A Florida state district judge in the high-profile lawsuit that financier Ron Perelman is pursuing against Morgan Stanley in connection with Mr. Perelman’s failed investment in Sunbeam Corp. ruled yesterday reports Law.com($) that the discovery abuses that Morgan Stanley and its counsel — Kirkland & Ellis — have engaged in during the litigation have been “offensive.”
As a result, the judge ruled that she would instruct the jury during the upcoming trial that Morgan Stanley had a role in helping Sunbeam conceal accounting fraud that reduced the value of Mr. Perelman’s investment in Sunbeam. The ruling increases the already high risk that a jury will find against Morgan Stanley and force the firm to pay Mr. Perelman some or all of the $680 million he contends that he lost on the investment. In addition, Mr. Perelman is seeking a cool $2 billion in punitive damages. Here is the Wall Street Journal article ($) on the case.
The ruling came a day after Morgan Stanley moved to fire Kirkland & Ellis, its longtime law firm, during jury selection in the case, which is being heard in a West Palm Beach state district court. The trial is currently scheduled to begin April 4.
The case involves a transaction in which Mr. Perelman sold an 82% stake in Coleman Inc., the camping gear company, to Sunbeam in 1998 for $1.5 billion, including $680 million in Sunbeam stock. Sunbeam was Morgan Stanley’s investment banking client in the transaction. The value of Mr. Perelman’s holding in Sunbeam dropped dramatically in the wake of accounting fraud at Sunbeam, which ended up filing a chapter 11 case in early 2001.
For the past several months, Morgan Stanley and Kirkland have been the subject of a number of adverse rulings and scathing in-court comments from the Florida state court judge, who has characterized Morgan Stanley’s behavior in the transaction as grossly negligent and has suggested the firm has purposely withheld information from the court and Mr. Perelman.
In an extraordinary development, Morgan Stanley on Tuesday placed Kirkland on notice of a potential malpractice claim arising out of its representation of Morgan Stanley in this case. The judge ruled yesterday that Morgan Stanley could replace Kirkland, but gave the firm only a week — not their requested six months — to do so and prepare for trial. Thus, Kirkland will probably end up having to try the case for Morgan Stanley while operating under a potential malpractice claim from its client.
If Morgan elects to keep Kirkland on the case in light of the judge’s refusal to grant a lengthier postponement, this will not exactly be the environment in which allies enjoy preparing for litigation combat.