A Paris court on Monday found U.S. investment bank Morgan Stanley guilty of defaming luxury goods leader LVMH in a landmark ruling which, if upheld, could change the face of investment research.
Following a 14-month legal battle, the Paris Commercial Court upheld allegations by LVMH that Morgan Stanley’s equity research had been biased against it, and awarded 30 million euros ($38.5 million) in compensation.
The five-judge tribunal under Judge Jean-Pierre Eck also appointed an “expert” to evaluate the extent of material damages against LVMH, which said it had evidence that could prove these damages would exceed 70 million euros.
Patrick Ponsolle, chairman of Morgan Stanley’s French operations, branded the judgment “terrifying for analysts” and said his company would seek to have the ruling overturned in the Court of Appeal.
“Obviously, we’ll appeal against a decision which seems without any real substance, without any real teeth, that we believe is totally unjustified,” Ponsolle told Reuters after the hearing. “It would not hold in a normal court.”
Analysts who follow major brokerages said the ruling could change how analysts cover French companies, but that it was unclear whether there would be repercussions in other major European markets.
In the United States, the legal barriers needed to prove defamation are considered much higher than in France, said Brad Hintz, who covers brokerages for Bernstein Research in New York.
LVMH accused Morgan Stanley of publishing incorrect information about its debt position, credit rating and currency exposure, trying to manipulate its stock price, and concealing its banking relations with LVMH’s arch-rival Gucci.
Eck said Morgan Stanley inflicted damage on the reputation of the French group -- home to such brands as Louis Vuitton, Guerlain, and Moet & Chandon.
In an expanded court opinion made available several hours after the original ruling, Eck said that Morgan Stanley did not enforce a strict separation of its investment banking and research divisions.
Research issued by well regarded Morgan luxury goods researcher Claire Kent were biased against LVMH and in favor of Gucci, and that Kent’s influence affected the market for LVMH stock, according to Eck.
Morgan Stanley strenuously denied the allegations and launched a 10-million-euro counterclaim.
Pierre Gode, adviser to LVMH president Bernard Arnault, told Reuters he was happy with the verdict.
“We are very satisfied, because the judgment of the court sets the clear principle of the necessary separation of financial analysts on one side and investment banking on the other side,” Gode said.
“Today the court showed good jurisprudence, which means that in future analysts will be free from any pressure from the investment banking operations,” Gode said, adding he believed this is what had happened at Morgan Stanley.
But Rick Levitt, a research manager at Dresdner Kleinwort Wasserstein, expressed concerns for the future of investment research.
“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,” Levitt said.
The head of a large Paris-based research house pointed at what he said was a paradox at the heart of the verdict.
“Even if the intention of the tribunal was to strengthen the independence of the analysts, it risks seriously limiting their already weak ability to resist the power of the bosses of listed companies,” he told Reuters.
But one French broker welcomed the ruling.
“It’s the first of its type in Europe and it ought to make French market authorities even more vigilant on the independence of research and on the separation of sell-side analysis and commercial banking operations,” he said.