Morgan Stanley fined over research bias

PARIS — PARIS - A French court has ordered Morgan Stanley to pay 30 million euros, or $38 million, to LVMH Moet Hennessey Louis Vuitton SA, ruling that research by the Wall Street bank defamed LVMH.

A lawsuit brought by LVMH contended that the luxury goods analyst for Morgan Stanley had issued biased research to help its investment banking client, Gucci Group, LVMH's biggest rival.


The ruling yesterday echoes concerns that have been raised in the United States and elsewhere over potential conflicts of interest among analyst at investment banks. The biggest Wall Street firms, including Morgan Stanley, agreed in late 2002 to a $1.4 billion settlement with regulators over charges that analysts published misleading stock research. Morgan Stanley's share was $125 million.

"The issues you find here you are going to find over there," Eliot Spitzer, the New York attorney general who led the investigations of Wall Street analysts, said of the French case.


The court decision may change how investment banks worldwide provide corporate research about French companies.

Critics of LVMH's lawsuit 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 the ruling. But LVMH argued that analysts could now feel free to speak without being under pressure from investment bankers at their firm.

The court also said yesterday that Morgan Stanley might be ordered to pay more later after an expert determined what other damages LVMH had suffered. LVMH sought a 100 million euro award.

"The facts constitute a serious fault on the side of Morgan Stanley, to the detriment of LVMH," said Gilbert Costes, the top ranking judge of the Commercial Court of Paris. Morgan Stanley, he said, "caused a moral and material prejudice to LVMH's image, which justifies reparations." He said the 30 million euro judgment covered the "moral" part of the damages.

Costes said Morgan Stanley's statements about LVMH, in analyst opinions and in interviews by company officials with reporters, included numerous errors and that the facts of the case constituted "faute lourde," or an intention to do damage.

Stephan F. Newhouse, the president of Morgan Stanley, said the firm would appeal the ruling. "Morgan Stanley believes this judgment is completely wrong and sets a dangerous precedent," he said.

"Research cannot constitute 'fautes lourdes' because it contains comments that are not positive, unless the giving of an opinion becomes in itself an offense," he 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 added: "This opens the floodgates for companies to use the threat of legal action to persuade analysts only to make positive statements about them."


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 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."

Analysts, he said, should be pleased by the ruling. "The analysts will have the ability to use the judgment today to say to the bank, 'Don't put pressure on me.' "

But Rick Levitt, a research manager at Dresdner Kleinwort Wasserstein, was more concerned. "I think this is a pyrrhic victory for LVMH and for French companies because it's going to make every major bank certainly think long and hard before expanding coverage of French companies, which is not a good thing," he told Reuters news service.

The ruling was the latest development in a long-running feud between Gucci and LVMH, which is best known for its Louis Vuitton leather goods and its Moet & Chandon champagne. 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 Frangois Pinault, a French billionaire who had helped Gucci thwart Arnault's advances.

The judge said that Morgan Stanley had contributed to the failure of the LVMH bid.

LVMH sued Morgan Stanley, Gucci's banker, in November 2002, accusing its London-based luxury goods analyst, Claire Kent, of publishing unusually critical research notes about LVMH.


LVMH contended that Kent published biased research to benefit Morgan Stanley's investment banking relationship with Gucci.