A Florida appellate court has thrown out a jury award of nearly $1.6 billion—including $850 million in punitive damages—to billionaire Ronald Perelman in his lawsuit blaming investment bank Morgan Stanley for financial losses he incurred after receiving stock that later proved worthless in the sale of a camping-equipment company.
The trial judge had earlier whacked Morgan Stanley for its failure to produce troves of emails in the case, instructing the jury to presume that certain allegations against the bank had been proven. Florida’s 4th District Court of Appeal, however, didn’t even get to the controversial email ruling in overturning the verdict. The majority in the 2-1 decision said that Perelman had not shown that his company suffered any actual damages, and consequently, he wasn’t entitled to punitive damages either.
Perelman
The lawsuit arose out of a merger in the late 1990s between appliance-maker Sunbeam Corp. and Perelman’s company, Coleman (Parent) Holdings. The deal was partly structured as a stock-swap, and lurched into court when the Sunbeam stock later turned out to have no value.
The appeals court swatted Perelman’s case down, saying that his company “measured damages based on the stock’s value years after the transaction” without any proof of the correct, “fraud-free” value of Sunbeam stock on the date of the transaction. Without that, no measure of damages could be made, the court said.
Stoltmann
Morgan Stanley “obviously dodged a very big bullet,” says Andrew Stoltmann, an independent securities lawyer in Chicago. But “trying to portray this as some great legal victory” may be an exaggeration, Stoltmann says, calling the ruling “one on a very narrow issue, in a case that just happens to be worth $1.58 billion.”
Christopher Bebel, a former Securities and Exchange Commission staffer who now practices securities law in Houston, says Morgan Stanley’s discovery misconduct in fact may have helped the bank on appeal. “If the judge can become so enraged that he or she acts irrationally and does unusual things, that exposes the case to reversal on appeal,” he says. That happened in the Perelman case, Bebel says, when the judge “went ballistic” that his discovery orders had been disobeyed.
The Sunbeam Trap
Under the merger agreement, Sunbeam bought stock in Perelman’s company, CPH, and paid CPH approximately half of the purchase price with its own stock. CPH received 14.1 million shares of Sunbeam stock, with an estimated value of more than $600 million. The transaction closed on March 30, 1998.
The deal contained a “lockup” restriction, however, which said CPH could not sell more than 25 percent of its Sunbeam stock for 90 days, another 25 percent 90 days later, and the remaining 50 percent in 270 days.
Dunlap
That lockup period came back to haunt Perelman. On April 3, 1998, Sunbeam announced that first quarter sales would be 5 percent below 1997 sales and that the company would show a loss for the quarter. Sunbeam stock dropped 10 percent to $34 a share. Ten weeks later, the company fired its CEO—the infamous Albert John ‘Chainsaw Al’ Dunlap, so named for his ferocious temper and job-cutting tactics—after an internal investigation revealed fraudulent bookkeeping. Shortly after that, Arthur Andersen pulled its 1996 and 1997 audit certificates for the company.
Originally, CPH had planned to sell its Sunbeam shares after the lockup period. After Dunlap’s departure and the company’s financial collapse, however, several senior CPH executives assumed leadership roles at Sunbeam and on its board. CPH then worried that selling any Sunbeam shares would expose it to insider-trading liability. On Feb. 6, 2001, nearly three years after the transaction closed, Sunbeam went bankrupt and its shares became worthless.
DECISION
The excerpt below is from The District Court Of Appeal Of The State Of Florida, 4th District, "Morgan Stanley & Co., Inc. v. Coleman (Parent) Holdings, Inc.," issued March 21, 2007:
...CPH was not entitled to have the jury speculate as to the value of the stock on the date of sale. Rather, it was required to prove the stock’s value on that date. As we explained in Totale, “the crucial time for the measurement is the time of the fraudulent representation. Later appreciation or depreciation of the property that is subject of the false representation generally does not alter the fraud damage computation.” 877 So. 2d at 815. The federal cases cited above merely expand on Florida law that requires the plaintiff to prove the actual, “fraud-free” value of the stock at the time of purchase. Although CPH insisted in oral argument that the stock market was doing well and that there were no non-fraud related factors affecting the stock price during the “lockup” period, it failed to present any competent proof at trial establishing the absence of non-fraud related factors.
In sum, CPH failed to meet its burden of proving the actual, “fraud-free” value of the Sunbeam stock on the date of the transaction. Instead, it measured damages based on the stock’s value years after the transaction. Because there was no proof presented at trial on the correct measure of damages, the trial court should have granted Morgan Stanley’s motion for directed verdict. We therefore reverse the final judgment for compensatory damages and remand for entry of a judgment for Morgan Stanley...
We reject CPH’s argument that it should, at the least, be given a new trial to prove damages because the trial court erred in its pretrial rulings and jury instructions concerning the proper measure of damages. CPH cannot complain about rulings that it urged the court to make in accordance with its damages theory. Furthermore ... a plaintiff is not entitled to a second “bite at the apple” when there has been no proof at trial concerning the correct measure of damages...
Source
Morgan Stanley & Co., Inc. v. Coleman (Parent) Holdings, Inc. (March 21, 2007)
CPH sued Morgan Stanley, Sunbeam’s investment banker, seeking benefit-of-the-bargain damages. To establish damages, CPH presented the testimony of a financial economist, who estimated that CPH suffered damages somewhere between $634 million to $680 million. Morgan Stanley said the expert’s opinion was worthless because he did not include a valuation date in his analysis. That objection was overruled.
The jury ultimately ruled that CPH had relied on the false statements made by Sunbeam or Morgan Stanley and awarded CPH $604 million in compensatory damages and $850 million in punitive damages.
‘Fraud Free’ Value
The appeals court agreed with Morgan Stanley that damages had to be measured by the difference between the value of the property as represented and the actual value of the property on the date of the transaction. CPH had claimed that, because it could not sell its stock, it was not bound by the date-of-transaction rule, but could recover for stock price declines until such time as it could resell the stock.
“CPH was not entitled to have the jury speculate as to the value of the stock on the date of sale,” the appellate court said. “Rather, it was required to prove the stock’s value on that date.” Florida law, the court said, requires the plaintiff to prove the actual, “fraud-free value” of the stock at the time of purchase. Although CPH insisted that no other, non-fraud factors affected the stock price during the lockup period, it failed to present any proof of that at trial.
The appeals court also said CPH was not entitled to a new trial, saying: “A plaintiff is not entitled to a second ‘bite at the apple’ when there has been no proof at trial concerning the correct measure of damages.”
Discovery Issue Ducked
Page
Boyd Page, a securities litigator with the law firm Page Perry, calls the ruling “reprehensible.”
“You have what most people who followed the case think was a fraud,” he says. “The court is almost establishing a fraud-free zone. The court says you have to prove the exact amount of the drop in the price of the stock at the point in time that a lie became apparent. I don’t think that’s the law.”
According to Boyd, if other jurisdictions follow the Florida court’s lead, “We’re back to the anything-goes society of robber barons that we had in the late 1800s and early 1900s. I just think this [decision] smells very bad. It’s very troubling.”
Cohen
But Barry Cohen, a partner with the Thorp Reed & Armstrong law firm, says there is “nothing unusual” in a court saying a plaintiff must prove its claim of damages.
The more interesting aspect of the case—involving the consequences of not turning over emails in discovery—was not even addressed, Cohen notes. “The message there is that you need to be conscious about emails and about production and retention policies,” he says. “The fact that [this verdict] got overturned helped Morgan Stanley, but it doesn’t give anyone else a free pass when it comes to emails.”
Stoltmann says he doesn’t think the Florida court’s decision will have much impact outside the Sunshine State. “I don’t think any trend can be taken from this decision,” he insists. “I know Morgan Stanley and other brokerage firms will portray this as a big deal, but that’s just a line of bull.”
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