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An Analyst in Court: LVMH, Morgan Stanley Case Kicks Off Today

PARIS — LVMH Moët Hennessy Louis Vuitton may be parading couture on the runways this week — but it’s airing a bitter grievance in a...

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PARIS — LVMH Moët Hennessy Louis Vuitton may be parading couture on the runways this week — but it’s airing a bitter grievance in a Paris courtroom, too.

This afternoon, judges at commercial court here will convene to receive first submissions regarding LVMH’s $100 million lawsuit against investment firm Morgan Stanley, alleging bias in its research and conflict of interest. Morgan Stanley’s investment bankers advise Gucci Group, and LVMH alleges they influence the ratings of the bank’s chief luxury analyst, Claire Kent.

The 2 p.m. session is likely to be quick and dry, little more than an exchange of documents by lawyers for the two parties. The court is expected to set another date, likely a month from now, for Morgan Stanley’s counsel to respond to LVMH’s charges and evidence.

In other words, it’s the first salvo in yet another fashion battle pitting LVMH against archrival Gucci.

"I’m afraid it could be the beginning of a very long-term court war," said Philippe Metais, a partner at White & Case, a business law firm in Paris. He said the case could easily drag on for a year or more, depending on the workload of the courts and the pace at which the parties wish to proceed.

The case is believed to have no direct legal precedents in France. But Metais noted that it arrives at a time when criminal and civil cases are multiplying over the publicizing of false or misleading financial information. He said several large financial-information firms here have recently been ordered to pay damages in the tens of thousands of dollars for publishing errors about a company’s fortunes. He also mentioned investigations into financial corruption at European corporations such as Vivendi, which ousted chairman Jean-Marie Messier last year.

LVMH is suing Morgan Stanley under French tort law, specifically statute 1382 of the civil code. Metais explained that the law states that even when there is no written contract between two parties, there is an obligation of impartiality and care in business dealings.

LVMH declined to discuss what evidence it has to support its claim that Morgan Stanley has a bias against it.

Metais speculated that e-mails, correspondence or phone records could be among the evidence submitted in such a case. He noted, however, that all submissions and exhibits would be disclosed only at the discretion of the parties.
It is believed that LVMH’s lawyers will attack the ethics of Morgan Stanley and paint a scenario that puts Kent squarely in Gucci’s corner from the early days of the battle for control of Gucci to her present-day writings on the luxury sector. One source said LVMH may allege that Kent was present at a pivotal meeting in spring 1999 regarding the French group’s attempt to gain creeping control of Gucci.

More recently, LVMH’s beefs with Kent are said to center on her praise of Gucci Group strategy and, in particular, her confidence in the turnaround potential at Yves Saint Laurent, despite the fact that break-even targets have been delayed by Gucci. It is also believed LVMH might call into question Kent’s impartiality regarding other luxury issues, including Burberry. Morgan Stanley helped lead Burberry’s initial pubic offering last summer.

Another key issue is said to be a boilerplate statement in the bank’s research reports last year stating it expected to receive or seek compensation for investment-banking services from LVMH. The boilerplate also mentioned that Morgan Stanley shared a director in common with LVMH. WWD has learned LVMH took legal action on the former in the commercial court here last fall, before the $100 million bias lawsuit was filed. Morgan Stanley removed and rectified the offending statements before the court took any action.

Morgan Stanley declined to comment on today’s hearing or its defense strategy, reiterating that it rejects LVMH’s claim and plans to defend the lawsuit vigorously. It is believed Morgan Stanley’s rebuttals will be based on Kent’s track record as a top-rated analyst, arguing her ratings of LVMH were correct and her writings on the sector balanced.

But the case could take some interesting turns, according to legal experts here.

Metais noted that the court has the authority to appoint an outside expert with special competence in the field of dispute. This expert would have the power to request documents and evidence and launch investigations, ultimately compiling a final report for the judges. However, the court would likely appoint such an expert only at the request of one of the parties, he noted.

Another Paris legal source said the court could also appoint a mediator, if the two parties requested. That would allow the dispute to be contested confidentially outside the court, avoiding the glare of the media.
If the case proceeds at the commercial court here, the public may have to wait until the end of the long process of submissions and rebuttals before learning all the nitty-gritty. That’s when the court will set a date for a hearing, at which lawyers for each side argue "the facts of their claim and all the legal issues," Metais explained. Following that, the judge or judges convene three to six weeks later to deliver their final decision, and the award of damages, if any. The court has the power to award less in damages than the $100 million asked for, but not more, Metais noted.

But that might not be the end of the story. Each party has the right to appeal the court’s decision. That process could take two to three years, said the Paris legal source, noting that "the judges are very busy at the court of appeal. It’s a bit of a crisis in France."

An out-of-court settlement is also a possibility, but Metais characterized that as unlikely, as it would amount to at least a partial admission of fault by Morgan Stanley.

Many industry sources and legal experts polled by WWD suggest that the French group might have a tough time prevailing, given the lack of legal precedents. Still, sources allowed that Pierre Gode, Arnault’s right hand and a chief legal strategist, is a force to be reckoned with and that LVMH could harbor some secret weapons.

"Do not underestimate the home advantage of LVMH by suing in Paris," said Anthony Sabino, associate professor of law at the Tobin College of Business at St. John’s University, and a partner at Sabino & Sabino in Mineola, N.Y. "LVMH is going after Morgan Stanley, not as a securities law violation, but on the concept of fault. If the case had been filed in a U.S. court, the concept of fault would be similar to a tortious interference or defamation action."

Attorneys in the U.S., where there’s been an intense legal and media focus on the securities industry and conflict of interest issues, highlighted by the investigations of New York Attorney General Eliot Spitzer, are keeping an eye on the LVMH case.
"Obviously, the conflict between the same firm performing both research analysis and investment banking, which is such a hot topic here, has crossed the Atlantic," said Jerry Reisman, an attorney at Reisman, Peirez & Reisman. "The mere fact that Morgan Stanley performed investment banking and stock analysis and research is not a per se violation of any securities laws. However, if the analysis and research is untrue, false and misleading with intent not to be performed with care, then Morgan Stanley might be liable to LVMH under French law.

"Ms. Kent’s actions must be reviewed in the totality of all the events to see if she was impartial, in favor of Gucci, to help Morgan Stanley gain Gucci’s investment banking account."

The two American lawyers noted that the LVMH-Morgan Stanley ruling could tighten securities laws oversees. European laws are not as developed as they are in the U.S., resulting in greater flexibility for companies in how they conduct business.

Benjamin Mark Cole, editor of the soon-to-be published book, "The New Investor Relations," by Bloomberg Press, said the focus on the banking-analyst relationship isn’t likely to ease up any time soon.

"We have seen public companies become more aggressive in asserting that a negative analyst report was issued by someone with a financial ax to grind," he said. "There is now an understanding on the part of management that a negative report is probably either a form of retribution for not giving the investment banking business to the analysts’ securities firm or, as in the LVMH case, the analyst trying to help the client by bashing its competition.

"For better or worse, the standard corporate spin now is conflict of interest. The damning thing is that the brokerage industry can’t refute that, even if the analyst is correct, because these firms do have conflicts of interest."