Multinational Monitor

MAY 2002
VOL 23 No. 5


East Meets West: European Union Expansion and the Troubled Former Communist Countries
by Tony Wesolowsky

Chernobyl Fallout: The Uncertain Future of Ukraine’s K2/R4 Nuclear Project
by Olexi Pasyuk

Pipeline Dreams: The World Bank, Oil Development and Environmental Protection in Georgia
by Manana Kochladze

Bank Accountability Redux: The Campaign for Compliance and Appeal Mechanisms at the European Development Banks
by Petr Hlobil

Fate of the Forests: Will the World Bank Replicate Amazonian Failures in Central and Eastern Europe?
by Jozsef Feiler


Countering the New Masters: Central and Eastern European Workers Struggle to Hold Their Ground in Hard Economic Times
an interview with
Jasna Petrovic


Behind the Lines

Restraints for the World Bank and IMF

The Front
Shredded: Justice for BAT - Enron Associates

The Lawrence Summers Memorial Award

Names In the News


The Front

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 lawyer’s 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.

BAT’s 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 company’s law firms.

Legal proceedings began against BAT’s 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, BAT’s 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, BAT’s 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 plaintiff’s 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 case’s 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 plaintiff’s 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 BAT’s 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, McCabe’s 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 judge’s 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 — Enron’s 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 company’s 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 university’s 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-arm’s-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 Enron’s 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 university’s 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


The May 2002 Lawrence Summers Memorial Award* goes to Enron. It seems almost unfair to kick a company when it is as far down as Enron, but the judges felt they had no choice when they came across reports on an April company filing with the Securities and Exchange Commission.

As reported in the Wall Street Journal, the company said it could post a write-down of its assets by about $14 billion and “attributed a ‘material portion’ — about $3 billion, according to one person familiar with the situation — to ‘possible accounting errors or irregularities’ prepared by prior management and reviewed by [Arthur] Andersen.”

The Summers award was designated for this eye-popping quote in the April SEC filing: “No party should rely on any previously reported financial information of the company prior to the commencement of Chapter 11 cases, nor should any reader of this operating report place undue reliance upon the information contained herein.”

Source: Mitchell Pacelle, “Enron May Post $14 Billion Write-Down,” Wall Street Journal, April 23, 2002.

Thanks to Andrew Wheat for directing our attention to this story.

*In a 1991 internal memorandum, then-World Bank economist Lawrence Summers argued for the transfer of waste and dirty industries from industrialized to developing countries. "Just between you and me, shouldn't the World Bank be encouraging more migration of the dirty industries to the LDCs (lesser developed countries)?" wrote Summers, who went on to serve as Treasury Secretary during the Clinton administration. "I think the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that. ... I've always thought that underpopulated countries in Africa are vastly under polluted; their air quality is vastly inefficiently low [sic] compared to Los Angeles or Mexico City." Summers later said the memo was meant to be ironic.




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