Louis Vuitton Caes
Morgan Stanley > Stock Research > Louis Vuitton vs Morgan's Gucci Research Lawsuit
Charges of Conflict of Interests in Morgan Stanley's Stock Research
In May 2003, LVMH, known for Louis Vuitton leather goods (handbags) and Moet and Chandon Champagne, and owned by French billionaire Bernard Arnault, sued Morgan for intentionally biased reseach report to help Gucci, its investment-banking client. The Paris Commercial sided with LVMH in finding Morgan Stanley guilty of biased research to hurt Louis Vuitton firm.
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.
Moët Hennessy Louis Vuitton and Gucci, major competitors in the luxury fashion industry, have a history of rivalry. Most notably, Gucci was nearly taken over in early 1999 by LVMH. Morgan Stanley advised Gucci to turn down the $91 per share bid that would have given LVMH control of the company. Gucci instead accepted Pinault Printemps-Redoute’s three billion dollar bid for 42% of the company’s shares. The move nearly guaranteed that Gucci would be secure against a public takeover.
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.
In January 2004, The Paris Commercial Court held that Morgan was guilty ("gross misconduct") of defaming (""considerable financial and reputational harm") the luxury goods maker LVMH Moët Hennessy Louis Vuitton and ordered the investment bank to pay 30 million euros, about 38 million dollars, to cover the 'moral' part of the suit. The damage part will be decided later. The E30 million judgment is only the beginning. The court appointed an examiner to recommend further damages and told him to determine what part of LVMH's spending from 1999 through 2002 - on everything from advertising to borrowing - was paid "to maintain its image and to thwart the denigration of which it was the victim because of the actions" of Morgan Stanley. [International Herald Tribune
Gilbert Costes, the top ranking judge of the Commercial Court of Paris, said that Morgan Stanley "caused a moral and material prejudice to LVMH's image, which justifies reparations." The judge said that Morgan Stanley's statements about LVMH, in analyst opinions and in interviews by company officials with reporters, included numerous errors (178 errors by LVMH's estimate) and that the facts of the case constituted "faute lourde," or an intention to do damage. [New York Times]
LVHM's allegations were that Morgan Stanley published incorrect information about its's debt position, credit rating and currency exposure and tried to manipulate its stock price to help Gucci. Judge Jean-Pierre Eck headed the five-judge tribunal. In this case, Forbes reported that "the court found the analyst statements--concerning the impending downgrade of LVMH's credit rating, the supposed "maturity" of its Louis Vuitton brand, the assertion that LVMH's management destroyed shareholder value, and the presentation of the bank's conflicts of interest--to be specific and factually erroneous. Rather than trying to attract new IPO business, Morgan Stanley was trying to improve on a longstanding relationship with Gucci, harming LVMH in the process."
Morgan Stanley was criticized by LVMH both for not highlighting its relationship with Gucci and for noting, in the fine print of its research reports, that the investment banking firm employed some former LVMH officials. The latter disclosure, the judge found, could have led an investor to conclude, erroneously, that "anything that Morgan Stanley said about LVMH, notably about its faults and weaknesses, could only be true." [Reuters]
LVMH, led by the French magnate Bernard Arnault, lost a bidding war of two and a half years for control of Gucci and agreed to sell its remaining Gucci shares to François Pinault, a French billionaire who had helped Gucci thwart Arnault's advances.The judge said that Morgan Stanley had contributed to the failure of the LVMH bid. [New York Times]