Could you imagine having to spend a budget-busting $6 million on e-discovery for a case to which you were not a party? That’s exactly what happened to the Office of Federal Housing Enterprise Oversight (OFHEO) – and the costs amounted to 9% of its annual budget. Ralph Losey, a lawyer specializing in e-discovery, has posted an excellent overview of the case to his blog, but here’s a quick summary:

OFHEO regulates the Federal National Mortgage Association, commonly known as Fannie Mae. In 2003, OFHEO examined Fannie Mae’s accounting and financial practices and conculded that it had manipulated its reported earnings in order to artificially the performance-related bonuses paid to its executives. Fannie Mae reached a settlement with OFHEO in which it agreed to take remedial action to address the recommendations made by OFHEO and pay a $400 million civil penalty. Matter closed – or so OFHEO thought. But not so.

OFHEO’s report prompted a civil action by Fannie Mae’s customers. Fannie Mae’s executives subpoenaed OFHEO records claiming that those records would help their defense by demonstrating that they “had been completely transparent with OFHEO,” that “OFHEOhad approved Fannie Mae’s accounting and compensation practices,” and that the OFHEO investigation was “was politically motivated and biased.” OFHEO’s counsel agreed to provide the documents by a specified date with the Fannie Mae executives being able to specify the search terms.

To cut a long story short, OFHEO’s counsel didn’t realise the implications of the order to which he was agreeing. Fannie Mae executives submitted more than 400 search terms which covered more than half a million documents – including 80% of OFHEO’s emails, many of which were stored on backup tapes offsite. OFHEO certainly did its best to comply, hiring 50 contract lawyers at a cost of more than $6 million. Despite this, the enormity of the task meant that they were unable to complete it by the specified date. Subsequent attempts to extend the deadline resulted in OFHEO being held in contempt and sanctioned because it had “treated its Court-ordered deadlines as movable goal posts and has repeatedly miscalculated the efforts required for compliance and sought thereafter to move them.”

OFHEO appealed this ruling but lost, with the appeal court stating “Though we appreciate OFHEO’s efforts to comply, we conclude that it ultimately failed to do so and find no abuse of discretion in the district court’s contempt finding or choice of sanction.”

Summing up his commentary on the case, Ralph Losey stated, “This case demonstrates what can happen when these fundamental precepts are not followed. It cannot be fair and just to allow a lawyer’s actions to drain 9% of an agency’s total annual budget, a budget paid for by taxpayer funds. Congress did not approve OFHEO’s budget last year thinking that 9% of it would go to help a group of plaintiffs sue Fannie Mae. The appellate court, and the district court before it, should have made an economic analysis of the situation in reaching its decision and considered the gross inefficiencies of its ruling.”

I think that the majority of people would agree with Ralph’s assessment but, rights and wrongs aside, there are two things which should be learned from this case:

• Legal and technical departments need to talk. I’m sure that each and every admin has, at one time or another, been left shaking his head in frustration over promises made by a non-technical executive (”Sure thing! No problemo! I’ll make sure that it’s done by not later than <insert completely unrealistic date>”). But when it comes to e-discovery, that simply cannot be allowed to happen. Whether you are being represented by in-house counsel or by a lawyer who specializes in e-discovery matters, you need to make sure that they are talking to your IT department.
• With so much information being comitted to email, an email archiving solution which enables easy searching is an absolute necessity.