Morgan Stanley won a major victory on Wednesday when a Florida state appeals court threw out a $1.58 billion award to billionaire financier Ronald Perelman over his 1998 sale of camping equipment company Coleman Co to Sunbeam Corp.
Perelman had accused Morgan Stanley of fraud in advising Sunbeam and helping the appliance maker hide its shaky finances while arranging the $1.5 billion Coleman purchase.
Coleman had received 14.1 million Sunbeam shares in the transaction. The stock became worthless after Sunbeam fired chief executive Al Dunlap and admitted it had inflated sales to prop up earnings. Sunbeam went bankrupt in February 2001.
In a 2-1 decision, Florida's Fourth District Court of Appeal in West Palm Beach said Perelman did not show what Sunbeam shares would have been worth at the time of the Coleman purchase had there been no fraud.
As a result, it said Perelman failed to show any "legally cognisable damage" stemming from the alleged fraud. "Because there was no proof presented at trial on the correct measure of damages, the trial court should have granted Morgan Stanley's motion for directed verdict," Judge Carole Taylor wrote for the majority.
A Florida jury had in May 2005 awarded Perelman $1.45 billion, including $604 million of compensatory damages and $850 million of punitive damages. The total rose to $1.58 billion with interest. Perelman had sued for $2.7 billion.
"To a certain extent, caveat emptor reigns," said James Ellman, president of Seacliff Capital, a San Francisco hedge fund that owns Morgan Stanley shares.
Morgan Stanley spokeswoman Jeanmarie McFadden said: "We're gratified by this decision. There's not a lot of ambiguity here. This is a victory for us."
Morgan Stanley had in 2005 set aside $360 million of reserves for the case. Many analysts had expected the $1.58 billion award to at least be reduced. In February 2006, Morgan Stanley paid $15 million to resolve a US Securities and Exchange Commission probe into its failure to retain e-mails.
Morgan Stanley on Wednesday also posted a 60 percent increase in first-quarter profit from continuing operations to a record $2.56 billion, or $2.40 per share. Its shares rose $3.27, or 4.3 percent, to $79.38 in afternoon trading.
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