03.22.07
Morgan Stanley Inc. won a reversal of a $1.58 billion verdict handed to billionaire Ron Perelman for misleading him in a deal to sell Coleman Co. to Sunbeam Corp. The Florida Court of Appeal in West Palm Beach ruled that the New York-based investment bank was punished unfairly for destroying e-mails involved in the transaction. The latest decision will be appealed in a case that could end up in the Florida Supreme Court.
Perelman, the chairman of cosmetics giant Revlon Inc., accused Morgan Stanley of conspiring with client Sunbeam to mislead him about the company's financial health. Because of this, he sold camping supplies maker Coleman Co. to Sunbeam in 1998months before Sunbeam restated earnings and ahead of its 2001 bankruptcy.
After the 2-1 vote, Judge Carole Y. Taylor wrote in her opinion that because there was no proof at trial on the correct measure of damages, the final judgment for compensatory damages should be reversed.
The original verdict on behalf of Perelman was seen as a major slam against Morgan Stanley's management, especially then-chief executive Philip Purcell. Coupled with lackluster earnings and a sagging stock price, a shareholder revolt forced him out in June 2005 and replaced him with John Mack.
The new regime at Morgan Stanley immediately hired new lawyers to overturn the verdict. The company could free up some $360 million it set aside after the verdict that was earmarked to pay off a legal settlement.
This is clearly a victory, Morgan Stanley chief financial officer David Sidwell said in a conference call with analysts after the company reported first-quarter results. Obviously we have to go through it in detail and work it out, and obviously there are additional steps the other party could take.
In a statement, Perelman said he was disappointed by the ruling but believes he ultimately will prevail in a higher appeal.
In the 2005 trial, Perelman said he relied on Morgan Stanley's statementsand was fooled into a deal that allotted him Sunbeam shares as part of the Coleman sale.
Morgan Stanley maintained there was no criminal intent in destroying e-mails related to the deal because it was not known at the time they were written that the information was inaccurate. But the trial judge found Morgan Stanley to be at fault for not turning over the e-mails and instructed a jury to assume the firm was guilty of defrauding Perelman and Coleman.
Jurors awarded Perelman $604 million in actual damages and $850 million in punitive damages. Another $123 million in interest was later added.
In the verdict's reversal, judges Taylor and George Shahood said Morgan Stanley was entitled to win because no legally cognizable damage was shown as a result of the alleged fraud. However, Judge Gary Farmer's dissent said compensatory damages should be left in place although the case should be retried on punitive damages.
The judges veered away from making any commentary about the legality of being able to produce electronic evidence. Instead, it focused on whether Perelman was able to prove damages regardless of Morgan Stanley handing over backup tapes for its e-mails.
The court focused on the damages, which allowed them to throw the judgment out, said Barry Cohen, a partner with Thorp Reed & Armstrong that focuses on commercial and business litigation. Certainly Morgan Stanley is very happy with that, but it didn't really address the legal issues. You can't read into this that its OK to play fast and loose with e-mails.