How to Find Electronically Stored Information

In our case study, gas station owner, Morris, has alleged that Green Fuel, a small gasoline distributor, overcharged him. Both parties had inadequate and unsophisticated documentation, making determining losses very difficult.

However, review of the parties’ sparse documents revealed Green’s electronically produced invoices for fuel sales to Morris, which meant that Green more than likely did have ESI available despite its claims to the contrary.  The new challenge became not only convincing Green that the information existed but also helping Green and its attorneys understand how it could be retrieved.

This is when it’s best to observe and understand the daily routines of the parties. Information-seeking interviews with personnel that regularly use the computer system, such as the accounting clerk or administrator are a good place to start.  Interview questions should seek understanding of the daily routine, including the functions regularly performed, and the tools used to accomplish those functions.

Observation of the performance of key functions will also aid in gaining an understanding of the computer system and the software programs used.

In the case of Green, the interview required a few hours with its accounting clerk to observe her daily routine, including the data processing of fuel deliveries, creation of computer-generated invoices and subsequent data processing of payment receipts.

At the completion of the interview, a plan was developed to extract the data from Green’s archaic system, which required a multi-step process including the use of more advanced technology.

A detailed discussion of the process is beyond the scope of this blog, but let’s just say that Green’s archaic system was able to provide electronic records of the gallons of fuel delivered to Morris, the date, and the amount charged – for all eight years.

With the ESI extracted from Green’s database, Morris’ economic loss claims were analyzed using two methods:

  1. As specified under the contract (“the contract method”) – This revealed not only was Morris not economically damaged, but that Morris had actually underpaid Green in excess of $1 million.
  2. As business was actually transacted (“actual performance method”) — Morris underpaid Green in excess of $700,000.

Morris’ claims were dealt a lethal blow by the analysis of relevant ESI.  Initially, Morris’ claims seemed somewhat feasible due to the lack of data by Morris and Morris’ “bet” that Green would never be able to organize and analyze the data to disprove his claims.

Morris had no way to prove his claims with reasonable certainty, but by using electronic data analysis, Green was able to disprove Morris’ claims (without question) and actually determine that Morris owed Green.  Morris dismissed his claims against Green only two weeks after the findings were revealed to his attorneys.

Adapted from:  “Unlocking the Potential of Electronically Stored Information in Damages Cases.”  Dunn on Damages – The Economic Damages Report for Litigators and Experts 4 (2011): 20-21.  For more information, visit http://www.valuationproducts.com/dunn.html

Electronically Stored Information: The Case Study

You might not think that a small business would have useful or accessible electronically stored information (ESI). Consider this example of identifying and obtaining relevant forensic evidence to determine lost profit damages with this particular small business.

Green Fuel (“Green”) was a small gasoline distributor who provided fuel to local gas stations. Green was owned by a gentleman in his late seventies.  He did not use a computer and his limited office staff included two office administrators, an accounting clerk, and a manager.

Green was a defendant in a state court case where numerous claims were made by Morris, a gas station owner. Morris alleged that Green overcharged him for fuel delivered to Morris’s two small-town gas stations during an eight year period.

Morris claimed that Green failed to transact business pursuant to their contract, and as a result, Morris suffered economic damages of $1 million dollars arising from overcharges and a failure to share profits as specified by their contract.

At first glance, both parties appeared to have inadequate documentation of fuel deliveries and payments.  The only documentation maintained by the gas station owner, Morris, was some sparse paper receipts and logs regarding fuel delivery.

Moreover, Morris’ stations used unsophisticated point-of-sale cash registers and did not utilize a computer system to maintain accounting records or other records of fuel deliveries.  Morris said in his deposition testimony that he relied on Green to keep detailed records of fuel orders and deliveries which allowed Green to overcharge him.

Green’s documentation of fuel deliveries was only slightly better than Morris’. Although Green used an antiquated DOS-based computer system to maintain limited accounting records, Green’s management vehemently maintained that no electronic record existed of fuel delivery or receipt of payment.

Left with such sparse information to determine losses, the attorneys for both parties were highly doubtful that any meaningful analysis of the transactions could be conducted.

The Green case epitomizes not only the challenges faced in extracting useful forensic evidence in small business lost profit cases, but also the need for persistence in seeking ESI.

The ESI challenge is rarely accomplished through force or the use of highly technical jargon; rather, success will come through an understanding and observation of the key personnel’s daily routines, which we’ll discuss in next week’s post.

Adapted from:  “Unlocking the Potential of Electronically Stored Information in Damages Cases.”  Dunn on Damages – The Economic Damages Report for Litigators and Experts 4 (2011): 20-21.  For more information, visit http://www.valuationproducts.com/dunn.html

Unlocking the Potential of Electronically Stored Information

The unsophisticated, unorganized small business is all too familiar – paper records yellowing from age, the vanilla box computer that only reads a five-inch floppy disk (remember those?) and of course the green font tube monitor!

Think twice before you assume that an unsophisticated small business cannot possibly have any useful or accessible electronically stored information (ESI).

Consider this question:  does the business have any printed documents?  Most of the time the answer is yes and chances are those documents were created by some form of technology that potentially possesses valuable ESI.

The quest for relevant forensic evidence in determining damages, especially lost profits, in a small business usually presents unique challenges in retrieving and utilizing ESI.

In fact, many small business owners and managers, as well as their attorneys are unaware of the types of ESI available that could be the key to their case.  Persistence, creativity, and knowledge are necessary to unlock the potential of small business ESI.

Three primary challenges are often encountered with small business ESI:

  1. The information may be stored, entered, or utilized on archaic hardware and/or software.
  2. The owner and employees may be unaware of the type and extent of data that is present on their system. They are often adamant that no useful ESI is available from their system because they have had difficulty or even failed in trying to extract information.  This leads the employees and the owner to conclude that relevant information is just not available.
  3. Small businesses generally have limited resources and their personnel usually do not have the expertise to extract relevant useful data from an outdated system.

Next week, we’ll blog about a true case example that demonstrates how these challenges can come into play with small business ESI.

Adapted from:  “Unlocking the Potential of Electronically Stored Information in Damages Cases.”  Dunn on Damages – The Economic Damages Report for Litigators and Experts 4 (2011): 20-21.  For more information, visit http://www.valuationproducts.com/dunn.html

Look for the anomaly to find fraud

Events may happen in a person’s life that can lead to an act of desperation. And desperate people may take irrational actions.

I am talking about bad economic times, the failure of a business, the loss of a job, divorce, a family member on drugs, disease, children in trouble, criminal acts by a family member or close friend. And the list goes on.

Any or all of these adverse life events can be the catalyst to commit an irrational act by an otherwise honest, hardworking employee, a trusted friend or a co-worker. Statistics tell us that two out of three people will commit fraud if the perceived need is great enough.

No matter what the event, it often creates a deep personal need that may push a person to commit fraud. People will react differently to the needs in their life.

However, predicting their behavior can be close to impossible, and creating a safety net for the varied reactions may be impractical.

Athletic coaches take a group of athletes and work daily on teaching how to react to each situation in a game. Coaches take individuals from diverse backgrounds and work to mold those individuals to perform at peak performance.

Business leaders do the same thing to train their employees to react to the demands of the job. The way these people will react under normal circumstances is therefore predictable.

Unfortunately, when life events (needs) happen to athletes, employees or our friends, we can’t predict how the person will react.

If the person reacts in desperation and does something irrational, such as committing fraud, the loss can be devastating. Not just in dollars, but the loss of trust, friendship and even one’s life.

Businesses have spent megabucks on detection systems and controls to prevent fraud — and yet fraud still occurs. There are ways, however, that all individuals and businesses can recognize fraud.

People ask me continuously, “How do you find fraud?” The answer is simple: You look for the anomaly! I mean, look for the unusual.

A great example is people who spend beyond their means.

And remember how HealthSouth always made their numbers and how Bernie Madoff made consistently high returns?

If something seems too good to be true, adopt the philosophy that IT IS. As Mark Twain said, “Trust everyone, just always cut the cards.”

But here is the real secret: You must look for the anomaly, recognize it and not ignore it. In hindsight, people will tell you they saw the signs of their kids or spouse using drugs, but they ignored it.

In interviews I have conducted after a fraud is discovered I ask the perpetrator, “What did you plan to do to either end the fraud scheme or what would you do if you got caught?” The answer is always the same: “I never thought of that!”

It only stands to reason — if the person did not know how to deal with the “need” they sure could not deal with the consequences.

No one likes a thief. No business will knowingly hire a thief. But adverse life events may cause an honest, hardworking co-worker or employee to become irrational and commit fraud.