On January 12, Morgan Stanley, the investment banker, learned that a story told by one of its star analysts, Claire Kent, was going to cost them the non-trivial sum of US$38 million. Ms. Kent was unlikely culprit of wrongdoing: she has been judged by Institutional Investor magazine as the top luxury-goods-industry analyst for nine of the past 10 years and her act of storytelling took no more than an instant: she had lowered her rating of LVMH, to neutral from outperform in May of 2000. And indeed her decision seemed vindicated later that year when the Gucci share price peaked and began to drop. 

But on Monday, the Paris Commercial Court ruled that her storytelling constituted "considerably prejudiced" research that hurt LVMH's activities and reputation. The court ordered Morgan Stanley to pay 30 million euros in damages. And that's not the end of it: the court also ordered an independent expert to produce an estimate of how much LVMH had to spend to counter the bad publicity, with an eye toward awarding further damages at a later date.

The Wall Street Journal reports that the case stems from LVMH's 2 1/2-year battle for Gucci Group, which ended in September 2001 when Chairman Bernard Arnault admitted defeat and agreed to sell LVMH's shares in Gucci to rival Pinault-Printemps-Redoute. At the same time, Ms. Kent maintained her outperform rating for Gucci. Gucci shares, too, rose a bit more and then declined. Mr. Arnault and LVMH sued Morgan Stanley in 2002, accusing Ms. Kent of casting a poor light on LVMH to please Morgan Stanley client Gucci, and it sought 100 million euros ($128 million) in damages.

Morgan Stanley’s American colleagues are of course no stranger to the cost of inaccurate storytelling, having participated in the securities industry's $1.4 billion settlement with state and federal regulators over the matter last year. But the ruling today isn't about a general tendency to provide softball studies concerning potential clients; it's about just one company, which didn't like what was being said. 

Patrick Ponsolle, chairman of Morgan Stanley in France, called it "a terrifying and absurd decision and one against which we will appeal immediately." If the judgment were allowed to stand, he said, "I don't think we'll have much critical analysis in the future."

Monsieur Ponsolle is however mistaken in thinking that he can avoid the risk by eliminating critical analysis, since this is the business that his firm is in. Instead he needs to learn the opposite lesson: in the financial sector, storytelling – unless it can be backed up with the facts and analysis – is an activity with significant financial risk.

Go to the article in the Wall Street Journal
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