Big brother is reading your e-mail

Financial advisers who think their e-mails are private messages protected from the prying eyes of regulators and compliance officers should think again.

Recent legal cases show that many otherwise sophisticated people mistakenly consider their e-mails to be casual notes that will never be traced or used against them. However, the case against Frank Quattrone hinges on one e-mail in which the former Credit Suisse First Boston LLC investment banker appears to encourage destroying evidence.

In his recent complaint about market timing, New York Attorney General Eliot L. Spitzer cites provocative e-mails from executives at Bank of America Corp., Janus Capital Group Inc. and other companies. Mr. Spitzer has successfully used e-mails as evidence in his complaints against securities analysts at Citigroup Inc. and Merrill Lynch & Co. Inc.

These cases raise an intriguing question: Why did such smart people send such dumb e-mails?

“People are still writing all kinds of crazy things,” says Jeffrey Plotkin, an attorney with Eiseman Levine Lehrhaupt & Kakoyiannis PC in New York. “It is just human nature to think that they won’t get caught and nothing is going to happen.”

For financial advisers, e-mails have particularly long lives. Under rules issued by NASD, the New York Stock Exchange and the Securities and Exchange Commission, all financial advisers must retain business-related e-mails sent to clients.

In addition, broker-dealers – but not necessarily financial planners – must retain their interoffice communications.

Last year, regulators underlined the importance of such records by fining five brokerage firms $1.65 million each for failing to keep e-mails.

In addition to keeping records of e-mails, financial services firms must monitor the electronic correspondence. Because it would be an overwhelming task to read thousands of messages, regulators allow firms to review a sample of e-mails.

Many companies use software that searches for phrases such as “insider tips” or “guaranteed returns” that raise red flags. Any messages that contain such key words are flagged and read by compliance officers.

Regulators allow firms to use their discretion in deciding how many e-mails to read. Mr. Plotkin says big firms can probably satisfy the rules by monitoring 5% of their e-mails.

But he suggests that firms use software to screen the text of all e-mails.

“There is no easy way around the burdens of complying with the rules,” Mr. Plotkin says. “Every week, you have to have some supervisory or compliance person sit down with e-mails and read them.”

Some advisers may be tempted to sidestep the problem by cutting back on the use of e-mails. When a client sends an e-mail, the adviser might consider replying by phone.

But attorneys note that phone calls don’t necessarily provide protection. Sometimes, clients tape calls and use them as evidence.

Instead of trying to avoid electronic messages, advisers should focus on using them properly, lawyers say. To help employees stay out of trouble, some companies have begun providing training in the proper use of e-mails.

“People must realize that if there are things you would not say in a formal written memo, then you should not say them in e-mails either,” says Soo J. Yim, a partner with Wilmer Cutler & Pickering in Washington.

Changing technology has facilitated the use of e-mail as evidence. In the past, an investigator might have spent weeks plowing through thousands of e-mails one by one.

Now, in addition to sorting e-mails by key phrases, artificial-intelligence programs go a step further, casting a wide net for any messages that seem connected to a certain idea. For example, a program searching for references to “Wimbledon” might turn up any message that also mentions tennis.

New software has also stymied executives who deleted e-mails hoping to avoid detection. After an e-mail is deleted, programs can recover copies that may still remain on backup tapes at the sender’s company and in the recipient’s office.