A Paris court decision last week against the US bank Morgan Stanley has paradoxically caused a sigh of relief among financial analysts who feel it has vindicated their integrity.
A Paris appeals court upheld a complaint by the luxury products giant LVMH, which charged that the stockbroking arm of Morgan Stanley had damaged it with incomplete financial analysis.
But the US bank was cleared of the most serious charges of intentionally denigrating LVMH, which had prompted the original court decision.
On Friday, lawyer Jean-Michel Darois, acting for Morgan Stanley, said that the appeal court decision had upheld only "minor errors."
He said: "The most serious of the supposed errors which had been upheld by the [commercial] court have been struck down by the appeal court."
"We're delighted that the Paris appeal court rejected the essential points of the LVMH complaints," said Patrick Ponsolle, chairman of Morgan Stanley France, who sees the ruling as a "decisive victory for freedom of expression, analysts' independence and for the financial sector as a whole."
The Paris tribunal confirmed a decision by a commercial court on January 12, 2004, which had found that "Morgan Stanley was at fault to the prejudice of LVMH" because of financial analysis published by the investment bank between 1999 and 2003.
But the appeal court did not rule on the amount of the prejudice, which the commercial court had valued at 30 million euros (US$38 million). The appeal court said an expert would calculate the moral and material damages.
LVMH had been seeking more than 200 million euros in damages.
The case stemmed from research Morgan Stanley published in 2002 at the height of a bitter tussle between LVMH and rival Gucci, which was a Morgan Stanley client.
LVMH alleged that the comments by the bank's analysts had forced it to back away from a corporate bonds issue with a resulting loss of 107 million euros.
LVMH accused the analyst at Morgan Stanley, Claire Kent, of having denigrated it in financial studies and recommendations aimed at investors, allegedly with the deliberate intention of weakening the position of the French group against its rival Gucci.
Jean-Paul Pierret, in charge of strategy at Natexis Bank and vice president of the French Society of Financial Analysts, said the case had provided a timely reminder of the need to respect ethical rules in order to avoid conflict of interest.
To avoid bias, financial houses which employ analysts must isolate these as far away as possible from their employers' banking activities, especially teams tasked with providing analysis on mergers and acquisitions.
This separation, nicknamed the "Wall of China" by bankers in the English-speaking world, is already in use by the major banks and the process has been accelerated by recent financial scandals in the US.
The conflict of interest at the heart of investment banks stems from the desire of banks to win investment banking business from companies while also operating a brokerage service, which employs analysts to issue independent advice to investors.
Financial analysis as a human activity "cannot be entirely objective or complete," Pierret said.
It did not only consist in adding up figures and dissecting results, but involved the opinion of the analyst.
He said the "Wall of China" separation between investment banking and analysts had resolved part of the risk of conflict of interest but the independence of the financial analyst also depended on his or her individual behavior, especially in contacts with companies.
"The judgment of an analyst is necessarily influenced by the quality of the relations he develops with the companies, which are sometimes determining factors when he has to make long-term forecasts about a sector," he said.
Patrick Houart, an adviser to LVMH president Bernard Arnault, expressed satisfaction with the outcome of the Paris hearing.
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