Leaky Credibility: Big Law Firm's Gaffe Over Sealed Records Raises Troubling Issues
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Sullivan & Cromwell Blew Bankers Trust Secrecy In Highly Sensitive Case
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Mr. Holley and His Press Pals
By Milo Geyelin
10/04/1995
The Wall Street Journal
(Copyright (c) 1995, Dow Jones & Company, Inc.)
Business Week legal editor Linda Himelstein was scanning a new court filing about a major lawsuit against Bankers Trust New York Corp. when she noticed something peculiar. On the cover page of an attached memorandum were these three words: "Filed Under Seal."
It made no sense. Sealed documents were supposed to be strictly off-limits, under possible penalty of contempt and stiff sanctions. Yet Ms. Himelstein had obtained her copy simply by picking up the phone and calling a friendly source at Bankers Trust's law firm, Sullivan & Cromwell.
Now, she later testified, she called her source and told him, "I have learned this document is sealed." On the other end of the phone line, she testified, came the reply: "Oh, s---."
The source -- later identified, to the surprise of clients and some fellow lawyers, as rising litigator Steven Holley -- contends that that conversation never happened. But the 38-year-old partner admits he gave Ms. Himelstein the documents, testifying that he believed they were public.
Now Mr. Holley's actions have plunged him into the center of an embarrassing nightmare that has enveloped one of the nation's most prestigious white-shoe corporate law firms. Yesterday, a Cincinnati federal court judge let stand an earlier order that had prevented Business Week from publishing a story based on the documents, which are at the heart of Procter & Gamble Co.'s $196 million lawsuit against Bankers Trust over Procter's losses in derivatives transactions. But he also unsealed the documents, effectively allowing publication by Business Week -- and other news organizations -- to go forward.
For Sullivan & Cromwell, the outcome offers little solace. Already, the case has not only laid bare missteps by Mr. Holley but also focused a spotlight on lax practices on the part of 119-year-old Sullivan & Cromwell that could alarm its other clients. Among other transgressions, according to the testimony, the firm didn't file the sealed papers in a secure place, contrary to the law firm's policy. Also contrary to its policy, the documents weren't stamped "confidential" on every page. An associate working on the matter freely handed them over to Mr. Holley, who wasn't working on the case himself and shouldn't have had access to the papers without notifying the partner in charge. And the associate, in violation of the court order, didn't tell Mr. Holley the documents were sealed.
The case has also raised questions about the confidentiality of other Sullivan & Cromwell client matters. Mr. Holley testified that while he had spoken with Ms. Himelstein on occasion, he didn't have a confidential-source relationship with her, contradicting her testimony. That put her credibility at stake, prompting Business Week to produce notes of her conversations with Mr. Holley when he was representing Microsoft Corp. during its antitrust fight with the Justice Department. Reading from Ms. Himelstein's notes, a Business Week lawyer quoted him in an off-the-record conversation making a crack about an outfit worn by the Justice Department's top antitrust prosecutor, Ann Bingaman. The notes also show him making biting personal snipes about Ms. Bingaman and saying that "everyone on her professional staff thinks she's out of her mind."
Such lapses go straight to the heart of the essential work of a corporate law firm that depends on the confidence of some of America's biggest clients, including, in Sullivan's case, Goldman, Sachs & Co., Exxon Corp., Eastman Kodak Co. and CS First Boston Inc., a unit of CS Holding. Already, some clients are privately expressing concern. "The whole thing is pretty surprising," says a top Microsoft official. "He's a very, very smart guy."
Exxon officials decline to comment, and Goldman officials couldn't be reached. First Boston spokesman Maynard Toll says the firm has sharply cut back its use of the firm since the 1980s and "is not in a position to comment on this particular case, but based on our own dealings with Sullivan & Cromwell we have the highest confidence in the firm and in its professional standards." At Kodak, senior vice president and general counsel Gary VanGraafeiland says a partner "called to explain the controversy to us, and my take-away from this was that the Bankers Trust incident was an aberration."
Sullivan & Cromwell issued a public apology, expressing in a written statement its "profound regret to Bankers Trust" and announcing an immediate review of its internal procedures "to insure that this type of exceptional breakdown never occurs again." The firm declined to comment for this article, and Mr. Holley couldn't be reached.
For those who know him, Mr. Holley's involvement in the whole mess came as a shock. Thorough and methodical, the New York University law-school graduate has worked at the firm since he was a summer associate. He was named a partner in 1991 and appointed to the New York City Bar Association's committee on Professional and Judicial Ethics a year later. Although Sullivan & Cromwell has traditionally eschewed anointing superstars from among its ranks, he had come to be seen by many as an exception.
A litigator and an antitrust specialist, Mr. Holley helped guide Microsoft to its successful consent decree with the Justice Department last year and helped successfully appeal a federal judge's order rejecting that settlement. He also represented the grunge-rock band Pearl Jam when it charged that Ticketmaster Holdings Group was illegally wielding monopoly control over the distribution of concert tickets. Mr. Holley's handling of the case -- and his calculated leaks to the media -- helped spark a federal investigation, which later was dropped, as well as congressional hearings into how tickets are peddled.
Along the way, he became a deft handler of the press. He testified last week that part of his strategy in the Pearl Jam case was to encourage reporters to publicize the allegations. One of the reporters he spoke to was Business Week's Ms. Himelstein.
Just last month, Mr. Holley was the subject of a flattering piece in Architectural Record magazine, which ran a pictorial on his newly renovated loft, a former industrial space just off Manhattan's Union Square. The piece, featuring photos of a soaring home divided by clear and sandblasted panes of glass, admiringly noted that he "proved to be as methodical in his architect-selection process as in preparing a court case." One of his architects added approvingly that his interest in Modernism was key, and that "the tipoff was he mentioned the Bauhaus."
Mr. Holley had first met Business Week's Ms. Himelstein in 1993, at a reception hosted by Sullivan & Cromwell at Tavern on the Green restaurant in New York during an annual American Bar Association meeting. A Columbia Journalism School graduate with extensive experience in writing about legal affairs, she testified that she had relied on him as a confidential source nearly a dozen times. (Throughout her testimony, she referred to him only as her "source"; his identity didn't become known until later.)
The confidential relationship was seldom stated but always understood when she called, according to Ms. Himelstein's testimony in federal court in Cincinnati on Sept. 21. Mr. Holley denies that he was regularly a confidential source, but there is no question that he returned a phone call from Ms. Himelstein on Tuesday, Sept. 12, six days after she had phoned him for help getting a copy of a Procter & Gamble petition. P&G was in the midst of suing Bankers Trust over losses it sustained in derivatives transactions arranged by the bank. The 300-page petition asked for permission to add civil racketeering charges to the case.
"I said, `I don't have a copy of it, but if it's a complaint, I'm sure I can find one around the office,'" Mr. Holley testified last week. "I'll fax one to you."
Mr. Holley wasn't involved in the Bankers Trust case; he testified he didn't know the document was sealed by a protective order binding upon Bankers Trust, P&G and all of the lawyers involved.
But Mr. Holley testified that he thought he was merely making available a courtesy copy of a public document when he picked up his phone and called an associate working on the Bankers Trust case, Richard C. Pepperman. Recently graduated from the University of Pennsylvania Law School, Mr. Pepperman had worked with Mr. Holley in the Microsoft and Pearl Jam matters as a trusted associate and a friend. When Mr. Pepperman handed a spare copy from his desk to Mr. Holley, he didn't ask him why he wanted it -- and Mr. Holley didn't say.
This proved to be a lapse on several counts. First, the document wasn't stamped "confidential" or kept in a secure location, as Sullivan's policy for such documents requires. Nothing on the cover sheet of the bound pleading indicated that the 300 pages of supporting documents attached to it were sealed. Just turning over the document to a lawyer not involved in the Bankers Trust case was a violation of the court's protective order. And Mr. Pepperman erred by not telling Mr. Holley of the court seal.
Mr. Holley, for his part, didn't sign for the document, as required by procedures detailed in the protective order. And he never indicated that he planned to give it to a news reporter. The firm's policy for communicating with the press is strict: Nothing is to be discussed or turned over without first conferring with the both the partner in charge and the client.
Mr. Holley testified last week that he ignored those prohibitions unwittingly. Realizing the document was too massive to fax late in the afternoon of Sept. 12, Mr. Holley slipped it into a white Sullivan & Cromwell delivery envelope and walked it to the messenger station on his floor to make arrangements for Business Week to pick it up.
Uptown, at Business Week's offices in Rockefeller Center, Ms. Himelstein skimmed the two-inch-thick document that had just landed on her desk and instantly realized it was newsworthy, she testified. She wrote a quick note by e-mail to Zachary Schiller, the bureau chief in Cleveland, to let him know she had gotten the papers. And at 5:45 p.m. Tuesday she met with Kelley Holland, the Business Week editor in charge of money and banking who had been following Bankers Trust and who would take the lead in writing the article. Together, they alerted senior editor Chris Wells to clear space in the magazine.
The deadline would be tight. For the following week's editions, Business Week closes shop at 9 p.m. on Wednesday -- giving the magazine in this case a little more than 24 hours to fully report, write, edit and get clearance from the magazine's lawyers to publish the story. Neither Ms. Himelstein nor Ms. Holland was aware that they were basing their news on a document with potentially explosive legal ramifications, they testified last month. Indeed, the only Business Week staff writer who knew of the protective order was Mr. Schiller, according to the testimony, and he wasn't due to return to Cleveland from a trip out of town until the following morning, Sept. 13.
But Mr. Schiller had known about the protective order for nearly a week; why hadn't he alerted his New York editors? Mr. Schiller would later testify that he had more pressing concerns: an interview with a company CEO that he needed to prepare for and a trip to San Francisco to consider a possible job transfer.
When he found out about the protective order Sept. 7, Mr. Schiller testified last week, he thought the Bankers Trust story was dead. And in any case, if Ms. Himelstein was still following up through her source at Sullivan & Cromwell, he reasoned, the law firm would surely advise her of the protective order.
Business Week, it turned out, wouldn't learn of this crucial detail until midmorning on Sept. 13, when Mr. Schiller, back at his office in Cleveland, told Ms. Himelstein. The two were discussing the planned Bankers Trust coverage for that night's deadline. "He told me that he had heard that at least some of the documents had been sealed," Ms. Himelstein testified.
To the legal editor, this didn't make sense. Court complaints, including requests to add a new claim to an existing lawsuit, are almost always a matter of public record. Exceptions are virtually unheard-of. The Business Week reporters continued working on their story.
But by Wednesday afternoon, Bankers Trust had gotten back to Business Week. The pleading was indeed confidential, the bank said, and now, for the first time, Ms. Himelstein decided to look at it closely for any indication that it was sealed by a protective order. What she found popped up on the fifth or sixth page, she testified: The words, "Filed Under Seal."
Back at Sullivan & Cromwell, Mr. Holley had been at his weekly partners' lunch during the early afternoon, unaware of what was unfolding at Business Week. He had made plans to leave the office early and fly to Detroit for a long weekend with his parents in Michigan, returning the following Sunday on Sept. 17. Shortly after 3 p.m. he left by cab to pick up his bags at home and rush to the airport. At this point Mr. Holley's and Ms. Himelstein's accounts of what happened diverge sharply.
The Business Week editor maintains -- with phone records to back her up -- that she called Mr. Holley at home about 3:30 p.m. to alert him that the documents she had received from him had been under seal, and that he had responded with an expletive. According to Ms. Himelstein, Mr. Holley asked first that she not write the story and, failing that, asked that she keep his name out of it. She agreed to protect his confidentiality.
Mr. Holley tells an utterly different version of events. Testifying last week, he denied ever speaking to Ms. Himelstein after sending her the court papers as a courtesy. But he had no explanation for Business Week's phone records showing that she called from her office to his home at 3:31 p.m. -- and spoke to someone there for nearly two minutes.
Mr. Holley testified: "I didn't have this conversation."
Bankers Trust, unaware that its own lawyer had leaked the papers, believed Business Week had deliberately violated the court's order, possibly by stealing the sealed documents from the file in Cincinnati. When Ms. Himelstein reached Bankers Trust attorney Michael Cooper, at Sullivan & Cromwell, for comment late Wednesday afternoon, the lawyer told her it was "inappropriate for me to be asking the questions, inappropriate for him to be responding to questions and inappropriate for Business Week to be doing the story," Ms. Himelstein testified.
He followed up with a faxed a copy of the protective order and a letter advising Business Week to contact its lawyers. But by now, Business Week's lawyers were already involved, and in their view the magazine was entitled to publish. The protective order barred only the parties in the lawsuit -- Bankers Trust and Procter & Gamble -- from disclosing the contents of sealed documents.
But as Kenneth M. Vittor, general counsel for Business Week publisher McGraw-Hill Inc., was wrapping up a routine prepublication review of the article at 6 p.m., his office fax machine suddenly jumped alive. Unknown to him, the federal judge overseeing the Bankers Trust suit had just signed a restraining order barring Business Week from publishing its story -- and threatening to hold Mr. Vittor personally in contempt of court if the magazine refused.
With the magazine's deadline three hours away, Mr. Vittor was stunned by the order. Senior District Judge John Feikens, 78 years old, had just signed it at the request of Bankers Trust and P&G after a telephone conference call to his chambers by lawyers for both companies. The ruling was extraordinary; Business Week wasn't given a chance to respond, and no hearing was held. Moreover, no permanent record was kept of the conference call, and the judge's order was open-ended rather than having a time limit placed on it.
The order set off a scramble by Business Week's lawyers that culminated, after a series of unsuccessful appeals up to the U.S. Supreme Court, with a hearing before the judge in Cincinnati to determine if Business Week had violated the court's protective order. Bankers Trust was still asserting that the magazine had broken the law, "possibly by invasion of the court's own sealed record."
But by now, Business Week's lawyers knew what Bankers Trust still did not -- that the source of the Bankers Trust story was a lawyer at the bank's own law firm. As the hearing date approached, Business Week and Ms. Himelstein kept that information to themselves, honoring her promise of confidentiality to Mr. Holley. Even as she took the stand to testify in her defense Sept. 21, Ms. Himelstein was determined not to disclose his identity.
Lawyers for Bankers Trust, the Cincinnati firm of Vorys, Sater, Seymour & Pease, pressed hard, arguing that under Ohio law, news-magazine reporters have no First Amendment shield against being compelled to cough up a source. Business Week countered that New York law -- and its broader press shield -- applied.
That gave Bankers Trust an opening. Was Ms. Himelstein's source from "the state of New York," she was asked? Ms. Himelstein answered that the source was.
That was enough. By midafternoon, lawyers for Bankers Trust put in a call to Sullivan & Cromwell, which in turn launched an immediate review of its messenger log. About 3 p.m. Mr. Holley's name turned up, along with that of Business Week. Three hours after Ms. Himelstein finished testifying, Mr. Holley got a call from Sullivan & Cromwell litigation partner Richard Klapper .
"Did she ever ask you for a copy of the complaint in Procter & Gamble and Bankers Trust?" he asked Mr. Holley, according to Mr. Holley's testimony last week. "Yes, she did," Mr. Holley answered.
"You didn't give it to her, did you?" Mr. Klapper asked.
"Yes, I did," Mr. Holley responded.
"Meet me on the 30th floor," Mr. Klapper snapped. "We need to speak to the chairman of the firm."
Up to this point, Mr. Holley had kept quiet, too. He testified that he didn't know that the court's protective order had been breached or that Bankers Trust was blaming Business Week, though both events were extensively reported in the media. Mr. Holley testified he doesn't own a television set, so he didn't see any news accounts of the case. He doesn't regularly read The Wall Street Journal and canceled his subscription to the New York Times, he testified. The first he learned that he had inadvertently violated the court's protective order was when he was summoned before Sullivan & Cromwell Chairman Ricardo A. Mestres Jr. on the firm's 30th floor on Sept. 21, he said.
"You're not going to tell me that this document came from Sullivan & Cromwell?" the chairman asked.
Mr. Holley's -- and Sullivan & Cromwell's -- troubles were just beginning. Mr. Mestres was "as distressed as I've ever seen him," Mr. Holley testified last week. The lawyers immediately began planning how to tell Judge Feikens, not to mention their client Bankers Trust. The first call was to Bankers Trust's lawyers in Cincinnati late Thursday afternoon, Sept. 21.
Though Mr. Holley had by now come forward, Sullivan & Cromwell nevertheless told the Cincinnati lawyers only that it suspected it might be the source of the breach. The firm waited until the following morning to confirm it officially; the judge was informed that afternoon.
Once everyone involved realized who the source was, Mr. Holley was called to testify, in a hearing last week. It was then that he admitted he had indeed furnished the documents, though he asserted that he was unaware that they were under seal. He also played down his contacts with Ms. Himelstein, testifying they didn't have a confidential-source relationship. His comments prompted Business Week's rejoinder, in which one of its lawyers read aloud from Ms. Himelstein's notes of his off-the-record, unflattering comments about the Justice antitrust official's outfit.
Mr. Holley's future is unclear. At 10 p.m. on Friday, Sept. 22, the young partner was summoned before Sullivan & Cromwell's chairman, Mr. Mestres, and senior litigation partner John Warden. Mr. Warden was livid.
"He told me," Mr. Holley testified last week, "that what I had done was incredibly stupid, that I had imperiled Bankers Trust, a very important client of Sullivan & Cromwell, that I had imperiled the partnership, that I had imperiled Mr. Pepperman, who was my friend and one of our very best associates, that I had imperiled myself, that this sort of careless and unthinking behavior was not tolerable from partners of Sullivan & Cromwell and . . . it just could never happen again."
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