M&A

Morgan Stanley’s Legal Bill Hits $1.4B

The bank has pledged to appeal both the original verdict and the punitive damages, citing the ''unprecedented and highly prejudicial rulings impose...
Stephen TaubMay 19, 2005

A Florida jury has awarded billionaire investor Ronald Perelman $850 million in punitive damages stemming from the 1998 sale of his stake in Coleman Co. to Sunbeam Corp., according to published reports.

Add that to the $604.3 million in actual, or compensatory, damages the jury awarded earlier this week, and the investment bank’s legal tab amounts to $1.4 billion. That’s roughly four times the $360 million that Morgan Stanley had placed in reserve, and much more publicly embarrassing than the $20 million that Perelman would reportedly have settled for in 2003.

The Revlon Inc. chairman had claimed that when he sold his 82 percent stake in Coleman to Sunbeam for $1.5 billion in stock and cash, he had been defrauded by Morgan Stanley, his adviser in the deal. Shortly afterward, Sunbeam became embroiled in a massive accounting scandal, which sunk its stock as well as Perelman’s investment. Sunbeam eventually filed for bankruptcy protection.

Morgan Stanley has pledged to appeal both the original verdict and the punitive damages, and some observers believe the parties will settle for a smaller amount. Even so, the $1.4 billion figure is another staggering blow to embattled Morgan Stanley chief executive officer Philip Purcell, who has faced a revolt by former top executives who want him to resign.

“This court has done a great injustice to the employees and shareholders of Morgan Stanley,” Purcell said in a statement. “We will fight to have this decision overturned and we fully expect to prevail.” He added that the bank is financially strong and that this development “will not impede our ability to serve our clients and grow our business.”

Morgan Stanley added in its statement: “This damages award is legally deficient and a by-product of the unprecedented and highly prejudicial rulings imposed by the judge throughout the trial. Morgan Stanley was not permitted to defend itself on the merits in either the compensatory damages or the punitive damages phases of the trial and, consequently, was denied a fair hearing.”

The company continued to argue that far from being part of the Sunbeam fraud, Morgan Stanley was a victim of that fraud, losing $300 million when Sunbeam collapsed, “one of the many facts that the jury was not allowed to hear.”