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Charges of Conflict of Interests in Morgan Stanley's Stock Research
In April 2003, Morgan Stanley settled with SEC, NASD, the New York Stock Exchange("NYSE"), the New York Attorney General, and other state regulators charge of research analyst conflicts of interest. Earlier LVMH, known for Louis Vuitton leather goods and Moet and Chandon Champagne, and owned by French billionaire Bernard Arnault, had sued Morgan for intentionally biased reseach report to help Gucci, its investment-banking client. Details follow.
Conflict of Interest Between Research and Investment Banking at Morgan Stanley?
New York Investigates Morgan Stanley for Conflict of Interest in Stock Research
Attorney General Eliot Spitzer and SEC investigated Morgan and found the investment bank had indeed created situations for its reseach analysis to be done for the investment banking business, leaving its objectivity in doubt. Research analysts were paid bonus related to performance in the investment banking sector; were presented as investment bankers; and were used as marketing tool to get banking business.
Fines came to $125 million, which seems to be a small amount compared to the monetary damage to investors its past actions might have caused.
Did Morgan Stanley Produce Biased Research Report to Help Gucci?
Louis Vuitton (LVMH) vs Morgan Stanley Law Suit
The LVMH suit against Morgan Stanley filed in France in May 2003, alleged that Morgan's analysts, especially Claire Kent, favored Gucci, a Morgan Stanley investment-banking client and direct rival to LVMH. It asked for 100 million euros, about$118 million dollars. The plaintiff, LVMH, was owned by French billionaire Bernard Arnault, who was not a buyer (or seller) of Gucci shares. However, both Gucci and LVMH were involved in an acrimonious takeover battle during the period Morgan's analyst issued the damaging reports. The chairman of LVMH, Bernard Arnault, battled for two and a half years to buy Gucci in the face of opposition from the company's chief executive, Domenico De Sole.
Morgan Stanley was an underwriter for Gucci’s 1995 IPO, and has assisted in transforming the company into a corporate conglomerate. LVMH’s suit focused on the ratings published by Morgan Stanley’s luxury goods analyst, Claire Kent, a winner of Institutional Investor magazine's best european luxury-goods analyst for a period covering nine years. Kent had dropped her "outperform" rating of LVMH to "neutral" in May of 2000. Meanwhile, her ratings of Gucci stayed at "outperform."
Furthermore, in the autumn of 2002, she set her price target for LVMH as 10 percent below what her model predicted stating that the management had erred in past and the it had reached "maturity."
Among more damaging actions was an e-mail from July 17 last year, in which Morgan Stanley warned investors that LVMH's credit rating was likely to be downgraded in coming months, harming its share price. The French company showed the court that this email was based on a three month old decision by Standard and Poor's to attach a negative outlook to its BBB+ credit ratiing. However, positive indicators since then were ignored and this email was to stoke fears for the stock, according to LVMH. The French group also said that Morgan Stanley repeatedly lied to investors that LVMH was one of its clients, to lend credibility to its negative stance on its stock.
Complete story linked above.