Thursday, March 22, 2007

There Goes $1.58 Billion

Investor Ronald Perelman won $1.58 billion in compensatory and punitive damages from investment bank Morgan Stanley on a fraud claim in 2005 in large part because the firm's e-mail production was so bad that the trial judge finally ordered a partial default judgment as a sanction for discovery abuses.  The case arose from Morgan Stanley's role in assisting the purchase of Coleman Cos., owned by Perelman, by Sunbeam in 1998, not too long before Sunbeam collapsed.  Perelman claimed that Morgan Stanley aided and abetted a fraud against him by not revealing the problems at Sunbeam.  On appeal, Florida's Fourth District Court of Appeal reversed the award on the ground that Perelman did not introduce sufficient evidence of damages to establish any loss on the transaction.  According to the court (opinion available below):

A plaintiff who seeks a benefit-of-the-bargain measure of damages is not entitled to a better bargain than the one it made. This is true even under Florida’s "flexibility theory" of damages. The "flexibility theory" of damages, which allows a plaintiff to chose either benefit-of-the-bargain or out –of-pocket damages in fraud cases, is not so flexible as to allow a plaintiff to pick and choose which parts of the contract it wants to affirm and which parts it wants to disaffirm. Furthermore, applying [Coleman]’s "but for" rationale to proving damages would result in recovery of all non-fraud related losses in virtually every fraud case, because the defrauded party would need only assert that it would not have agreed to the contract had it known of the fraud.

The appellate court majority found that the plaintiff's expert ignored the actual value of the Sunbeam shares received by Coleman at the time of the transaction, so the compensatory damages calculation of $680 million was unsupported by any evidence.  Once the compensatory damages left the building, so too did the $850 million in punitives.  Easy come, easy go, I guess, but there's enough at stake here to guarantee an appeal to the Florida Supreme Court, so it may be a bit premature to reverse any litigation reserves.  (ph)

Download morgan_stanley_v_coleman_4th_dist_court_of_appeal_march_2007.pdf

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