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Detailing the Defense: Morgan Stanley Sues LVMH for $11.8 Million

Morgan Stanley countersues LVMH for $11.8 million, citing damages caused by proceedings it considers “abusive.”

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PARIS — Fending off a $118-million bias and conflict of interest suit launched by LVMH Moët Hennessy Louis Vuitton, Morgan Stanley relied on an unusual industry expert on its defense: Bernard Arnault.

The LVMH chief is cited in the investment firm’s case, tabled Monday at the commercial court here, since he expressed opinions similar to those of Claire Kent, the Morgan Stanley luxury analyst he accuses of waging an anti-LVMH, pro-Gucci Group campaign in her research and in the media. Morgan Stanley is Gucci’s longtime financial advisor.

Arguing that Kent’s comments on LVMH were “completely justified,” Morgan Stanley’s defense quotes Arnault as agreeing with her on such topics as the impact of yen weakness and the Iraqi conflict on the luxury sector.

But the investment bank also disagrees sharply with LVMH, accusing it of “truncating and manipulating” Kent’s writing to construct its case.

Also on Monday, Morgan Stanley filed a counterclaim with the court seeking $11.8 million, converted from euros at current exchange, for damages caused by proceedings it considers “abusive.” Legal experts had been expecting a higher amount. But Morgan Stanley characterized the LVMH demand as “exorbitant and without precedent,” while describing its amount as “justified in all the circumstances of the case.”

An LVMH spokesman said LVMH stands by the merits of its case, but had no comment on the Morgan Stanley defense, saying its legal team needs to study the documents tabled Monday.

However, sources close to the French group said it views the defense as weak, since it stopped short of accusing LVMH of any false declarations. As reported, LVMH already claimed a victory last month when a magistrate denied a Morgan Stanley request to have its opponent clarify certain evidence.

Lawyers for Morgan Stanley filed its defense and counterclaim with the court during a brief hearing and exchange with LVMH counsel. The court set Sept. 15 as the date for the luxury group to respond, part of a long process of submissions and rebuttals that could drag the case into next year.

None of the documents tabled Monday were made public, but Morgan Stanley organized a press briefing to outline its defense.
As legal experts expected, Morgan Stanley’s legal team trumpeted Kent as a top-ranked analyst admired by her peers and superiors. It noted that Kent covers seven luxury firms and oversaw more than 400 published reports on the sector from 1999 to 2002.

But the crux of the defense is that LVMH constructed its case by cherry-picking Kent’s comments from only a “handful” of her reports and press articles, mostly from April 2001 and September 2002. Furthermore, Morgan Stanley charged LVMH with quoting Kent out of context.

At the briefing, Morgan Stanley cited nine instances where LVMH misconstrued Kent’s opinions, made “illogical” allegations or actually agreed with the investment bank.

For example, LVMH’s original writ, filed last October, cites an article in an Italian newspaper from April 2001 in which Kent is quoted as saying Fendi lacks strong management and design, while Yves Saint Laurent is on a fast track to profitability. The implication is that Kent trumpets YSL because its part of Gucci Group, while Fendi is belittled because it belongs to LVMH.

On Monday, Morgan Stanley pointed out that LVMH only owned 25.5 percent of Fendi at the time of the article, compared to 84.1 percent today, taking exception to LVMH’s description of Fendi as “an LVMH Group company.” The defense team also pointed out that the two unrelated observations were separated by 10 paragraphs in the original article, not juxtaposed as in the writ.

But in a case where both sides seem prepared to debate every letter, even LVMH’s punctuation is taken to task, with Morgan Stanley pointing out where its opponent underlined or put in boldface certain words in the writ for emphasis.

The most surprising element of Morgan Stanley’s defense is how it uses LVMH’s own words against it.

In the writ, LVMH infers that Kent attempted to persuade investors to buy Gucci stock over LVMH by stating in a report last September that a war in Iraq would lessen the likelihood of its DFS chain reaching breakeven. In its defense, Morgan Stanley cites Arnault as quoted in WWD. In disclosing first-half earnings at an analysts’ conference last September, Arnault said: “If there’s a war, airports and tourism will screech to a halt.”
Citing another example of how Kent and LVMH allegedly saw eye-to-eye, Morgan Stanley notes that the then-chief executive of Donna Karan, Pino Brusone, agreed with Kent that the LVMH-owned company was having problems. LVMH complained that Kent told the Italian newspaper La Repubblica that “purchases like the Donna Karan brand appear to be integrating badly.” But the investment bank notes that Brusone told the Wall Street Journal Europe a few months earlier that: “We have to suffer in the beginning….[We] will close stores, cut back production and restructure the business.”
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