ESI Case Study 2

Client Background

The client is a national broker-dealer that has been in the securities industry for approximately 25 years.

Client Situation

Several of the client’s key employees simultaneously resigned on a Friday afternoon to join a major competitor on Monday morning. Prior to resigning, the employees secretly downloaded and copied the client’s confidential customer information, provided it to their new employer, and immediately began soliciting the client’s customers. The employees targeted accounts representing tens of billions of dollars in assets under management. Adding insult to injury, the employees also falsified affidavits upon their resignation, affirming that they “did not possess any confidential customer information” belonging to the client.

Primary Goals:

  • Prevent former employees from improperly raiding client’s customer base
  • Retrieve any confidential information that employees had misappropriated, so they cannot unfairly compete against client
  • Obtain damages for employees’ gross misconduct


Anticipated Problems:

  • The new employer was a large competitor with significantly greater litigation resources.
  • The former employees were not subject to non-competition covenants in their employment agreements, thus requiring the client to establish alternate theories of liability.
  • The misappropriated information was stored electronically, making time of the essence to preserve it from intentional or inadvertent destruction.
  • The former employees had already engaged in a pattern of deception and evasiveness that was likely to continue.
  • The parties were contractually bound to arbitrate, but the delay in constituting an arbitration panel created an unacceptable window for the former employees to solicit the client’s customers and intentionally or inadvertently destroy electronic evidence.


Service Summary

Working with members from the firm’s Litigation Practice Group and Securities Service Group, Levenfeld Pearlstein’s ESI Task Force instantly filed a lawsuit in the United States District Court for the Northern District of Illinois, seeking emergency injunctive relief. On an expedited basis, the Court granted the client a temporary restraining order (“TRO”), requiring the former employees – and their new employer – to immediately return all of the client’s confidential information, and to subsequently expunge any remaining copies of that data from their computer systems and files.

The ESI Task Force worked closely with its team of highly specialized computer forensic examiners to analyze the former employees’ computer systems and determine the extent of their misappropriations. We were able to determine that the former employees had downloaded thousands of files to their personal computers and related devices (e.g., PDA’s, “thumb drives” and laptop computers), which they had not disclosed (let alone returned) in violation of the Court’s TRO. Not only had the former employees lied to the Court regarding the nature and extent of the confidential information in their possession, but their lawyers had clearly failed to take appropriate steps to investigate, preserve and produce this evidence in violation of the client’s discovery rights.

On this basis, we were able to achieve the extraordinary result of obtaining a second TRO requiring the former employees to turn over their personal computers and related devices for examination. Working with its computer forensic examiners, our ESI Task Force has subsequently established that the former employees not only lied and violated the first TRO, but intentionally deleted over 11,000 files (destroying 1,100 of these files permanently) from their personal computer equipment in preparation for the second court hearing and TRO. Once again, the former employees and their lawyers were caught red-handed.

Results

In the course of one month, Levenfeld Pearlstein’s ESI Task Force:

  • Stopped the former employees from withholding (and destroying) electronic evidence necessary to establish liability.
  • Established beyond doubt that the former employees and their lawyers had engaged in a pattern and practice of wrongdoing and bad faith litigation, which will result in sanctions and a potential default judgment in the pending arbitration proceeding.
  • Positioned the client to shift the cost of its computer forensic investigation to the former employees, as a sanction for their bad-faith conduct.
  • Established an alternate basis for liability and damages under the federal Computer Fraud and Abuse Act, which was not otherwise available to client.