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Banks Cruisin' for E-Mail Bruisin'

Is UBS Warburg Violating SEC Rules?

Dec 16, 2002 | Fortune Embarrassing e-mails from Henry Blodget, Jack Grubman, and other Wall Street analysts have been the talk of the business community for months. We would be hearing even more juicy revelations were it not for the fact that many Wall Street firms ignore the SEC requirement that companies preserve three years of business
related e-mails. That is about to change.

In December five brokerage houses: Deutsche Bank Securities, Goldman Sachs, Morgan Stanley, Salomon Smith Barney, and U.S. Bancorp Piper Jaffray--agreed to pay SEC fines totaling $8.25 million for failing to keep their e-mails. All five were nailed because they are embroiled in the ongoing probe of Wall Street analysts. Now a rougher, tougher SEC seems ready to cast a much wider net. "I think [e-mail retention] is already on their priority list," says Scott Kursman of the Securities Industry Association (SIA).

The SEC's record-keeping rules and "interpretations" seem fairly clear. They demand the retention of e-mails for three years, with the first two years in an "accessible place" and in a nonerasable format. Says the SEC's John Heine: "If we ask for records, the company has to produce them within 36 hours." Why has the Street ignored the rules? Some firms might prefer to pay a fine rather than archive potentially damning e-mails. Another factor is that the SIA has been on a six-year crusade to expose the requirements as unclear, obsolete, expensive, and legally challengeable.

That's the general position of UBS Warburg, the American unit of the Swiss company UBS. But Warburg may be yet another firm violating the SEC regulations. FORTUNE obtained an Oct. 9 letter written by Warburg director and senior counsel Michael Stern in response to a subpoena from securities arbitration attorney Stuart D. Meissner seeking certain of the bank's e-mails from 2000 and 2001. Wrote Stern: "E-mails are retained on backup tapes.... Only the snapshot for the last Friday of each month is retained." Warburg spokesman David Walker admitted to FORTUNE that the "snapshot" may not include all the deleted e-mails.

Furthermore Stern claims in his letter that producing the e-mails would be "unduly burdensome" because of the "extraordinary expense (in the eight-figure range) and time (approximately two years) involved in the restoration of the backup tapes, which would not be text searchable." (Experts say the tapes would be searchable.) Asked about the letter, which clearly implies that Warburg is flouting SEC rules, Walker says, "[The letter] is our current policy, and our policy is under review." Warburg's "eight figure" estimate for restoring its backup tapes seems high, even by SIA estimates. But whatever the real number, it's just the latest cost of doing business in the post-scandal era.

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