Morgan Helped Sunbeam Inflate Its Finances, Judge Rules

Morgan Stanley suffered a setback in a Florida court Wednesday when a judge ruled that the bank helped Sunbeam Corp. improperly inflate its financial condition as it pursued a takeover of Coleman Co. in 1998.

In a related ruling, Florida Circuit Court Judge Elizabeth Maass also ruled that Morgan Stanley’s outside counsel, Kirkland & Ellis, could withdraw and she postponed the start of trial until April 4.

Morgan Stanley has already been taken to task by Maass in the past for what she concluded was its failure to produce e-mail documents requested by Coleman and for stonewalling the court.

“In sum, [Morgan Stanley] has deliberately and contumaciously violated numerous discovery orders,” the judge wrote. “The other discovery abuses outlined call into doubt all of Morgan Stanley’s discovery responses. The judicial system cannot function this way.”

Maass also ordered that Morgan Stanley’s behavior be reviewed with the jury and that jury members be instructed that they may consider these failings when deciding whether punitive damages were appropriate.

In 1998, MacAndrews & Forbes Holdings Inc., controlled by billionaire investor Ronald Perelman, sold camping equipment maker Coleman to Sunbeam for $1.5 billion in Sunbeam stock. But the value of the shares plunged when Sunbeam’s weak financial condition came to light amid an accounting scandal.

Sunbeam, the maker of blenders and other appliances, filed for bankruptcy protection in 2001.

In a 2003 lawsuit, Coleman claimed that Morgan Stanley -- which advised Sunbeam and underwrote $750 million in notes to help fund the purchase -- knew or should have known about Sunbeam’s financial condition. Coleman has asked for nearly $900 million in damages, but that could be tripled to about $2.7 billion under the state court’s rules.

A Morgan Stanley spokesman said that the investment bank disagreed with the court’s ruling and that “far from being a part of the Sunbeam fraud, Morgan Stanley was [a] victim of that fraud, losing $300 million.”

The firm lost $300 million on a loan it made to the appliance maker at the time of the Coleman transaction.

“In the event of an adverse verdict, we believe we have grounds for an appeal and intend to pursue them to the fullest extent,” the spokesman said.

A MacAndrews & Forbes spokeswoman said: “While the war Morgan Stanley is waging is not over, a just conclusion to this case is now clearly in sight.”