PARIS — Chilling.
That is likely to be the impact on the investment analyst community worldwide following the landmark decision Monday by a Paris court awarding LVMH Moët Hennessy Louis Vuitton a victory in its long-smoldering war with Gucci Group and investment bank Morgan Stanley. The court ordered Morgan Stanley to pay at least $38.4 million for gross misconduct and “moral prejudice.”
But that’s not all.
The court also appointed a chartered accountant in Paris to calculate the amount of “material prejudice” owed, leaving the French luxury group optimistic it might win every penny of its original suit for $128 million, or 100 million euros (dollar figures have been converted at current exchange.)
LVMH sees it as just compensation for what it described as a premeditated and systematic effort by analyst Claire Kent to discredit and denigrate LVMH. Morgan Stanley advises Gucci on acquisitions and other financial matters.
Meanwhile, Morgan Stanley said it would “vigorously” appeal the ruling, firm in its conviction that LVMH’s suit was groundless, opportunistic and abusive. Morgan Stanley had launched a counterclaim for $12.8 million, or 10 million euros, for damages caused by the proceedings.
The bank also said it stood fully behind Kent, one of the most popular and highest-rated analysts in the luxury sector.
Pierre Godé, LVMH’s legal counsel and a key adviser to LVMH chairman Bernard Arnault, beamed as he spoke to reporters outside the Paris commercial court.
“It is a very good decision, because the court has decided to make very clear the separation between financial analysts and investment banking,” he said. “The court has said analysts must be completely independent in front of the investment community.”
Listing some of Morgan Stanley’s wrongful acts in a press release, LVMH said Kent published incorrect information about its debt position, credit rating and currency exposure; made erroneous statements about the “supposed maturity” of the Louis Vuitton brand; asserted baselessly that LVMH management destroyed shareholder value, and concealed Morgan Stanley’s banking relations with Gucci.
Boilerplate statements in Morgan Stanley reports were among the most contentious issues in the suit. They stated that Morgan Stanley had a director in common with LVMH and that it would be seeking compensation from the French group for investment advice.
On Monday, the court said Morgan Stanley’s actions caused LVMH “considerable financial and reputational harm.”
Godé and LVMH lawyer George Terrier described Monday’s decision, in what is believed to be the first case of its kind in France, as a landmark one that ultimately would be enshrined in French law. At the least, it is believed to set a precedent for any future cases against other investment or research houses.
But first the case must wind its way through Paris’ court of appeals, a process that could take several months.
In the meantime, Morgan Stanley also was ordered to pay for advertisements to publicize the decision, and other costs LVMH may incur in buffing its image in the wake of the case and of Morgan Stanley’s past research reports.
“It’s unfortunately another black eye for the investment research community, coming on the heels of some major scandals in the U.S.,” Anthony Sabino, associate professor of law at the Tobin College of Business at St. John’s University, said, alluding to the string of Enron-like catastrophes and New York State Attorney General Eliot Spitzer’s probes into Wall Street.
In December 2002, Morgan Stanley agreed to pay $125 million of a total $1.4 billion settlement made by Wall Street banks in the Spitzer suit, but did not admit any wrongdoing.
Sabino said Monday’s ruling suggests Europe’s security laws are likely to take on “some of the more litigious aspects of American law.”
He also said the decision would reverberate in the business community. “It’s a sharp warning to equity analysts covering the fashion community when one of the leading houses in the industry is willing to protect its name and image and take aggressive action against anyone who soils it.”
“This decision, unfortunately, has poor timing,” said Richard Hastings, Retail Sector analyst at Bernard Sands. “It is compounded by the recent news from European companies such as Adecco, Parmalat and Ahold and the issues of fraud and conflict of interest they’ve raised. These developments could trigger a European or international version of the Sarbanes-Oxley Act. That creates a potential for damage to capital markets. It is my hope that the capital markets are not damaged by overregulation from overseas. If anything, Europe is already overregulated.”
“On the one hand, you could just dismiss it as the French courts being biased against an American company,” said consultant Emanuel Weintraub of Weintraub Associates. “On the other hand, you have LVMH taking issue with research written during the stock market bubble, or just after the bubble, which was a time, we have now learned, when a lot of research was tainted by conflicts of interest.”
“The situation is regrettable and once again points out the virtual impossibility of enforcing rules prohibiting conflicts of interest when conflicts of interest naturally abound,” said Peter J. Solomon, chairman of the investment banking firm that bears his name.
Analysts, speaking on condition of anonymity, said they were surprised the court sided so strongly with LVMH and warned the ruling would place a further chill on already tense dealings with the companies they cover.
“I think it’s quite sad for my profession because I’m sure it is a harbinger of more to come,” said one Paris-based luxury analyst. “It could open the door to more retaliation against analysts and that’s what worries me….Already, it’s difficult enough to do our jobs.”
When LVMH first filed its case, it cast light on the stern, even violent, admonishments analysts can encounter for downgrading a stock or criticizing a company’s strategies. Since then, many investment firms have tightened the reins on researchers. Today, it is commonplace for internal legal experts to scrutinize analysts’ comments that might appear in the media.
As reported, LVMH used Kent’s comments about the luxury sector in French, Italian and American newspapers to help illustrate its case.
“It’s scary,” said a London-based analyst, also speaking on condition of anonymity. “It’s another step toward curtailing our freedom of speech.”
Analysts who know Kent and her work said she has a reputation as a straight shooter and were shocked by Monday’s ruling. “She’s not the type of person that you’d expect to get this kind of decision,” said one analyst. “She’s known for top-notch research and for her integrity.”
A lawyer who teaches at the London School of Economics and who asked that his name be withheld said, “There is a lot of sensitivity and concern in London about the legal risks associated with equity research right now. The Financial Services Authority [Britain’s equivalent of the S.E.C.] has come out with a think piece on the issue of conflict of interest with regards to banks carrying out equity research and advising the companies they report on. The feeling is that, if the findings become more serious, then publishing research reports will have to stop. The LVMH-Morgan Stanley case appears to be the last straw. It is a tremendously problematic issue right now among those who evaluate legal risk at the banks.”
Speaking outside the courtroom, Patrick Ponsolle, president of Morgan Stanley in France, condemned the ruling as unacceptable and terrifying.
“If companies can claim prejudice on the basis of undescribed judgments and faults, it is very dangerous and it is something we all have to think about,” he said.
In a statement, Stephan Newhouse, chairman of Morgan Stanley International Ltd., went further, saying the ruling has grave consequences in France for freedom of speech “and threatens the very existence of analysts….This opens the floodgates for companies to use the threat of legal action to persuade analysts only to make positive statements about them.”
But Godé claimed the decision represents a victory for analysts, too, seeing Monday’s ruling as “good news for companies and for financial analysts and as well for the public….[It] proves the necessity of a Chinese wall [between equity researchers and investment bankers].”
The court-appointed accountant, Didier Kling of Avenue Friedland in Paris, is now faced with sifting through mountains of documents related to the case, which spans the years 1999 to 2002. Evidence tabled by LVMH includes correspondence between LVMH and Morgan Stanley, some e-mail records and a CD-Rom containing some 1,900 pages of Kent’s equity research.
LVMH’s relations with Morgan Stanley took a turn for the worse following Kent’s May 2000 downgrade of LVMH stock, from “outperform” to “neutral.” The stock peaked in August of that year at $93.90 and then fell by a third over the following 12 months.
It is believed the two parties, which have been warring ever since Gucci and Morgan Stanley thwarted LVMH’s hostile takeover attempt of Gucci in 1999, did not seek any settlement out of court.
Sabino said it might have been better that way. “Obviously, an out-of-court settlement might well have been better for Morgan, but even for LVMH, avoiding the glare of further publicity, and now the upcoming appeal, would have likely been better,” he said. “It is a shame that two such powerhouses of industry and fine names could not resolve their differences in a quieter manner.”