Between 1999 and 2002, a senior analyst at Morgan Stanley “deliberately and systematically” skewed her research to bolster Gucci Group, a long-time client of the American multinational investment bank and financial services company. But not only did Morgan Stanley’s analyst allegedly issue favorable financial findings for Gucci in reports widely used by institutional investors; she also propped up the Italian group by downgrading its fiercest rival. Specifically, she drafted “unusually negative,” “biased,” and inherently “misleading” assessments of LVMH Moët Hennessy Louis Vuitton.
That is what LVMH argued in the €100 million ($118 million) lawsuit that it filed against Morgan Stanley in a Paris commercial court in late 2002. With its focus on claims of conflict of interest between a brokerage firm’s research and investment banking departments, the case was the first of its kind to go before a French court.
At the crux of the closely watched dispute were allegations that Morgan Stanley and its luxury goods analyst, Claire Kent, systematically attacked LVMH to make Gucci Group (now Kering) – one of its more lucrative investment-banking clients and one of LVMH’s closest competitors – appear to be a better stock option for investors than it actually was. “Unlike in the U.S., where most high-profile regulatory actions have involved analysts issuing overly rosy research on the stocks of investment-banking clients, the LVMH-Morgan Stanley case involved [an analyst] ‘talking down’ a stock,” John Carreyrou wrote for the Wall Street Journal at the time.
But LVMH claimed there was more to it than just skewed research that served to “highlight and emphasize [Gucci Group’s] supposed virtues” over the course of a three-year period. LVMH argued that Morgan Stanley and its star analyst were up to something else: in addition to building up Gucci, they had intentionally and repeatedly failed to disclose Morgan Stanley’s longstanding investment banking relationship with Gucci in research notes until August 2002.
The Background and the Poison Pill
The timing of the lawsuit that LVMH filed in late 2002 was curious. Less than a year before, LVMH had been very publicly foiled by Gucci. After enacting a plan to quietly acquire shares in Gucci from the open market and existing shareholders, such as Prada chairman Patrizio Bertelli, in what would ultimately see it accumulate a whopping 34.4 percent stake, LVMH found itself with a losing hand.
Gucci and its CEO Domenico De Sole outwitted LVMH chief Bernard Arnault. In light of LVMH quietly building up what the group characterized as a “passive” stake in Gucci beginning in early 1999 and fearing that LVMH and its notoriously aggressive chairman were laying the groundwork of an impending hostile takeover, Gucci’s board – with help from Morgan Stanley, which had handled Gucci’s 1995 IPO – issued a “poison pill.” Arguably “the most effective anti-takeover device” at a company’s disposal, as Duke University School of Law’s Ofer Eldar and Ohio State University Fisher College of Business’s Michael Wittry put it, the defensive maneuver saw Gucci create a new 42 percent stake via an Employee Stock Ownership Plan, effectively diluting the stakes of every existing stockholder, including LVMH.
In a matter of minutes on an otherwise ordinary day in February 1999, LVMH’s ownership stake plummeted from 34.4 percent to roughly 20 percent. To make matters worse, Gucci later sold the newly issued shares – all 37 million of them – to LVMH’s rival conglomerate PPR (now Kering). And not only did it sell the shares to a group that was not LVMH, it sold them at a stunning discount compared to LVMH’s offer. In choosing to sell to PPR, Gucci rejected LVMH’s takeover bid in favor of a much-less-lucrative one simply to keep itself out from under the umbrella that is LVMH.
It was against this backdrop – and amid a broader climate of scrutiny over conflicts of interest on Wall Street, particularly a $1.4 billion settlement involving 10 major banks, including Morgan Stanley, that had published misleading stock research – that LVMH and Morgan Stanley found themselves embroiled in a high-stakes legal battle.
“A Mission of Destruction”
At the heart of LVMH’s civil complaint were its allegations that Morgan Stanley had run afoul of French tort law. Its “treatment of LVMH is iniquitous, partial and misleading, with the goal of highlighting and emphasizing the supposed virtues and hoped or unhoped successes of Gucci, its client,” the luxury goods giant argued. The bank and Ms. Kent were on a “mission of destruction.”
LVMH focused the bulk of its accusations on Morgan Stanley and Kent’s “false assertions” about the prospects of LVMH-owned Fendi and the PPR-owned Yves Saint Laurent. According to Kent’s research notes, Fendi was poised to struggle due to the lack of “hard-hitting management,” while YSL “would break even by the end of 2002,” despite losing some €33 million in the first two quarters of that year. These projections, among others, were part of a “premeditated” campaign against LVMH, the French giant asserted.
LVMH also took issue with Kent’s characterization of its cash position versus Gucci’s, including LVMH’s alleged “exposure to a weak yen.” Beyond that, it was troubled by Morgan Stanley’s “suggestion that [its] credit rating could be downgraded,” pointing to a July 2002 report, in which Kent warned investors that downgrading LVMH’s debt rating by Standard & Poor’s might be imminent. And still yet, LVMH called foul on the bank’s characterization of Louis Vuitton – LVMH’s marquee brand – as having “reached maturity.”
These assertions were “completely fanciful,” LVMH argued in furtherance of its suit.
In its complaint and during the parties’ trial, LVMH concentrated on statements made by Kent – and alleged omissions from her reports, including her failure to adequately consider the expected impact of the revelation in late 2003 that De Sole and creative director Tom Ford would leave Gucci. But the case also brought communications from other Morgan Stanley employees under the microscope, including Morgan Stanleymanaging director Michael Zaoui’s statement in a Financial Times article about the different liquidity of LVMH versus Gucci.
Finally, LVMH’s complaint asserted that there was an interesting pattern at play between the timing of Kent’s claims and the nature of the claims, themselves. “The number of inaccuracies, as well as the seriousness of these breaches,” increased significantly after “the control of Gucci changed between 1999 and 2000.” In other words, LVMH argued that when PPR acquired Gucci, the Morgan Stanley research notes really began to slant against it.
How would LVMH – which was seeking nearly $150 million in damages – support its claims? It would rely on dozens of pieces of evidence, including “a CD-ROM with 1,900 pages of research dating back to 1999,” all aimed at showing that Kent’s reports contained false declarations, or in some cases, omitted necessary disclosures.
Morgan Stanley’s Response
Morgan Stanley fired back in response to LVMH’s headline-making lawsuit. Vehemently denying LVMH’s claims and describing the lawsuit as nothing more than an act of revenge for the bank’s role in blocking LVMH’s bid to take over Gucci, the financial services titan filed a countersuit against LVMH and Arnault – one of the richest men in the world – in his personal capacity. It argued that LVMH’s claims were “without basis” and instead of amounting to a bona fide legal dispute, the case was little more than “an abuse of the French court system.”
In addition to seeking an estimated €10 million in damages in connection with its counterclaims, which consisted of defamation and abuse of process, Morgan Stanley was angling for something else, as well: It wanted the text of the final court verdict, should it prevail, to be published in 20 newspapers and magazines in order to clear its name of LVMH’s stunning allegations.
In late 2003, almost exactly a year after LVMH first filed suit, the two corporate entities appeared before the French commercial court for closing arguments of their trial. In the six-hour-long closing arguments that took place in November 2003, LVMH’s principal counsel Georges Terrier told the five-judge panel that LVMH was ”not attacking financial analysts in general.” Instead, Terrier – a managing partner at Jeantet Associés at the time – clarified that the case was focused exclusively on the damages suffered by LVMH as a result of “subjectivity” that was intentionally and “systematically” aimed at LVMH by way of “dozens of factual errors in Ms. Kent’s reports.”
Counsel for Morgan Stanley called foul in a scathing retort. French litigator Philippe Nouel, who served as the bank’s lead counsel, attacked LVMH’s suit, calling it a meritless and revenge-driven “continuation of the so-called ‘war of the handbags,’” a nod to the failed Gucci deal.
At the same time, Bruno Quentin, another attorney on Morgan Stanley’s defense team, characterized the litigation as “opportunistic” and politically motivated. “LVMH is seeking to establish an artificial link with the work of Eliot Spitzer,” he said, pointing to the former Attorney General’s prosecution of a handful of the world’s biggest banks on the basis of conflicts of interest between the institution’s investment banking and analysis arms, resulting in an eye-watering $1.4 billion settlement in the U.S. just months prior.
“Let us not import alleged wrongdoings from a foreign jurisdiction that might not apply in this country,” Quentin urged that initial day in court, while also driving home the more fundamental argument that “LVMH was not able to provide any evidence to justify the 100 million euros” in damages that it was seeking. In fact, he claimed that LVMH had – quite tellingly – never formally contested any of the bank’s analysts’ assertions before it decided to file suit.
An Initial Win & A Mixed Appeal
A couple of months after the parties’ trial concluded, the court held that Morgan Stanley’s statements about LVMH, both “in analyst opinions and in interviews by company officials with reporters included numerous errors and that the facts of the case constituted ‘faute lourde,’ or an intention to do damage,” the New York Times reported, with such “gross misconduct” serving to defame the luxury goods giant.
“The facts constitute a serious fault on the part of Morgan Stanley, to the detriment of LVMH,” Commercial Court of Paris Judge Gilbert Costes wrote in the decision in January 2004, stating that the financial institution ”caused a moral and material prejudice to LVMH’s image, which justifies reparations” to the tune of €30 million ($38 million).
Morgan Stanley chairman Stephan Newhouse said the ruling by the court set a dangerous precedent. “This opens the floodgates for companies to use the threat of legal action to persuade analysts only to make positive statements about them,” he said in a statement.
In an interview, Oliver Labasse, a spokesman for LVMH, said analysts had no reason to be concerned over the court’s ruling. ”We have never attacked the analyst, never,” he said. ”We have attacked the deviant, biased behavior of Morgan Stanley, which in our view and in the tribunal’s view today, did not respect the Chinese wall between the analysts’ sector and the investment banking sector of the bank.”
The matter did not end there, of course, as Morgan Stanley lodged an appeal, which resulted in a mixed ruling. In June 2006, a French appeals court upheld the lower court’s determination that Morgan Stanley had defamed LVMH as a result of its statements. In a win for Morgan Stanley, though, the appeals court overturned the earlier ruling that the bank’s equity research was biased in favor of Gucci Group during LVMH’s battle with PPR for ownership of Gucci.
An Unexpected Truce
After more than four years of legal wrangling, LVMH and Morgan Stanley reached a settlement. “LVMH and Morgan Stanley have agreed to put their past differences behind them and to resume business relations,” the two companies said in a joint statement in February 2007. “They have ended the court action involving each other in the French courts and they look forward to future opportunities to work together.”
The resolution came as something of a surprise. LVMH had already secured a partial legal victory and given Bernard Arnault’s reputation for aggressive strategic persistence, as well as the deeply hostile tone of the litigation, many expected the luxury group to press further. Instead, the joint statement marked a sharp shift, signaling a pragmatic truce between two former adversaries with reputations to protect and business interests to realign.
At the same time, LVMH had already landed a partial win – and not just in court, but also in the court of public opinion. More than just a matter of correcting the record, the case was as a calculated assertion of brand control and corporate dignity in the face of what Arnault and co. viewed as reputational sabotage. At a time when LVMH was fending off competitive threats and navigating a bruising rivalry with Gucci and PPR, the lawsuit allowed it to publicly challenge what it saw as the entanglement of biased financial analysis and adversarial market positioning. The resulting court victory (in part) reinforced Arnault’s willingness to use legal channels as an extension of brand defense.
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