 2005, the Court entered its Order on Plaintiff's ore tenus Motion to Compel Additional Production, which ordered MS & Co. to produce by 3:00 p.m. on March 7, 2005, all items within its care, custody, or control dealing with the Riel/SEC investigation, other than documents representing communications between or among MS & Co. inside and outside counsel that were not copied to anyone other than counsel. MS & Co. sought to discredit Riel and thus distance itself from the false June 23, 2004 certificate of compliance; in doing so, it sought to hide Riel's whistle blower status and the existence of an SEC investigation into whether MS & Co. employees sought kick backs from third party vendors; whether MS & Co. employees were improperly pressured into dealing with third-party vendors who may provide business to MS & Co .; and whether MS & Co. continued to overwrite backup tapes contrary to the SEC's December 3, 2002, Cease and Desist Order. • A script error prevented the insertion of some emails into the archive. MS & Co. produced over 4,600 pages of emails on March 21, 2005, some of which it suggested may have been located on correction of the error; alternatively, it suggested the emails may have been located by NDCI as part of its efforts to verify MS & Co.'s searches. *8 MS & Co.'s discovery abuses have not been confined to its email production. William Strong is a MS & Co. managing director and was one of the principal players for it in the Sunbeam deal. He took credit for the fees generated. On May 9, 2003, CPH requested a copy of “(a)ll documents concerning employment contracts, performance evaluations, and/or personnel filed (including without limitation any documents that describe or discuss [his] training, experience, competence, and accomplishments) ...” MS & Co. asserted that the requested documents were not relevant and that production “would unnecessarily infringe on the privacy interests of [Strong].” On March 15, 2004, the Court ordered MS & Co. to produce “(a)ll references (positive or negative) to [Strong's] truthfulness, veracity, or moral turpitude.” Some portions of Strong's evaluations were produced in response to that order. Those evaluations noted Strong's colleagues' reservations about his candor and ethics. Two of his evaluators, Joseph Perella and Tarek Abdel-Meguid, were deposed, when some relatively vague testimony about the bases for those conclusions was offered. It now appears Strong was facing criminal prosecution in Italy for complicity in bribery while he was working on the Sunbeam transaction, which his evaluators knew, and that MS & Co. purposely withheld that information from CPH and the Court.[16] Even once CPH independently discovered evidence of Strong's indictment in Italy, MS & Co. sought to shield its files from discovery. It claimed that virtually all of the documents it had were privileged under joint defense agreements in place between it, Strong, and Saloman Brothers, Strong's employer at the time of the incident. As the Court's March 10, 2005 Order Following In Camera Inspection (Strong) details, the documents MS & Co. relied on to support that position, and sought to prevent CPH from obtaining, reflect no such agreement. The other discovery abuses and misrepresentations by MS & Co. other than those involving its email production practices are outlined in CPH's Chronology of Discovery Abuses by Defendant served March 1, 2005, and would take a volume to recite. They include: • failing to provide the information retained by MS & Co.'s internal document management system pertaining to MS & Co.'s work for Sunbeam; falsely representing to the Court that no useful information was contained in that information; and producing a Rule 1.310 representative who had made an insufficient inquiry into authenticity, business record status, and authorship of documents; see February 28, 2005 Order on CPH's Motion to Deem Certain Documents Admissible and for Sanctions due to Morgan Stanley's Disregard of Court Order; • when faced with contempt proceedings for violating the Stipulated Confidentiality Order by providing a copy of a settlement agreement between CPH and Arthur Andersen to other counsel, representing to the Court that the law firm of Kellogg, Huber was retained to handle the “Andersen aspects” of this litigation because of a conflict between Andersen and Kirkland & Ellis; Mark Hansen, a partner at Kellog, Huber, testified that his firm was hired as co-counsel for all aspects of the case; *9 • providing answers to interrogatories signed by a corporate representative who performed insufficient verification of the responses; • routinely asserting unfounded privilege claims;[17] and • failing to timely comply with the Court's orders; for example, MS & Co. did not produce Strong's 1994 Performance Evaluation until the afternoon of March 15, 2005, though it was obviously included in the Court's March 15, 2004 Order. The failure cannot be excused as oversight since, when CPH specifically asked for the 1994 evaluation in the spring of 2004, MS & Co.'s counsel said it was withheld as non-responsive; see, also, Ex. 197, 198. In sum, MS & Co. has deliberately and contumaciously violated numerous discovery orders, including the April 16, 2004 Agreed Order; February 3, 2005 Order Specially Setting Hearing; and the March 4, 2005 Order on Plaintiff's ore tenus Motion to Compel Additional Production. At the February 14, 2005, hearing on CPH's Adverse Inference Motion, it chose to hide information about its violations and coach witnesses to avoid any mention of additional, undisclosed problems with its compliance with the Agreed Order. Implicit in the requirement that MS & Co. certify compliance with the Agreed Order was the requirement to disclose impediments to its ability to so certify. As outlined in this Order, MS & Co. employees, and not just counsel, have participated in the discovery abuses. The prejudice to CPH from these failings cannot be cured. Even if all the script errors have been located and corrected, and MS & Co. has failed to show they have, and even if all of the email backup tapes have now been located, and MS & Co. has failed to show they have, the searches cannot be completed in time. The other discovery abuses outlined call into doubt all of MS & Co.'s discovery responses. The judicial system cannot function this way. Based on the foregoing and on the Court's March 1, 2005 Amended Order on Coleman (Parent) Holdings, Inc.'s Motion for Adverse Inference Instruction Due to Morgan Stanley's Destructions of E-Mails and Morgan Stanley's Noncompliance with the Court's April 16, 2004 Agreed Order, it is ORDERED AND ADJUDGED that CPH's Renewed Motion for Entry of Default Judgment is Granted, in part. SeeRobinson v. Nationwide Mut. Fire Ins. Co., 887 So.2d 328 (Fla.2004); Mercer v. Raine, 443 So.2d 944 (Fla.1983); Precision Tune Auto Care, Inc. v. Radcliffe, 804 So.2d 1287 (Fla. 4th DCA 2002); Rule 1.380(b)(2)(C), Fla. R. Civ. P. Paragraphs 2 (excluding the last sentence thereof); 3 (excluding the portion of the last sentence beginning with “in order to close ...”); 8-10, 11 (excluding everything after the first sentence); 12 (excluding all parts following “June 1998”); 13 (excluding the last sentence thereof); 14-27; 28 (excluding everything after “firm” in the second to last sentence thereof); 29-39; 41-52; 53 (excluding the second sentence thereof); 54-57; 58 (excluding “CPH and” in the second line thereof); 59-63; 64 (excluding the third line thereof); 65 (excluding the last sentence thereof); 66 (excluding the last sentence thereof); 67-70; 71 (excluding the first word of the last sentence and the remainder of that sentence after “material”); 72; 73 (excluding the first sentence thereof); 74 (excluding the words “CPH and” in the second to last sentence thereof); 75-81; 85; 86; 87 (excluding (g)); 90, and 91 (excluding (g)) of Plaintiff's Amended Complaint, as amended by the Court's Amended Order on Morgan Stanley's Motion to Dismiss, Motion to Strike, and Motion for More Definite Statement, shall be read to the jury and the jury instructed that those facts are deemed established for all purposes in this action. A copy of a redacted Amended Complaint is attached as Exhibit A. It is further *10 ORDERED AND ADJUDGED that the Court shall read to the jury a Statement similar to that attached as Exhibit A to the Amended Order on Coleman (Parent) Holdings, Inc.'s Motion for Adverse Inference Instruction Due to Morgan Stanley's Destructions of E-Mails and Morgan Stanley's Noncompliance with the Court's April 16, 2004 Agreed Order, but incorporating the relevant additional findings of this Order, and the jury will be instructed that it may consider those facts in determining whether MS & Co. sought to conceal its offensive conduct when determining whether an award of punitive damages is appropriate. See General Motors Corp. v. McGee, 837 So.2d 1010 (Fla. 4th DCA 2002), rev. den. 851 So.2d 728 (Fla.2003). Counsel are each invited to submit proposed Statements. It is further ORDERED AND ADJUDGED that CPH shall be entitled to an award of reasonable fees and costs incurred as a result of the Renewed Motion for Entry of Default Judgment and the violations of Court orders recited herein. The amount shall be determined at an evidentiary hearing following trial. It is further ORDERED AND ADJUDGED that MS & Co. is relieved of any future obligation to comply with the April 16, 2004 Agreed Order and the February 4, 2005 Order on Coleman (Parent) Holdings Inc.'s Motion to Participate in Search of Additional E-Mail Back-Up Tapes or Appoint Third Party to Conduct Search. It is further ORDERED AND ADJUDGED that the pro hac vice admission of Thomas Clare is revoked. It is further ORDERED AND ADJUDGED that the portions of CPH's Motion for Correction and Clarification of Order on CPH's Motion for Adverse Inference that seek to amend the body of that Order to correct clerical and spelling errors, as agreed to by counsel, is Granted, and the corrections deemed made to the body of the Amended Order on Coleman (Parent) Holdings, Inc.'s Motion for Adverse Inference Instruction Due to Morgan Stanley's Destructions of E-Mails and Morgan Stanley's Noncompliance with the Court's April 16, 2004 Agreed Order, by interlineation. In all other respects the remainder of the Motion for Correction and Clarification is declared moot. DONE AND ORDERED. [Redacted text] Exhibit A In April 1997, Morgan Stanley began serving as Sunbeam's investment banker. Morgan Stanley originally attempted to find someone to buy Sunbeam. When Morgan Stanley was unable to find a buyer, Morgan Stanley developed a strategy for Sunbeam to use its fraudulently-inflated stock to acquire a large company that Sunbeam would own and operate. Then, trading on Morgan Stanley's relationships with CPH's senior officers, Morgan Stanley found Coleman for Sunbeam. At the time of the sale to Sunbeam, Coleman was a leading manufacturer and marketer of consumer products for the worldwide outdoor recreation market, with annual revenues in excess of $1 billion. [Redacted text] After Sunbeam announced plans to acquire Coleman, Morgan Stanley agreed to underwrite a $750 million debenture offering for Sunbeam. Sunbeam needed the proceeds of that debenture offering to complete the acquisition of Coleman. As Sunbeam's investment banker and as the sole underwriter for the $750 million debenture offering, Morgan Stanley received detailed and specific information concerning Sunbeam's financial condition and performance. Morgan Stanley received information that directly contradicted Sunbeam's and Morgan Stanley's assertions to CPH that Sunbeam had undergone a successful turnaround and that its financial performance had dramatically improved. By no later than March 18, 1998, Morgan Stanley knew that Sunbeam's January and February 1998 sales were only 50% of January and February 1997 sales, and Morgan Stanley also knew that the shortfall was caused by Sunbeam's practice of accelerating sales which otherwise would have occurred in 1998 in order to boost Sunbeam's income in 1997. Although Morgan Stanley and Sunbeam previously had advised CPH that Sunbeam's sales were running ahead of analysts' expectations for the first quarter, Morgan Stanley decided not to correct those material misrepresentations. Instead, in March 1998, Morgan Stanley assisted Sunbeam in concealing the problems with Sunbeam's first quarter 1998 sales [Redacted text] [Redacted text] *11 Plaintiff Coleman (Parent) Holdings Inc. (“CPH”) directly or indirectly owned 44,067,520 shares-or approximately 82%-of Coleman prior to the transactions at issue. On March 30, 1998, Sunbeam acquired CPH's interest in Coleman. Sunbeam paid for the Coleman shares with 14.1 million shares of Sunbeam common stock and other consideration. Defendant Morgan Stanley & Co., Inc. (“Morgan Stanley”) is a highly sophisticated investment banking firm that provides a wide range of financial and securities services. Among other things, Morgan Stanley provides advice on mergers and acquisitions and raises capital in the equity and debt markets. Morgan Stanley served as Sunbeam's investment banker and as the underwriter of securities issued by Sunbeam in connection with the events at issue herein. Sunbeam Corporation (“Sunbeam”) was a publicly-traded company headquartered in Delray Beach, Florida. Sunbeam designed and manufactured small household appliances and outdoor consumer products, which it marketed under the Sunbeam and Oster brand names. Sunbeam filed a bankruptcy petition under Chapter 11 of the Bankruptcy Code in February 2001. Albert Dunlap (“Dunlap”) was the Chief Executive Officer of Sunbeam from July 1996 until June 1998 when he was terminated by Sunbeam's Board of Directors. [Redacted text] Russell Kersh (“Kersh”) was the Executive Vice President of Sunbeam from July 1996 until June 1998 when he was terminated by Sunbeam's Board of Directors. [Redacted text] Arthur Andersen LLP (“Andersen”) provided outside accounting services to Sunbeam through its West Palm Beach, Florida office. Andersen auditors provided information concerning Sunbeam's first quarter 1998 sales and earnings to Morgan Stanley. [Redacted text] Sunbeam designed and manufactured outdoor and household consumer products, which it marketed under the Sunbeam and Oster brand names. Sunbeam's products included small kitchen appliances, humidifiers, electric blankets, and grills. Many of the country's leading retail stores, including Wal-Mart, Target, and Home Depot, were among Sunbeam's major customers. Despite Sunbeam's well-known brands and strong customer base, its financial performance was disappointing. In 1994, Sunbeam earned $1.30 per share. In 1995, Sunbeam's earnings declined to $0.61 per share. In 1996, Sunbeam's earnings continued to suffer. On March 22, 1996, Sunbeam issued an early warning that its first quarter earnings would be well under analysts' expectations and down from first quarter 1995. Shortly after issuing the March 22 earnings warning, Sunbeam's Chief Executive Officer and two of Sunbeam's directors announced their resignations. Less than a week later, Sunbeam announced that its first quarter 1996 earnings had plunged 42% from first quarter 1995 levels. Sunbeam also announced that its second quarter 1996 earnings would be lower than its second quarter 1995 earnings. Sunbeam's disappointing earnings caused its stock price to plummet. During 1995, the price at which Sunbeam's stock traded fell 40%, from a high of $25-1/2. In 1996, Sunbeam's stock price continued to decline until it reached a low of $12-1/4 in July. *12 On July 18, 1996, Sunbeam's board of directors hired Albert Dunlap as Sunbeam's new Chief Executive Officer. Based upon brief terms as Chief Executive Officer of other publicly traded companies, including Scott Paper Company (“Scott Paper”), Dunlap was viewed as a “turnaround specialist”-that is, someone who could take a poorly performing company and significantly increase its value by “turning around” its financial performance. Because Dunlap touted the benefits from firing large numbers of employees and closing large numbers of plants, Dunlap became widely known as “Chainsaw Al .” Dunlap lived in Boca Raton, Florida, and one of his first tasks at Sunbeam was to consolidate the company's six headquarters into one located in Delray Beach, Florida. Immediately after joining Sunbeam, Dunlap hired Kersh as Sunbeam's Chief Financial Officer. Kersh had teamed with Dunlap for over 15 years, serving as a senior executive with Dunlap at other companies, including Scott Paper. Dunlap also brought in several other handpicked executives to make up his senior management team. Dunlap and his senior management team entered into employment agreements with Sunbeam. Under those agreements, Dunlap and his senior management team stood to make tens of millions of dollars if they were able to boost Sunbeam's apparent value and then sell Sunbeam to another company at a premium. [Redacted text] In order to convince other companies that they should want to purchase Sunbeam, Dunlap needed to improve Sunbeam's reported financial performance quickly and dramatically. It was, of course, no small task to transform Sunbeam from a poorly performing company, with weak sales and declining profits, into a strong company with growing sales and soaring profits. In fact, as the world later learned, Dunlap did not achieve that change in Sunbeam's fortunes. Instead, Dunlap created the illusion of a dramatic turnaround at Sunbeam by engaging in what SEC officials subsequently described as a “case study” in financial fraud. Dunlap had a three-step plan at Sunbeam. In the first step, Dunlap overstated Sunbeam's financial problems so that Sunbeam appeared to be in worse shape than it really was. After making Sunbeam look worse, Dunlap moved to step two, where he made Sunbeam look more valuable than it really was by inflating Sunbeam's sales and engaging in other earnings manipulations. In step three, Dunlap planned to sell Sunbeam to another company before it became apparent that the “improved” results were fictional. By doing so, Dunlap would make tens of millions of dollars and would be free to blame his successor for any subsequent problems. [Redacted text] Dunlap began implementing his strategy soon after his arrival at Sunbeam in 1996. Claiming to be engaged in a clean-up of Sunbeam's financial problems, Dunlap recorded artificially high reserves and booked expenses that should not have been recorded until later periods. Both of those actions made Sunbeam's financial condition appear worse than it really was, thus lowering the benchmark for measuring Sunbeam's performance in future years. *13 The overstated reserves also provided Dunlap a means by which he could inflate Sunbeam's future results during the second step of his plan. Dunlap later could “re-evaluate” and release millions of dollars from the overstated reserves to boost income in later periods. The income from released reserves contributed to the illusion of a rapid turnaround in Sunbeam's performance. Using inflated reserves to enhance income in future periods is a fraudulent practice and overstated reserves are commonly called “cookie jar” reserves. [Redacted text] After making Sunbeam look worse than it really was in 1996, Dunlap manipulated Sunbeam's sales and expenses in 1997 to create the false appearance of quarter after quarter improvement in financial performance. For example, Dunlap caused Sunbeam to inflate its sales by engaging in phony “bill and hold” sales. Under this practice, Sunbeam recognized revenues from “sales,” even though customers did not actually pay for or even take delivery of the products, which continued to sit in Sunbeam's own warehouses. Although Sunbeam recorded the “bill and hold” sales as if they were current sales, they were, in reality, simply sales stolen from future quarters. In 1997, phony “bill and hold” sales added approximately $29 million in sales and $4.5 million in income. Throughout 1997, Sunbeam also engaged in a sales practice known as “channel stuffing”-accelerating sales that otherwise would occur in a later period, sometimes by offering steep discounts or other extraordinary customer inducements. On the grand scale employed by Sunbeam, channel stuffing inevitably leads to major sales shortfalls in later periods when “stuffed” customers simply stop buying. Sunbeam's senior sales officer referred to Sunbeam's unsustainable practice of inflating performance through accelerated sales as the “doom loop.” [Redacted text] Dunlap further “enhanced” Sunbeam's income in 1997 by causing Sunbeam to record a “profit” of $10 million from a sham sale of its warranty and spare parts business. Dunlap also made Sunbeam appear to be more successful than it really was by reaching into the “cookie jar,” reversing inflated reserves, and recording $35 million as income. Sunbeam's 1997 profit margins also looked better than they really were because Dunlap already had recorded millions of dollars of 1997 expenses in 1996. In October 1997, Dunlap announced that Sunbeam's “turnaround” was complete. Compared to the third quarter of 1996, Sunbeam's third quarter 1997 performance was remarkable. In the third quarter of 1996, Sunbeam had reported a loss of $18.1 million. In the third quarter of 1997, however, Sunbeam reported earnings of $34.5 million-an extraordinary turnaround from substantial losses to hefty profits. Sunbeam's combined results for the first three quarters showed dramatic improvement as well. Sunbeam reported that its profits for the first nine months were up tenfold over the same period the year before-from $6.5 million in 1996 to $67.7 million in 1997. Sunbeam's reversal of fortune caused a spectacular increase in the price of its stock. In July 1996, when Dunlap was hired, Sunbeam's shares traded at $12-1/4. By October 1997, Sunbeam's shares had risen to $49-13/16. [Redacted text] *14 With steps one and two successfully completed, Dunlap was more than eager to complete the final step of his scheme: to sell Sunbeam to another company and collect tens of millions of dollars for himself before the outside world could learn the truth about Sunbeam's phony “turnaround.” To accomplish that third and final step, Dunlap needed an investment banking firm [Redacted text] When Dunlap announced in early 1997 that he would begin interviewing investment bankers, Morgan Stanley immediately began pursuing the job. Although Morgan Stanley had no previous relationship with Sunbeam, one of Morgan Stanley's senior executives, William Strong, had worked closely with Dunlap on other large transactions between 1986 and 1993, when Strong was employed by Salomon Brothers. Morgan Stanley knew that it was competing with other investment bankers, including Mark Davis, for Dunlap's business. Davis was the head of the mergers and acquisitions department at Chase Securities and had worked previously with Strong at Salomon Brothers. Davis had a very strong relationship with Dunlap, and Davis had served as Dunlap's investment advisor on numerous transactions, including Dunlap's sale of Scott Paper. Shortly after arriving at Sunbeam, Dunlap hired Davis to handle the sale of Sunbeam's furniture business. Morgan Stanley put together a team headed by its Vice Chairman, Bruce Fiedorek, and Strong. Beginning in April 1997, Morgan Stanley's personnel traveled to Sunbeam's offices in Delray Beach, Florida to study Sunbeam and woo Dunlap. After months of uncompensated work, in September 1997, Morgan Stanley finally persuaded Dunlap to name Morgan Stanley as Sunbeam's exclusive investment banker. Dunlap instructed Morgan Stanley to find a buyer for Sunbeam. Morgan Stanley knew that if it failed to deliver a major transaction, Morgan Stanley would not be compensated for the extensive work it had performed for Sunbeam, Morgan Stanley also knew that Davis and Chase Securities were standing by-ready and willing to reclaim their position as Dunlap's investment banker of choice. Throughout the fall of 1997, Morgan Stanley aggressively searched for a buyer for Sunbeam. Morgan Stanley put together extensive and detailed materials to use in marketing Sunbeam to potential buyers. Morgan Stanley pitched the transaction to more than 10 companies-including Gillette, Colgate, Sara Lee, Rubbermaid, Whirlpool, and Black & Decker-that Morgan Stanley hoped might have an interest in acquiring Sunbeam. Morgan Stanley, however, was not able to find a buyer. As 1998 approached, the pressure on Dunlap increased. Dunlap was aware that Sunbeam would be unable to sustain the appearance of a successful turnaround in 1998 because Sunbeam had stolen sales from 1998 to boost 1997's numbers and the “cookie jar” reserves had been depleted. Dunlap needed a way to conceal Sunbeam's phony turnaround until a buyer could be found. Morgan Stanley provided the solution to Dunlap's problem. [Redacted text ] *15 Morgan Stanley knew that its failure to find a buyer for Sunbeam could prove fatal to the relationship it had worked so hard to establish with Dunlap. As the pressure on Dunlap increased, the pressure on Morgan Stanley increased as well. Although Morgan Stanley was not able to find a buyer for Sunbeam, Morgan Stanley responded with a plan that would allow Dunlap to conceal his fraud. Morgan Stanley recommended that Sunbeam acquire other companies, using Sunbeam's stock, which was fraudulently inflated, as the “currency” that would be used to pay for the acquisitions. Morgan Stanley's strategy was doubly deceptive. First, Morgan Stanley's acquisition strategy would allow Dunlap to consolidate Sunbeam's results with those of the newly-acquired companies. That would help Dunlap camouflage Sunbeam's results and make it difficult to detect any shortfall in Sunbeam's performance. Dunlap simply could label any problems that were detected as attributable to the poor performance of the acquired companies or as a temporary “blip” caused by the distraction of integrating the acquired companies with Sunbeam. Second, Morgan Stanley's strategy would allow Dunlap to take new massive restructuring charges (purportedly relating to the acquisitions) and thus create more “cookie jar” reserves that could be tapped to bolster the future earnings of the combined companies. Morgan Stanley identified Coleman as one of the key potential acquisition targets. CPH owned 82% of Coleman's stock. Morgan Stanley searched the ranks of its investment bankers to locate those with the best access to CPH. Drawing on relationships between some of Morgan Stanley's investment bankers and senior CPH officers, Morgan Stanley set about trying to persuade CPH to sell its interest in Coleman to Sunbeam-and, most importantly, to accept Sunbeam stock as consideration. Morgan Stanley laid the groundwork for a meeting to take place in December 1997 in Palm Beach, Florida between Dunlap and Kersh and representatives of CPH. In advance of the Palm Beach meeting, Morgan Stanley provided materials to Sunbeam to prepare Sunbeam for the meeting. Morgan Stanley also met with Kersh and other Sunbeam personnel to prepare for the Palm Beach meeting. However, Dunlap nearly scuttled Morgan Stanley's carefully crafted plan at the outset. During the December 1997 Palm Beach meeting, when CPH rejected Dunlap's initial all-stock offer, Dunlap became so angry that he cursed and ranted at the CPH representatives and stormed out. [Redacted text] Dunlap's tantrum appeared to kill any chance that CPH would sell its interest in Coleman to Sunbeam. Morgan Stanley, however, worked to revive the discussions. Drawing again on Morgan Stanley's relationships with CPH officers, Morgan Stanley was able to restart the discussions with CPH with the promise that Dunlap would be kept away from the negotiating table. Thereafter, Morgan Stanley, through Managing Directors Strong, James Stynes, and Robert Kitts, led the discussions with CPH on Sunbeam's behalf. *16 Morgan Stanley knew that it had to persuade CPH not only to sell Coleman, but also to accept Sunbeam stock-ultimately, 14.1 million shares of Sunbeam stock-as a major part of the purchase price. During the course of negotiations, Morgan Stanley prepared and provided CPH with false financial and business information about Sunbeam designed to create the appearance that Sunbeam was prospering and that Sunbeam's stock had great value. For example, Morgan Stanley provided CPH with false 1996 and 1997 sales and revenue figures, as well as false projections that Sunbeam could not expect to achieve. Together, in face-to-face discussions, Morgan Stanley and Sunbeam assured CPH that (a) Sunbeam would meet or exceed its first quarter 1998 earnings estimates; (b) analysts' 1998 earnings estimates for Sunbeam were correct; and (c) Sunbeam's plan to earn $2.20 per share in 1998 was easily achievable and probably low. Morgan Stanley and Sunbeam also falsely assured CPH that Sunbeam's “early buy” sales program would not hurt Sunbeam's future revenues. However, the “early buy” program was one of Sunbeam's revenue acceleration programs-and the devastating effects of Sunbeam's revenue acceleration programs already had begun to materialize at Sunbeam. Sunbeam's January and February 1998 sales were down drastically, although those results were not disclosed to CPH or the public. To the contrary, Morgan Stanley and Sunbeam together specifically advised CPH that Sunbeam's first quarter 1998 sales were “tracking fine” and running ahead of analysts' estimates. [Redacted text] On February 27, 1998, Sunbeam's Board of Directors met at Morgan Stanley's offices to consider the purchase of Coleman, as negotiated by Morgan Stanley. At the February 27, 1998 meeting, Morgan Stanley made an extensive presentation to Sunbeam's Board concerning the proposed transaction. Numerous Morgan Stanley representatives, including Managing Directors Strong, Kitts, Stynes, Ruth Porat, and Vikram Pandit, attended the meeting. Morgan Stanley presented Sunbeam's board with Morgan Stanley's opinion on the value of Coleman. Using a discounted cash flow analysis, which Morgan Stanley represented was the best gauge of stand-alone economic value and the best method of capturing the unique value of Coleman, Morgan Stanley valued CPH's Coleman stock at a range of $31.06 to $53.24 per Coleman share. CPH's 44,067,520 Coleman shares were worth, therefore, between $1.369 billion and $2.346 billion. Following Morgan Stanley's presentation, Sunbeam's Board of Directors voted to acquire Coleman on the very favorable terms that Morgan Stanley had negotiated. [Redacted text] Morgan Stanley spent the following weekend developing Sunbeam's public relations strategy to announce the Coleman transaction. Morgan Stanley scripted the points for Dunlap to make in a conference call with analysts. Morgan Stanley also crafted a list of “key media messages” for Dunlap to use in his communications with the press. On Sunday, March 1, 1998, Morgan Stanley spoke with a reporter for the Wall Street Journal to inform him that Sunbeam would announce its acquisition of Coleman the following morning. *17 Sunbeam announced its acquisition of Coleman on Monday, March 2, 1998, prior to the opening of the financial markets. Consistent with Morgan Stanley's valuation, investors viewed Sunbeam's purchase of Coleman-and the price that Sunbeam had paid-very favorably. The day before the acquisition was announced, Sunbeam's stock closed at $41-3/4. In the days following Sunbeam's announcement of the transaction, Sunbeam's stock rose approximately 25%, to a high of $52. [Redacted text] Dunlap knew that Sunbeam needed to raise funds to pay the cash portion of the acquisition consideration. Dunlap also knew that Sunbeam needed cash to purchase two other smaller companies in addition to Coleman. Morgan Stanley recommended that Sunbeam raise funds through a $500 million offering of convertible subordinated debentures. To assure the offering's success, Morgan Stanley lent its name to the offering. Indeed, Morgan Stanley agreed to serve as the sole underwriter for the offering. The money raised from the sale of the debentures was used by Sunbeam to complete the acquisition of Coleman. Unbeknownst to CPH or the public, Sunbeam's first quarter 1998 sales were a small fraction of the financial community's expectations for the quarter. If Dunlap could consolidate Sunbeam's sales with Coleman's sales, Dunlap knew that he could obscure Sunbeam's actual first quarter sales. As a result, Dunlap was especially anxious to complete the acquisition of Coleman before Sunbeam announced its first quarter 1998 sales. Indeed, the success of the scheme depended upon Sunbeam's ability to complete the Coleman acquisition before Sunbeam's first quarter results were announced. To satisfy Dunlap's objectives, Morgan Stanley moved up the launch date of the offering. The debentures were marketed to investors at a series of “road show” meetings and conference calls arranged by Morgan Stanley. Morgan Stanley prepared and distributed a memorandum for its sales force to use in marketing the debentures to investors. Morgan Stanley also developed the script for Dunlap and Kersh to deliver during the road show. In those materials, Morgan Stanley misrepresented Sunbeam's financial performance and emphasized Dunlap's purported “turnaround” accomplishments. Morgan Stanley launched the debenture offering with a research analyst presentation to the Morgan Stanley sales force. As part of Morgan Stanley's growing relationship with Sunbeam, one of Morgan Stanley's top-rated research analysts planned to initiate equity coverage of Sunbeam. That Morgan Stanley analyst had modeled values for Sunbeam's acquisition of Coleman that were higher than even Sunbeam's management had predicted. Although Morgan Stanley initially planned to sell $500 million worth of debentures, Morgan Stanley's efforts were so successful that the size of the offering was increased to $750 million on March 19, 1998-the day of the last road show. The debentures were sold to investors nationwide, including investors based in Florida. [Redacted text] *18 As Sunbeam's investment banker and the sole underwriter for the debenture offering, Morgan Stanley had a duty to investigate Sunbeam's finances and business operations. Morgan Stanley, which had been working hand-in-hand with Sunbeam for almost a year and had traveled to Sunbeam's Florida offices, repeatedly asserted that it had satisfied that duty. Strong, who was one of the senior Morgan Stanley investment bankers involved, has admitted in sworn testimony that he may have had more than 100 telephone conversations with Dunlap and Kersh (whose offices were in Sunbeam's Delray Beach headquarters) and that Strong was “sure” that he would have been apprised of Sunbeam's financial performance during the first two months of 1998. With the $750 million debenture offering and the Coleman transaction set to close at the end of March 1998, Sunbeam's Florida-based outside auditors were shocked that Morgan Stanley had not asked them about Sunbeam's financial performance for first quarter 1998. Sunbeam's auditors were alarmed because Sunbeam's first quarter results were a disaster, but Dunlap, Kersh, and Morgan Stanley were telling CPH and the investing public, [Redacted text] that Sunbeam's turnaround was a success, that Sunbeam's sales for the first quarter of 1998 were ahead of the expectations of outside financial analysts, and that Sunbeam was poised for record sales. On March 17, Sunbeam's auditors forced the issue. From their Florida offices, Sunbeam's auditors sent Morgan Stanley a letter reporting that Sunbeam's net sales through January 1998 were down 60%-$28 million in January 1998, as compared to $73 million in January 1997. The March 17 letter explained that the decline was “primarily due to the ... new early buy program for grills which accelerated grill sales into the fourth quarter of fiscal 1997.” The next day, Morgan Stanley was faxed a schedule from Sunbeam's Florida office that showed that Sunbeam's January and February 1998 net sales totaled $72 million, an amount that was 50% lower than Sunbeam's January and February 1997 net sales of $143.5 million. Based on information that Sunbeam and Morgan Stanley had disseminated, Wall Street analysts were anticipating that Sunbeam's first quarter 1998 net sales would be in the range of $285 million to $295 million. Sales in that range would have been approximately 15% higher than first quarter 1997 sales. Sunbeam's January and February 1998 sales, however, totaled barely 25% of $285 million. As Sunbeam's outside auditors advised Morgan Stanley in writing, the sales drop-off was caused by Sunbeam's sales acceleration program. The information put into Morgan Stanley's hands on March 17 and March 18 showed that Morgan Stanley's and Sunbeam's assertions to CPH and other investors were false. Contrary to what Morgan Stanley and Sunbeam had represented, Sunbeam had not undergone a successful turnaround, Sunbeam's financial performance had not dramatically improved, and Sunbeam's performance in 1998 was not better than Wall Street analysts' expectations. It was imperative, therefore, that the truth be kept from CPH until the Coleman transaction closed at the end of March 1998. [Redacted text] *19 Morgan Stanley did not disclose Sunbeam's disastrous first quarter, Morgan Stanley did not insist that Sunbeam disclose its disastrous first quarter, Morgan Stanley did not correct any of the false and misleading statements it and Sunbeam had made to CPH about Sunbeam's business or performance, and Morgan Stanley did not suspend any of the critical transactions that were scheduled to close in the next two weeks. Instead, with Morgan Stanley's knowledge and assistance, Sunbeam prepared and issued a false press release on March 19, 1998 that affirmatively misstated and concealed Sunbeam's true condition. The March 19, 1998 press release stated: “Sunbeam Corporation ... said today that it is possible that its net sales for the first quarter of 1998 may be lower than the range of Wall Street analysts' estimates for $285 million to $295 million, but net sales are expected to exceed 1997 first quarter net sales of $253.4 million.... The shortfall from analysts' estimates, if any, would be due to changes in inventory management and order patterns at certain of the Company's major retail customers. The Company further stated that based on the strength of its new product offerings and powerful brand names, it remains highly confident about the overall sales outlook for its products for the entire year.” As Morgan Stanley was fully aware, the March 19, 1998 press release was false, misleading, and failed to disclose material information. The March 19, 1998 press release failed to disclose Sunbeam's actual January and February 1998 sales or the true reasons for the poor results. Instead, the press release held out the false possibility that Sunbeam still could achieve sales of $285 million to $295 million and suggested that, if any shortfall occurred, that shortfall would be due to the fact that certain retailers had decided to defer first quarter purchases to the second quarter. The press release also assured that Sunbeam at least would exceed first quarter 1997 net sales of $253.4 million Based on information that Morgan Stanley had in its hands on March 18, 1998, it was obvious that Sunbeam would not achieve sales of $285 million to $295 million and that Sunbeam's first quarter 1998 sales would be below its first quarter 1997 numbers. To simply meet 1997 first quarter sales, Sunbeam needed sales of $123.3 million over the 12 remaining days of the quarter-an average of $10.28 million per day. Sales of $10.28 million per day would be 306% more than the average per day sales in March 1997, and 281% more than the average per day sales for the first 17 days of March 1998. Furthermore, Morgan Stanley knew that the shortfall from analysts' estimates was not caused by retailers' deciding to defer purchases from the first quarter of 1998 to the second quarter, as the press release indicated. Rather, as Sunbeam's outside auditors had advised Morgan Stanley in writing, the collapse in first quarter sales was caused by Sunbeam's acceleration of 1998 sales into the fourth quarter of 1997. *20 After Sunbeam's false press release was issued, Morgan Stanley stood arm-in-arm with Sunbeam while Dunlap and Kersh told CPH, analysts, and investors that the March 19, 1998 release was a purely cautionary statement because some first quarter 1998 sales might simply “spillover” into the second quarter and that Sunbeam still believed that it actually would meet analysts' estimates of $285 million to $295 million in first quarter 1998 sales. Morgan Stanley knew that a full and truthful disclosure of Sunbeam's first quarter sales would doom the debenture offering, which was scheduled to close on March 25, 1998, [Redacted text] As Morgan Stanley was fully aware, the written contract between CPH and Sunbeam gave CPH the express legal right to refuse to close the sale if there was a material adverse change in Sunbeam's “business, results of operation or financial condition.” [Redacted text] Furthermore, if the transactions did not close, Morgan Stanley would not be paid its $10.28 million fee for the Coleman acquisition or its $22.5 million fee for underwriting the subordinated debenture offering. Morgan Stanley also knew that Sunbeam would promptly replace Morgan Stanley with another investment banking firm-such as the Chase Securities team led by Mark Davis. Sunbeam's outside auditors already had made it perfectly clear to Morgan Stanley that Sunbeam's first quarter 1998 sales were a disaster, [Redacted text] One of Sunbeam's senior outside auditors, Lawrence Bornstein, has testified under oath that on March 19, 1998, he told Morgan Stanley's John Tyree that the statement in Sunbeam's March 19, 1998 press release-that Sunbeam would at least exceed first quarter 1997 sales of $253.4 million-was not credible: “Just do the math ... they've done a million dollars in sales the first 70 days of the year and now they need to do $10 million worth of sales for the next ... I think it was 11 days ... I mean, something ridiculous.” Bornstein also told Tyree: “I've been to every shipping dock domestically, I've been to Hattiesburg, I've been to Neosho, I've been to Mexico City, and I don't think these guys can physically ship this much stuff.” [Redacted text] Morgan Stanley knew that the March 19 press release was false and misleading. Despite that knowledge and Bornstein's explicit statements, Morgan Stanley continued with its preparations to close the debenture offering on March 25, 1998 and the Coleman acquisition on March 30, 1998. As part of those preparations, on March 24, 1998, Morgan Stanley's Tyree spoke by telephone with Sunbeam's Kersh, who was located in Sunbeam's Delray Beach offices, to obtain an updated report concerning Sunbeam's first quarter performance. By the time of that March 24, 1998 call, Sunbeam had fallen even further behind first quarter 1997 sales. As of March 18, 1998, Sunbeam needed to achieve average sales of $10.28 million per day, over 12 days, to reach first quarter 1997 sales. Sunbeam's sales between March 18 and March 24, 1998 had averaged only $6.81 million per day-well short of the $10.28 million per day that Sunbeam needed to achieve. Sunbeam's March 18 through March 24, 1998 sales were further proof that Sunbeam's March 19, 1998 press release was false and that Sunbeam would not achieve first quarter 1998 sales in excess of first quarter 1997 sales. *21 Morgan Stanley also knew no later than March 25, 1998, if not much earlier, that Sunbeam's earnings for the first quarter of 1998 were going to miss Wall Street analysts' earnings expectations, which were in the range of $0.28 to $0.31 per share (excluding one-time charges). Sunbeam's outside auditors advised Morgan Stanley on March 25 that Sunbeam had suffered a $41.19 million loss during the first two months of 1998, including a one-time charge of $30.2 million. Even excluding that one-time charge, Sunbeam's loss for the first two months was $0.13 per share. To achieve first quarter 1998 operating earnings of $0.28 per share, which were at the low end of analyst expectations, Sunbeam needed to realize a profit of $35.5 million during March 1998 alone. A net profit of $35.5 million in March was 500% more than Sunbeam's net profit for the entire first quarter of 1997. In fact, Sunbeam's first quarter 1998 earnings fell far short of Wall Street's expectations. Sunbeam's first quarter earnings were material, [Redacted text] Having directly participated in misleading CPH [Redacted text] Morgan Stanley had a duty to disclose the true facts before the closing of the debenture offering and the Coleman acquisition. Morgan Stanley also could have required Sunbeam to postpone the closings of those transactions until the necessary disclosures were made. Morgan Stanley did neither. Instead, Morgan Stanley marched forward and closed the $750 million debenture offering on March 25, 1998, which was needed to close the Coleman transaction, and assisted Sunbeam in closing the acquisition of Coleman on March 30, 1998. Morgan Stanley received $22.5 million for the subordinated debenture offering and $10.28 million for the Coleman acquisition. Morgan Stanley would have received nothing if the transactions had failed to close. [Redacted text] On April 3, 1998-just four days after the Coleman transaction closed-Sunbeam announced that sales for the first quarter of 1998 would be approximately 5% below the $253.4 million in sales that Sunbeam reported in the first quarter of 1997. In other words, Sunbeam was expecting sales in the range of $240 million. That sales shortfall was shocking news, particularly in view of assurances provided by Sunbeam both in and after its March 19, 1998 press release that $285 million to $295 million of sales was still a real possibility. The April 3, 1998 press release also disclosed that Sunbeam expected to show a loss for the quarter, although the release did not disclose the magnitude of the loss or how much of the loss was attributable to operating earnings as opposed to one-time charges. Sunbeam's news stunned the market. On April 3rd, Sunbeam's stock price dropped 25%-from $45-9/16 to $34-3/8. Sunbeam's actual first quarter 1998 performance was even worse than Sunbeam disclosed on April 3, 1998. The April 3, 1998 release indicated that Sunbeam's first quarter sales were in the range of $240 million. In fact, Sunbeam's first quarter sales were $224.5 million. Sunbeam obscured the true shortfall by extending its quarter from March 29 to March 31, 1998-thereby adding two more days of Sunbeam sales. Sunbeam also failed to disclose that it had included two days of Coleman sales after the Coleman transaction closed on March 30. Further, Sunbeam inflated first quarter 1998 sales with $29 million of new phony “bill and hold” sales. *22 Just as Sunbeam's first quarter 1998 sales had been a disaster, so, too, were Sunbeam's first quarter 1998 earnings. Morgan Stanley and Sunbeam had represented to CPH that Sunbeam would achieve or exceed analyst first quarter 1998 earnings estimates. At the time of that representation, the consensus among analysts was that Sunbeam would enjoy first quarter 1998 earnings of $0.33 per share. However, on May 9, 1998, Sunbeam disclosed that it would record a first quarter loss of $0.09 per share (excluding one-time charges)-more than $0.40 per share lower than CPH had been told to expect. Within weeks, Dunlap's fraudulent scheme began to unravel. In June 1998, after a number of news articles critical of Sunbeam's practices, Sunbeam's Board of Directors launched an internal investigation. That investigation led quickly to the firing of Dunlap and Kersh, and, subsequently, to a restatement of Sunbeam's financial statements for 1996, 1997, and the first quarter of 1998. [Redacted text] As detailed above, Morgan Stanley participated in a scheme to mislead CPH and others and cover up the massive fraud at Sunbeam until Morgan Stanley and Sunbeam could close the purchase of Coleman. Morgan Stanley provided CPH with false information concerning Sunbeam's 1996 and 1997 financial performance, its business operations, and the value of Sunbeam's stock. Morgan Stanley also actively assisted Sunbeam in concealing Sunbeam's disastrous first quarter 1998 sales and earnings and the true reasons for Sunbeam's poor performance. Morgan Stanley knew that its statements to CPH were materially false and misleading and omitted the true facts. Morgan Stanley intended that CPH rely on Morgan Stanley's representations concerning Sunbeam. [Redacted Text] As detailed above, Dunlap engaged in a fraudulent scheme to inflate the price of Sunbeam's stock by improperly manipulating Sunbeam's 1996 and 1997 performance, by falsely asserting that Sunbeam had successfully “turned around,” and by concealing the collapse of Sunbeam's first quarter 1998 sales and earnings and the reasons for Sunbeam's first quarter 1998 performance. As detailed above, Morgan Stanley knew of Dunlap's fraudulent scheme and helped to conceal it until after Sunbeam could close the purchase of Coleman. As detailed above, Morgan Stanley provided substantial assistance to Dunlap and Sunbeam, including: concealing Sunbeam's first quarter 1998 sales collapse; assisting with the false March 19, 1998 press release; arranging road shows and meetings with prospective debenture purchasers at which Morgan Stanley, Dunlap, and others made false statements concerning Sunbeam's financial condition and business operations; preparing and disseminating the preliminary and final offering memoranda for the subordinated debenture offering, both of which contained false information concerning Sunbeam's financial condition and business operations; providing CPH with false financial and business information concerning Sunbeam; scripting Dunlap's false public statements concerning Sunbeam's acquisition of Coleman; [Redacted text] and underwriting the $750 million convertible debenture offering, proceeds from which were used to fund Sunbeam's purchase of Coleman. *23 As detailed above, Morgan Stanley conspired with Dunlap and other senior Sunbeam executives to conceal the truth about Sunbeam's financial performance and business operations. [Redacted text] As detailed above, Morgan Stanley committed overt acts in furtherance of the conspiracy, including: concealing Sunbeam's first quarter 1998 sales collapse; assisting with the false March 19, 1998 press release; arranging road shows and meetings with prospective debenture purchasers at which Morgan Stanley, Dunlap, and others made false statements concerning Sunbeam's financial condition and business operations; preparing and disseminating the preliminary and final offering memoranda for the subordinated debenture offering, both of which contained false information concerning Sunbeam's financial condition and business operations; providing CPH with false financial and business information concerning Sunbeam; scripting Dunlap's false public statements concerning Sunbeam's acquisition of Coleman; [Redacted text] and underwriting the $750 million convertible debenture offering, proceeds from which were used to fund Sunbeam's purchase of Coleman. Footnotes [1] On February 17, 2005, CPH served its First Amended Complaint, which dropped the claims against MS & Co. for fraudulent and negligent misrepresentation, leaving only the aiding and abetting and conspiracy claims. [2] Complaints about MS & Co.'s tactics are not new. See Ex. 196 [February 26, 2004, letter from EEOC to Hon. Ronald L. Ellis in EEOC/Schieffelin v. Morgan Stanley & Co., Inc., et al., 01-CV-8421 (RMB)(RLE) (S.D.N.Y.) (“(w)hen EEOC received [Morgan Stanley's] January 27, 2004 Responses to EEOC's Fifth Requests for Production of Documents which did not contain any e-mails, the parties communicated further. At that time, Morgan Stanley took the position that searching for e-mails would be burdensome both in regards to expense and the time it would take to respond. While the parties were in the process of attempting to work out these disputes, EEOC for the first time learned that [Morgan Stanley has] an easy, systematic ability to search for relevant documents. In a February 16, 2004, conversation with an IT representative of [Morgan Stanley], EEOC learned that [Morgan Stanley has] an e-mail system, which, while not yet fully comprehensive, was easily searchable on February 18, 2004, the close of discovery ... which is certain to produce discoverable information highly relevant to EEOC's and Plaintiff-Intervenor's claims ... After disclosing their state-of-the-art system to EEOC, [Morgan Stanley] dropped [its] assertion that the process was too expensive, but maintained that they refuse to search for e-mails because it is burdensome for attorneys to review large numbers of documents prior to production.”) [3] Saunders provided misleading information in his deposition. See footnote 12, infra. [4] Though CPH would not learn for months that the certificate was false, and even then the magnitude of MS & Co.'s misrepresentations would not be admitted, MS & Co. personnel, including in-house counsel, knew the certification of compliance was false when made. [5] Not only does this letter fail to answer Brody's legitimate questions, it implies that MS & Co. was still processing and reviewing emails from the newly found tapes. As we now know, though, no additional information was migrated to the archives between approximately August 18, 2004 and January 15, 2005. Of course “no additional responsive e-mails [would have been] located.” [6] Concerned that MS & Co. had been less than candid with both CPH and the Court, on February 4, 2004, the Court entered its Order on Coleman (Parent) Holding's ore tenus Motion to Participate in Search of Additional E-Mail Backup Tapes or Appoint Third Party to Conduct Search, ordering MS & Co. to pay for a third party vendor to check its compliance with the Agreed Order. The Court previously found that the two scripts errors testified to by Allison Gorman at the February 14, 2005, hearing would not have been discovered or revealed without the threat that the third-party vendor would discover the errors. Given Ms. Gorman's testimony at the March 14, 2005, hearing, though, it now appears MS & Co. knew about the errors before the appointment of the third-party vendor. Consequently, the errors were only revealed, but not discovered, in response to the February 4, 2004, Order. [7] On December 17, 2003, CPH served its Third Request for Production seeking “(a)ll materials and documents submitted to the United States Securities and Exchange Commission (“SEC”), received from the SEC, or reflecting communications with the SEC in connection with any investigation, inquiry, or examination concerning or relating to Morgan Stanley's policies and/or procedures with regard to the retention, storage, deletion, and/or back-up of electronic mail (emails) ...” On October 12, 2004, CPH served its Request for Supplemental Documents seeking to bring MS & Co.'s document production current, requesting “(a)ll documents not previously provided by MS & Co. that are responsive to any Request for Production of Documents that CPH previously has served upon MS & Co. in the litigation, including documents obtained by MS & Co. or its counsel after the date of MS & Co.'s prior productions.” No SEC documents were produced in response to either request; no privilege log was generated. On other privilege logs generated in response to court orders, MS & Co. did not show the SEC on the distribution portion of the log. See March 9, 2005 Order Following in Camera Inspection (Riel/SEC Documents) footnotes 1, 2. See, also, footnote 15, infra. Kirland & Ellis, outside counsel for MS & Co. in this litigation, represents MS & Co. in the SEC's inquiry into its email retention practices. [8] MS & Co. manipulated the unhinging of the SEC's email investigation from the IPO litigation in January, 2005, to conceal the email issues as long as possible. [9] It is now apparent that MS & Co. chose deliberately to keep its affidavits concerning the informal SEC inquiry submitted to support its privilege claims vague, despite two requests from the Court seeking specific information. See February 28, 2005 Order (Release of Exhibits). [10] See February 25, 2005 Order on Morgan Stanley's Objections to Coleman (Parent) Holding Inc.'s Notice to Produce at Hearing and Motion for Protective Order and March 4, 2005 Order on Plaintiff's ore tenus Motion to Compel Additional Production. [11] While MS & Co. contends that its representations to the Court that it would cost “hundreds of thousands of dollars” to search the backup tapes and that there was no pre-2000 backup tapes were not false, they were deliberately misleading: MS & Co. never had an intention to search the back up tapes to respond to the requests and some of the year 2000 backup tapes backed up email back to 1997. In 2001, MS & Co. decided to create the email archive. By June,2003, it had decided that the archive should have two components. First, MS & Co. wanted to create an archive that captured and stored email as it was generated. Second, MS & Co. wanted to add historical data to the archive. That task involved searching for all email backup tapes containing historical emails; sending those tapes to an outside processor; loading the processed tapes into a staging area; and migrating the stored data from the staging area onto the archive. As we now know, archive searches are quick and inexpensive. They do not cost “hundred of thousands of dollars” or “take several months.” The restrictions imposed by the Agreed Order were not needed. [12] On February 10, 2004, Robert Saunders, an executive director of IT for MS & Co., was deposed. He testified that in January, 2003, MS & Co. had put into effect the email archive system. When specifically asked whether the new email archive system would include prior backups or only going forward backups, he testified that “(t)he way it was built was for going forward backup.” He was next asked whether “(w)ith respect to backup dated January 2001 and previously, does Morgan Stanley have any new capabilities to restore and search e-mail?” After counsel interposed a vagueness objection, he answered “(t)here are no new capabilities to search that e-mail.” That testimony was so misleading as to be false. As Sauders well knew, since he was on the team responsible, the “live” email capture portion of the archive was already operational. The migration of the historical data to the archive was expected to be completed by April of 2004, just two months after his deposition. [13] MS & Co. sought to use the entry of the Adverse Inference Order as a shield against further inquiry into its email abuses, arguing that the matter was closed by the Adverse Inference Order. It previously used this tactic with the SEC, arguing that the December 3, 2003 Cease and Desist Order shielded it from other sanctions for email retention failures. See Ex. 14 [February 10, 2005 letter from outside counsel for MS & Co. to SEC] [14] MS & Co. argued at the March 14 and 15, 2005 hearing that there were only 13 unique, new emails contained in the November 2004 production when compared to the May 2004 production. Nine of those emails, however, were originally given to MS & Co.'s lawyers for responsiveness review by the IT staff for the May 2004 production. No explanation of why they were not produced in May was offered. This is particularly concerning given the large number of documents Ms. Gorman testified the search parameters found compared with the relatively small number found responsive and produced after review by counsel. [15] The Court previously rejected MS & Co.'s argument that the January 14, 2005, email exchange between its outside and in-house counsel was not required to be produced under the February 3, 2005, Order Specially Setting Hearing because it referred to the “documents issue” and not specifically to the backup tapes. See March 16, 2005 Order on Morgan Stanley's Motion to Disqualify Plaintiff's Counsel Searcy, Denney, Scarola, Barnhart & Shipley, P.A. and Jenner & Block, LLC. MS & Co.'s insistence on a narrow interpretation of the February 3, 2005, Order is not particularly sympathetic, when the only reason that Order confined production to the backup tape issue was because MS & Co. had failed to notify the Court of the other deficiencies in its certificate of compliance. [16] MS & Co. originally argued that documents concerning the Italian proceedings were not in Strong's “personnel file” and so were not required to be produced in response to CPH's initial request. MS & Co.'s practice of filing damaging information about an employee other than in his personnel file and then claiming it was not included in the request is about at convincing as its argument that, since it has a corporate directive not to keep drafts of documents once they are in final form, document drafts cannot be business records exempt from hearsay because they are not “kept in the course of a regularly conducted business activity.” See Fla. Stat. § 90.803(6)(a). In any event, there was no excuse for not producing its records of the Italian proceedings once the Court's March 15, 2004 Order was entered. [17] For example, MS & Co. produced over 260 documents dealing with the Strong investigation over which it had previously claimed privilege once the Court announced its intention to conduct an in camera review; the Court found another 200 documents were not privileged after conducting its review, by its March 10, 2005 Order.