Digital evidence changes the litigation landscape.

Civil litigation procedures governing the discovery process have evolved along with technology in recent years to accommodate the use of electronically stored information as digital evidence in court proceedings. And as electronic data replaces the customary paper trail, risk management experts believe relevant civil and criminal evidence will increasingly be in the form of digital records stored on a computer, server, storage network or some form of backup media.

Alan Brill of risk consulting firm Kroll Inc. said, during a Marsh & McLennan Co. conference call, he believes in 2006 there will be specific changes to federal civil procedure rules focusing on e-discovery and digital evidence, requiring litigants to meet early to discuss the use and exchange of such data.

The emergence of e-discovery in litigation is a relatively new, but fast evolving phenomenon that every bank, financial institution, underwriter and regulator must watch closely, said Brill, who was among several experts who spoke about emerging risk issues facing financial institutions during the call hosted by the insurance broker.

In June 2005, one of the most closely watched electronic discovery cases resulted in a $1.5 billion judgment against Morgan Stanley & Co., after the court found the investment banking firm had deliberately failed to recover backup tapes of e-mails as ordered and overwrote e-mails after 12 months in violation of U.S. Securities and Exchange Commission rules, among other improper actions.

The Florida state court judge presiding in the case read a statement to the jury chastising Morgan Stanley for its failures in the e-discovery process, which he said "was done knowingly and deliberately, and in bad faith." As punishment for failing to produce required data, the jury members were told they could assume there was a conspiracy.

Although Morgan Stanley is currently appealing the case, Brill said the case and the resulting $1.5 billion verdict has gotten everyone's attention.

The obvious inadequacy of digital records and practices is surfacing in criminal cases, too. Brill said there've been cases where companies simply couldn't find files that would be central to bringing a criminal case against another entity.

Sometimes, information technology personnel decide on their own that it costs too much in terms of storage to keep files, he said, adding such decisions can no longer be just a technical decision.

Brill said theft of proprietary information and unauthorized access into corporate networks are on the rise, making the handling of digital evidence more and more critical.

With digital evidence, there's no second chance to get it right, he said. "Failure to show it was protected from change ... may lessen its evidentiary value. If an employee can log in using the credentials of another, how can you then prove who is doing what. All of it becomes part of the problem."