Paris Commercial Court establishes principle of analyst independence as requested by LVMH; Upholds LVMH’s Claims against Morgan Stanley

The Paris Commercial Court has held that the claims brought by LVMH against Morgan Stanley demonstrate “gross misconduct” against LVMH, causing it “considerable financial and reputational harm” and ordered the bank to pay LVMH euro 30 million in damages.

On October 30, 2002, LVMH filed a lawsuit against Morgan Stanley resulting from the bank’s persistent and serious breaches of its obligation to provide independent and impartial financial research and analysis of the luxury goods sector.

From 1999 to 2002, while acting as the investment banking advisor to Gucci, Morgan Stanley systematically denigrated LVMH through the publication of false or biased information in the financial press, as well as its own weekly report on the luxury goods sector (Luxury Goods Weekly). The Court declared that Morgan Stanley engaged in grossly wrongfully conduct by failing to ensure the independence of its research analysts and, instead, linked their activities to the bank’s investment banking activities.

That Morgan Stanley has been held liable, consistent with the French public prosecutor’s recommendation on 17 November 2003, confirms the seriousness of the bank’s wrongful conduct in trying to serve the interests its clients in the luxury goods sector through damaging LVMH.

Among Morgan Stanley’s wrongful acts that the Court considered gross misconduct were the bank’s erroneous July 2002 announcement of an impending downgrade of LVMH’s credit rating, the statements of analysts regarding the supposed “maturity” of the Louis Vuitton brand, the baseless assertion that LVMH’s management destroyed shareholder value and the inaccurate presentation of the bank’s conflicts of interest, through multiple incorrect footnotes.

The wrongful acts confirmed by the Paris Commercial Court today are similar to those for which Morgan Stanley has been repeatedly criticized in the United States, where the SEC and New York State’s Attorney General have made public Morgan Stanley’s practice of using star analysts to the advantage of clients who had retained the bank as financial adviser (see SEC Litigation Release No.18117 / 28 April 2003, according to which “from at least July 1999 through June 2001 … Morgan Stanley … offered research coverage by its analysts as a marketing tool to gain investment banking business … [and] failed to establish and maintain adequate procedures to protect research analysts from conflicts of interest”.)

LVMH expressed its satisfaction that the Paris Commercial Court has affirmed the application of the principle of independence in financial research and analysis by investment banks. This decision confirms the necessity of Chinese Walls within investment banks and guarantees that analysts will henceforth be free to reach their own conclusions.

The Paris Commercial Court’s decision establishes a legal precedent requiring from now on that banks ensure the absolute separation of their investment banking and financial research and analysis activities.