PARIS: A Paris court yesterday found US financial powerhouse Morgan Stanley guilty of defamation in its investment research, sending shockwaves through the investment banking industry.
Following an acrimonious 14-month legal battle, the court upheld allegations by global luxury leader LVMH that Morgan Stanley’s equity research had been biased against it, fining the US bank 30 million euros (US$38.5 million).
Morgan Stanley said it would appeal against the ruling.
The court said Morgan Stanley had committed a “serious fault” to the detriment of LVMH and must pay a further 10,000 euros (US$12,800) to restore the brand. It also appointed an expert to decide if the investment bank should pay extra damages.
Although the court’s verdict does not set a legal precedent in the United States or Europe, if it stands it could pave the way for similar filings against any research house active on the French market. LVMH stock erased earlier losses after the ruling, trading up 0.17 per cent at 59.15 euros (US$75.71) by 1357 GMT.
Sources close to the case said there had been no attempt by either party to reach an out of court settlement.
The LVMH/Morgan Stanley case has no direct link to the probe by New York State Attorney General Eliot Spitzer into allegedly biased research, yet investment banks remain sensitive to allegations of bias in the wake of Spitzer’s action.
Morgan Stanley in December 2002 agreed to pay US$125 million of a total US$1.4 billion settlement made by Wall Street banks in the Spitzer suit, but did not admit any wrongdoing.
Although the findings of the French court cannot serve as a legal precedent under European or US legislation, a ruling against Morgan Stanley could pave the way for similar actions against any market player active in France.
This might mean brokers adopt an excessively cautious stance when publishing research on French companies, said one head of research. “They’d have to be much more cautious about putting anything in print. They wouldn’t be more cautious in giving their opinions, but those opinions would go underground. That becomes extremely unhealthy for good and efficient capital markets.”
LVMH alleges that Morgan Stanley published incorrect information about its debt position, credit rating and currency exposure, tried to manipulate its stock price, and concealed its banking relations with LVMH’s arch rival Gucci.
The bank denies all wrongdoing and has made a counterclaim, alleging damage to its reputation.
A finding in Morgan Stanley’s favour would effectively preserve the status quo, although it might have the effect of dissuading companies from launching similar actions in future.
Conversely the consensus of market players was that a substantive judgment in favour of LVMH could cause serious problems for investment banks. “Sell-side analysts are paid to take views of situations. Sometimes they’re right, sometimes they’re wrong,” said one hedge fund manager.
