Shredded: Justice for BAT
The latest major blow against the tobacco industry has been struck in
Australia.
There, a judge has concluded that British American Tobacco (BAT) has
engaged in a massive document-destruction scheme intentionally designed
to thwart smokers or former smokers from successfully bringing suit against
the company.
The judge found the document destruction to be so serious that he directed
a verdict for the plaintiff in the case before him, a 51-year-old Australian
woman named Rolah Ann McCabe, without permitting BAT to mount a defense.
In a 133-page decision issued in March but made public in April, Judge
Geoffrey Eames details an elaborate, carefully considered, company-wide
document-destruction scheme. The terms of the [BAT] Document Retention
Policy and the program of destruction of documents ... were the product
of advice, decision and supervision by an army of litigation lawyers from
several countries, the judge found.
That document retention policy was actually a policy to systematically
shred documents that might hurt the company in litigation, with an eye
to prospective lawsuits anywhere in the world, especially the United States.
The policy was designed to provide cover for the shredders, offering
the excuse that materials were consigned to the dustbin to save space
and for administrative convenience.
Here is what the policy said about its purpose: The Program is
not a way of ensuring destruction of damaging records or retention
of helpful records. Records will be treated as a series, in
large blocks. It is not the intention to spring clean the
files to remove or retain records on a selective basis. Any such action
would prevent the Program from passing judicial scrutiny.
Here is what the judge said about this statement of purpose: That
paragraph is a lawyers attempt to disguise the reality, which is
that the primary purpose for the reduction of documents was to impede
the prospects of success of any plaintiff who brought proceedings against
the defendant. ... The paragraph constitutes a clumsy and self-serving
attempt to declare innocence but at the same time, in my opinion, demonstrates
the clear purpose behind the program.
The predominant purpose of the document destruction, the
judge found, was the denial to plaintiffs of information which was
likely to be of importance in proving their case, in particular, proving
the state of knowledge of the defendant of the health risks of smoking,
the addictive qualities of cigarettes and the response of the defendant
to such knowledge.
Key documents included reports, memoranda and other materials specifying
what the company knew about the addictiveness of nicotine and when it
knew it, what it knew about health impacts of smoking and when it knew
it, and matters relating to marketing cigarettes to children, among other
topics.
BATs Australian subsidiary first put into place the shredding policy
in 1985, the judge found. Following some corporate shuffling of affiliates
and subsidiaries in 1989, BAT instituted a policy in which all sensitive
documents more than five years old were shredded, with no records kept
of which documents were shredded, but with copies kept offshore,
including by the companys law firms.
Legal proceedings began against BATs Australian subsidiary in 1990,
at which point a hold order blocked document shredding. The company was
a defendant in various lawsuits from 1990 until 1998, during which time
shredding may have stopped, though the judge expresses skepticism about
this claim.
In February 1996, Phyllis Cremona brought suit against BAT in Australian
courts. In the course of the discovery phase of that litigation, BATs
subsidiary identified 30,000 documents as possibly relevant to the proceeding.
With a few exceptions, BAT scanned all of the documents, creating electronic
versions. Company lawyers also indexed and summarized virtually all of
the documents. The lawyers rated each document on a scale of one to five,
according to how damaging each was likely to be to the company in litigation.
A rating of five meant the document was a knockout against
the company, a rating of one a knockout for BAT.
Only about 200 of the documents were requested by the plaintiff in the
Cremona case.
When the Cremona case ended and with no pending litigation, BATs
chief counsel told an associate, now is a good opportunity to dispose
of documents if we no longer need to keep them. That should be done outside
the legal department.
Thousands of the 30,000 documents were then destroyed. Also destroyed
were the electronic versions of the documents, the summaries, the indices
and the ratings.
The process of destruction of documents in which the defendant
engaged included destruction of CD Roms on which they were all imaged,
the judge wrote. There was no factor of storage space which caused
that.
The decision to destroy all such lists and records, the judge
concluded, can only have been a deliberate tactic designed to hide
information as to what was destroyed.
In 2001, the McCabe litigation commenced. In the course of discovery,
the plaintiffs lawyers requested a range of materials which it appears
would have included many of the documents in the Cremona database, but
which were destroyed after that cases completion.
Rather than acknowledge the destruction of the documents, however, BAT
lawyers engaged in a series of obfuscations and delaying tactics. The
judge found that the BAT lawyers misled both the court and the plaintiffs
lawyers, though eventually through persistent questioning the document-destruction
scheme was revealed.
BAT defended, and continues to defend, the shredding on the grounds that
the company was not obligated to hold on to documents that may be useful
to an opposing party in some future litigation. With no litigation pending
after the Cremona case, document destruction was proper, the company claims.
But the judge stated that while corporations are not obligated to store
documents indefinitely, they are not free to destroy them in anticipation
of future litigation. In BATs case, the company and its lawyers
viewed future litigation as a virtual certainty, the judge
held. At all times those who took the decisions about the implementation
of the policy regarded future proceedings to be not merely likely, but
to be a near certainty, Judge Eames wrote. It was that certainty
which meant that any opportunity to destroy documents which arose by virtue
of the elimination of current proceedings was to be seized upon.
The effect of the document destruction was to deny McCabe and
any other potential plaintiff a fair trial, the judge concluded.
The defendant intended that by the destruction of documents any
plaintiff in the position of the present plaintiff would be prejudiced
in the conduct of their action, both generally and, in particular, in
the ability to lead relevant evidence or to cross examine witnesses. It
was intended by the defendant that any such plaintiff would be denied
a fair trial.
The judge concluded that the exact prejudicial effect to McCabe was unknowable
since the prejudice to the plaintiff might be immense by
virtue of the deliberate destruction of one document, which might have
been decisive in her case but potentially extreme. Accordingly,
the judge issued a ruling in favor of McCabe, without permitting BAT to
mount a defense.
A jury issued an award of more than $350,000. With their client likely
to die at any time, McCabes lawyers had agreed before trial that
no punitive damages would be sought, in order to expedite the trial.
BAT has said it will appeal the judges decision.
The potential implication of the decision is enormous. While Judge Eames
decision will have no binding effect in future cases, other judges, confronted
with the same evidentiary problems as in the McCabe case, are likely to
consider following Eames example. BAT may find itself in Australia
facing the flood of litigation it long feared, but without the ability
to defend itself.
The decision also has potential implications in the United States, especially
because Judge Eames found that U.S. lawyers for BAT both company
counsel and the Kansas City tobacco firm of Shook Hardy and Bacon
played a critical role in directing the document destruction.
Robert Weissman
Enron Associates
The fraud perpetrated by Enron and its auditors succeeded because of
the active complicity of several prominent banks and law firms, according
to a 485-page lawsuit filed in federal court in Houston in April.
The University of California, the lead plaintiff in the Enron shareholders
lawsuit, added nine financial institutions, two law firms and other new
individual defendants to a list that already included 29 current and former
Enron executives and the accounting firm of Arthur Andersen LLP.
The 485-page amended complaint lays out the alleged scheme in detail,
naming J. P. Morgan Chase, Citigroup, Merrill Lynch, Credit Suisse First
Boston, Canadian Imperial Bank of Commerce (CIBC), Bank America, Barclays
Bank, Deutsche Bank and Lehman Brothers as key players in a series of
fraudulent transactions that ultimately cost shareholders more than $25
billion.
Two law firms were also added to the list of Enron defendants because
of their alleged involvement in the fraud Enrons Houston-based
corporate counsel Vinson & Elkins, as well as Chicago-based Kirkland
& Ellis, which Enron used to represent a number of special purpose
entities.
These prestigious banks and law firms used their skills and their
professional reputation to help Enron executives shore up the companys
stock price and create a false appearance of financial strength and profitability
which fooled the public into investing billions of dollars, says
James E. Holst, the universitys general counsel. In return,
these firms received multi-million-dollar fees, and some of their top
executives exploited the situation to cash in personally.
Lawyers for the University of California acknowledged that they added
the financial institutions and law firms as defendants in the case because
they are searching for defendants who have assets to pay aggrieved shareholders.
Enron has declared bankruptcy, and Andersen is teetering of the verge
of collapse.
The new defendants deny any culpability in the Enron scandal.
We believe there is no basis for their claim and we intend to vigorously
defend against it, a Merrill Lynch spokesperson told Reuters.
In a statement, Vinson & Elkins said, As we have said from the
beginning, we are confident that there is no legitimate basis, either
in the facts or in the law, to include Vinson & Elkins in this litigation.
Legal analysts said the Enron shareholders will face an uphill climb
winning a verdict against the new defendants, because a 1994 U.S. Supreme
Court decision establishes that aiders and abettors are not
liable under anti-fraud provisions of the securities laws unless they
actively participate in the fraud.
But the shareholders allege the evidence shows the banks and law firms
were indeed active partners in the scam.
Many of the financial institutions named in the complaint allegedly helped
to set up clandestinely controlled Enron partnerships, used offshore companies
to disguise loans and facilitated the phony sale of overvalued Enron assets.
As a result, the University of California charges, Enron executives were
able to deceive investors by moving billions of dollars of debt off its
balance sheet and artificially inflating the value of Enron stock.
For their part, the law firms allegedly issued false legal opinions,
helped structure non-arms-length transactions, and helped prepare
false submissions to the U.S. Securities and Exchange Commission.
The amended complaint describes the banks role in the scheme as
a hall of mirrors inside a house of cards. While bank executives
were helping conceal the true state of Enrons precarious financial
condition, securities analysts at the same banks were making false, rosy
assessments of Enron to entice investors, according to the complaint.
As underwriters in the sales of Enron securities, the banks also allegedly
misled the public by approving incomplete or incorrect company statements.
J.P. Morgan Chase, for instance, helped Enron raise $2 billion in publicly
traded securities that are now almost worthless, the lawsuit says.
Instead of protecting the public from the Enron fraud, the bankers
knowingly chose to become partners in deceit, says William Lerach
of Milberg, Weiss, Bershad, Hynes & Lerach, the universitys
lead counsel.
The lawsuit alleges that executives at several of the banks took advantage
of their positions to invest more than $150 million in one of the Enron-controlled,
off-the-books partnerships called LJM2, which they knew would pay an exorbitantly
high return because of self-dealing transactions with Enron,
according to the complaint.
The complaint alleges the prefunding of LJM2 by J.P. Morgan
Chase, CIBC, Deutsche Bank, Credit Suisse First Boston, Lehman Brothers
and Merrill Lynch at the end of December 1999. Although under no obligation
to do so, the banks advanced nearly 100 percent of the money for LJM2,
including a $65 million credit line.
LJM2 used the money in the final days of 1999 to buy four Enron assets
that the company had failed to sell to other parties, enabling Enron to
report large gains and prevent a sudden decline in stock prices that would
have meant large losses for the company and the banks.
The four transactions allowed Enron to overstate its profits, meeting
forecasts put out by the company and bank analysts. Simultaneously, bank
executives who had invested in LJM2 were enriched when the special-purpose
entities paid millions to LJM2. Banks and law firms helped Enron conceal
loans and create fake profits, according to the University of California
complaint.
They helped set up transactions that appeared to be independent, but
which, in fact, Enron controlled through a series of secret understandings
and illicit financing arrangements, says Lerach.
Loans, which should have counted as debt, were made to look like profits
from sales. The complaint explains how J.P. Morgan Chase helped Enron
hide $3.9 billion in debt through a company known as Mahonia Ltd., located
in the Channel Islands off England. The bank disguised approximately $5
billion in back-and-forth transactions in which Enron sold gas and oil
contracts to Mahonia, but then secretly repurchased the contracts.
The complaint also alleges that Vinson & Elkins gave J.P. Morgan
Chase and Enron legal cover for the Mahonia transactions by writing an
opinion corroborating them as legitimate.
The complaint alleges numerous other misdeeds by the new defendants.
The defendants sophisticated manipulations allowed them to
enrich themselves at the expense of millions of Americans who lost billions
of their hard-earned dollars invested in Enron for their retirements,
said Holst. Our lawsuit seeks to return those funds to their rightful
owners and to retirees and working families across the country.
Russell Mokhiber
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