“Americans learn only from catastrophe and not from experience.”
— Theodore Roosevelt

Caveat vendor
May 19th 2005 | NEW YORK
>From The Economist print edition

A Florida court wallops one of Wall Street’s top investment banks

COULD the headlines get any worse for Morgan Stanley? Already facing an attempt by dissident former managers to unseat its chief executive, on May 16th the investment bank was ordered by a Florida court to pay $604m for defrauding Ronald Perelman, one of America’s smartest and richest investors. Mr Perelman contended that Morgan Stanley had misled him in 1998 when he agreed to accept shares in its client, a second-rate appliance manufacturer named Sunbeam, in exchange for his controlling interest in Coleman, a supplier of camping equipment.

And yes, things could get worse. On May 18th, after no more than a brief deliberation, the jury decided to award Mr Perelman another $850m, this time in punitive damages.

Yet none of this was ever brought before the jury, because of something that turned out to be critical to Morgan Stanley’s defence. It had consistently failed to turn over internal e-mails. As the bank had done in other investigations, it blamed the omissions on computer errors and the like. This time, however, in Mr Perelman it faced an adversary who was implacable, well represented and determined to extract more than a token settlement; past opponents, mainly regulators, have been more easily satisfied.

Worse still for the bank, it faced a judge who found its delays and evasive answers to requests intolerable. “Many of these failings were done knowingly, deliberately and in bad faith,” concluded Judge Maass, in her critical pre-trial ruling. “A reasonable juror could conclude that evidence of Morgan Stanley & Co’s misconduct demonstrates its consciousness of guilt.”

That ruling, and the thought that lots of embarrassing dotcom-era e-mails might come to light, will warm the heart of many a plaintiff lawyer. And an odd twist to the Sunbeam case is worth a moment’s meditation—not for Morgan Stanley specifically, but for the whole financial industry. According to Mr Perelman’s allegations, the company’s problems came to light only because of the demands of its auditor: Arthur Andersen, an accounting firm once renowned for its probity. How easily can reputations crumble to dust.

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