A French judge on Monday ordered Morgan Stanley to pay $38 million, to LVMH Moët Hennessey Louis Vuitton for comments made by an analyst for the investment bank over a period of years when Morgan Stanley had an investment banking relationship with a rival luxury goods maker, Gucci Group, The International Herald-Tribune reports.
It was the first case brought in Europe in which an investment bank was accused of issuing tainted research in the interest of one of its investment banking clients.
Critics of the suit had expressed concern that it would lead to analysts being afraid to criticize any company, a point Morgan Stanley raised in saying it would appeal Monday’s ruling, the newspaper reports. But LVMH argued that analysts could now feel free to speak without being under pressure from bankers at their firm.
In the latest chapter of a long-running feud between Gucci and LVMH, the judge said Morgan Stanley might be ordered to pay more later after an expert determined what other damages LVMH had suffered. LVMH had sought a $127.2 million award.
“The facts constitute a serious fault on the side of Morgan Stanley, to the detriment of LVMH,” the commercial court judge, Gilbert Costes, reportedly said. Morgan Stanley, he said, “caused a moral and material prejudice to LVMH’s image, which justifies reparations.”
The judge reportedly said that Morgan Stanley’s statements about LVMH, in analyst opinions and in interviews by company executives with reporters, included numerous errors and that the facts constituted faute lourde, or serious tort.
“Morgan Stanley believes this judgment is completely wrong and sets a dangerous precedent,” Stephan Newhouse, president of Morgan Stanley, reportedly said. “The judgment has very serious implications in France for freedom of speech and analyst independence and threatens the very existence of analysts. This cannot be good for investors.”
He reportedly added, “Since LVMH put forward no evidence either of loss or causation,” he reportedly said, “we find the damages award unjustifiable and impossible to understand.”
In his opinion, the judge reportedly said, “the structure of Morgan Stanley did not include a strict separation between investment services and financial analysis services.”
He accepted the LVMH arguments that a variety of opinions expressed by Clare Kent, the Morgan Stanley analyst, and other officials, constituted errors, including one that the Louis Vuitton brand had reached maturity. That, the judge reportedly said, could leave the impression that it was bound to decline.
Morgan Stanley, he reportedly found, was “sorely lacking” in its duty to be independent and was guilty of denigrating LVMH. “Such behavior is not acceptable in a professional financial analysis firm of international reputation, which must constantly check and verify its information, taking into account the stakes for the investors and companies involved.”
In an interview, Oliver Labasse, a spokesman for LVMH, said analysts had no reason to be concerned over the court’s ruling. “We have never attacked the analyst, never,” he reportedly said. “We have attacked the deviant, biased behavior of Morgan Stanley, which in our view and in the tribunal’s view today, did not respect the Chinese wall between the analysts’ sector and the investment banking sector of the bank.”
Labasse reportedly said LVMH did not wish to intimidate analysts from writing negative reports about it or other companies. “You can have an analyst who said sell,” he reportedly said. “The question is, ‘Did you say sell because your bank does not respect the Chinese Wall?'”
The judgment is the latest development in a long-running feud between Gucci and LVMH, headed by French magnate Bernard Arnault, lost a heated 2 1/2 year bidding war for control of Gucci and agreed to sell its remaining Gucci shares to François Pinault, a French billionaire who had helped Gucci thwart Arnault’s advances. The judge said Morgan Stanley had contributed to the failure of the LVMH bid.
LVMH sued Morgan Stanley, Gucci’s banker, more than a year ago accusing its luxury-goods analyst, Claire Kent, of publishing unusually critical research notes about LVMH, the newspaper reports. LVMH contended that Kent published biased research to benefit Morgan Stanley’s investment banking relationship with Gucci. Kent has been ranked the top analyst in her sector for nine consecutive years by money mangers polled by Institutional Investor magazine.
Morgan Stanley filed a countersuit last May charging LVMH and its chairman, Bernard Arnault, of instigating an “unjust and abusive procedure” against it and demanding $12.7 million in damages and the publication of a final court verdict in 20 newspapers and magazines.