Court Orders Morgan Stanley to Pay Damages to LVMH

LVMH, the maker of Louis Vuitton handbags and Moet champagne, won a court judgment Monday ordering investment bank Morgan Stanley to pay at least $38.5 million in damages for allegedly biased research that hurt LVMH’s image and helped its rival Gucci.

In the first major ruling by a European court on conflicts of interest between research and investment banking services, the Paris commercial court said Morgan Stanley had “considerably prejudiced” LVMH and helped Gucci, its own client.

LVMH, whose brands include Vuitton bags, Tag Heuer watches and Moet et Chandon champagne, had sought $128.5 million in damages.

It argued successfully that Morgan Stanley carried out a three-year campaign of “systematically erroneous and biased information” against LVMH while hiding its business relationship with Gucci.

The suit is the latest twist in a long-running global scandal over conflicts of interest between research and investment banking departments operating under one roof. Wall Street’s biggest brokerages, including Morgan Stanley, agreed last year to pay $1.4 billion to U.S. and state regulators to settle allegations that the firms routinely issued tainted research during and after the 1990s bull market.

Imposing $38.5 million in punitive damages at Monday’s hearing, the court said further compensation would be awarded for the financial loss LVMH was found to have suffered as a result of Morgan Stanley’s research bias. It appointed an independent expert to produce an estimate within three months.

The court also rejected Morgan Stanley’s contention that the lawsuit was motivated by lasting enmity over the bank’s 1999 role in helping Gucci evade a planned LVMH takeover.

Presiding Judge Jean-Pierre Eck said the court agreed that the decision by Morgan Stanley luxury analyst Claire Kent and her team in mid-2002 to slash their valuation of LVMH by 10% had been unjustified.

The judgment also condemned the investment bank for warning that a credit downgrade was imminent for LVMH based on a 3-month-old ratings agency report, while ignoring positive financial results the company had posted since then.

Morgan Stanley President Stephan Newhouse said the court’s ruling was “completely wrong” and vowed to appeal.

“The judgment has very serious implications for freedom of speech and analyst independence and threatens the very existence of analysts,” he said.