Eaton Corp. has found religion. As I discussed 2 weeks ago, Eaton got into more trouble with Hinds County Circuit Judge Jeff Weill in the Frisby litigation over not producing emails. The emails contained reports from Ed Peters—who had not appeared in the case—on his efforts to influence Judge Bobby DeLaughter to help Eaton.

Judge Weill ordered Eaton CEO Alexander Cutler and others to explain Eaton’s misdeeds. Here are excerpts from Cleveland Plain Dealer reporter Allison Grant’s article about Cutler’s explanation:

Details on how the emails surfaced are in a report by Latham & Watkins, a giant New York law firm that Eaton hired to help with Frisby litigation. The Latham report is attached to an affidavit from Eaton General Counsel Mark McGuire.

According to the report, James Brandt, managing partner of Latham’s New York office, met in February with lawyers at Eaton to hear a summary of a presentation they’d prepared for a special committee of Eaton’s board of directors about the Frisby litigation.

In reviewing documents assembled for the presentation, Brandt noticed an email thread from March 23, 2007. It contained exchanges that Brandt thought should have been submitted to the court in Hinds County, when it was investigating whether Peters tried to improperly influence DeLaughter.

Eaton then asked Latham to conduct an internal inquiry into why the email was not found earlier, whether any others should have been turned over and the reasons for the failure.

Latham’s report said the firm discovered no evidence of a deliberate attempt by Eaton to hide emails. But it did find "serious lapses" in producing records.

Latham describes how individual lawyers and legal assistants at Eaton reviewed emails saved on their computer for ones they thought should be submitted to a special master in Mississippi investigating whether there was judicial corruption.

Litigation counsel Sharon O’Flaherty said that she collected responsive emails, including her own, and provided them to her boss, Vic Leo, Eaton’s chief litigation attorney, the Latham report said. None of the files contained the two recently produced email exchanges, Latham said.

The company IT department also made forensic copies of computer hard drives of O’Flaherty, Leo and other lawyers. Two IT employees interviewed by Latham said it was the department’s practice to apply search terms — in this case "Peters," "DeLaughter," "Frisby" and several other words — to all files, including Word, Excel, PowerPoint, PDFs and emails.

But an IT employee said Leo told him in a phone call not to search emails because attorneys in the company’s law department already had reviewed their own mailboxes. The employee’s supervisor also recalled hearing that had been the directive.

Latham’s report said Leo denied instructing the IT team not to search emails. In his affidavit, Leo says that Eaton made a good faith effort to comply with all court orders and that any oversights were inadvertent.

O’Flaherty, in her affidavit, said she reviewed her email mailbox when she learned of the order to preserve documents because of the Peters-DeLaughter probe. O’Flaherty said she gave emails to Leo for review. She also said it was her understanding that the IT department had forensically searched her hard drive in 2008.

"I never did anything to withhold, alter, delete or hide any responsive documents and the ‘newly discovered’ emails are still on my computer, which I verified today," O’Flaherty said in her statement, dated May 16.

Here is a link to Cutler’s affidavit. The affidavit states that Cutler personally met with Eaton’s outside lawyers John Sneed of Wise Carter in Jackson and James Brandt of Latham & Watkins in New York. Neither of these lawyers or their firms were involved when Eaton hired Ed Peters.

Just as significant to me is who apparently wasn’t at that meeting: Eaton’s Milwaukee law firm that hired Ed Peters and appeared to be calling a lot of the shots through much of the litigation.

It has long been my opinion that it was imperative for Eaton to cut out its in-house lawyer and the outside firm that hired Peters and completely turn things over to Wise Carter and other lawyers who did not have a dog in the hunt. It looks like they now have. And heads have rolled.   

The Plain Dealer also reports that Eaton fired in-house lawyers Vic Leo and Sharon O’Flaherty last week:

Eaton Corp. has fired two top attorneys as the company faces on-going scrutiny from a Mississippi judge about how controversial emails in a trade-secrets case popped up years after they were supposed to be produced.

Eaton confirmed that Vic Leo, vice president and chief litigation counsel, and Sharon O’Flaherty, litigation counsel, have been let go.

Leo is the guy who told the IT department to not search for emails. Leo says he didn’t do anything wrong and his affidavit has the familiar “we didn’t do anything wrong” ring to it.  

But it gets worse for Eaton. As NMC reports, the Justice Department dismissed all criminal charges against the former Eaton (and now Frisby) employees. Eaton alleged that the employees stole trade secrets and claimed $1 billion in damages in the Hinds County litigation.

To summarize where things now stand: the criminal case is dead and Eaton’s civil case is dead. The only thing that’s left are lawsuits against Eaton. This could end with Eaton writing a check—or multiple checks.

Eaton now appears to be saying and doing the right things—and listening to the right lawyers. Among other things, Eaton proposes as one of its sanctions that it sponsor courses at Ole Miss and UMC law schools on electronic discovery.

It was apparent in 2009 that this would end badly for Eaton. Of course Eaton lawyers knew what Peters was up to. As always, the cover-up is worse than the crime. It now looks like the Eaton lawyers who knew tried to cover it up. That appears to be what Judge Weill thought.  

The big question now is does Cutler survive as CEO? In today’s world of lackey boards (Chesapeake for example), the answer is probably yes. But an independent Eaton board would launch an investigation of what Cutler knew and when he knew it, just to be safe.