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Just as the Group of Eight intensifies its efforts to persuade shareholders to oust Morgan Stanley CEO Philip Purcell, Purcell is facing another potentially more damaging threat to his power: the Sunbeam trial that opened Wednesday in West Palm Beach, Fla. The case concerns the 1998 sale of Ronald Perelman’s 82 percent stake in Coleman Corp. to Sunbeam Corp. for $1.5 billion. Morgan Stanley advised and provided financing to Sunbeam, whose shares tanked as the firm’s accounting scandals were later revealed. Perelman is alleging that Morgan Stanley withheld knowledge of Sunbeam’s weak financial condition. On Monday, Morgan Stanley said it would set aside an extra $100 million in reserves for the Sunbeam litigation, bringing its total reserves to $360 million. Perelman is seeking more than $2 billion in damages. The case “simply adds more fuel to the fires that have already been ignited,” said fund manager Michael Holland, whose firm Holland & Co. doesn’t own any shares of Morgan Stanley. “I don’t see anything positive for the incumbent management as a part of it. The more of these kinds of things there are, the more it turns up the heat.” The Sunbeam case could prove more damaging to Purcell than the public efforts to remove him from his job, some say. That’s because Purcell loyalists were at the core of Morgan Stanley’s mishandling of many of the documents related to the case, for which the firm was reprimanded before the trial started. Morgan Stanley revealed in a quarterly report filed Wednesday that the Securities and Exchange Commission delivered written notice on Jan. 14 that the Commission was investigating Morgan Stanley for violating a Dec. 3, 2002 cease and desist order relating to the firm’s retention of emails. Morgan Stanley submitted a written response on February 10 and the investigation continues. Morgan Stanley’s first law firm on the case, Chicago-based Kirkland & Ellis, was Purcell’s pick as the bank’s main legal adviser back in 1999, when he tapped outspoken former Kirkland litigation partner Donald Kempf as Morgan Stanley’s general counsel. Kirkland had done work for Purcell when Purcell was at Dean Witter, Discover & Co. As GC, Kempf presided over the document-gathering in the Sunbeam suit. Before that deal, Davis Polk & Wardwell handled the bulk of Morgan Stanley’s legal work. Kirkland & Ellis was kicked off the case in March after Morgan Stanley said it had put the firm on notice of a potential malpractice claim. Palm Beach Circuit Court Judge Elizabeth Maass later allowed Mark Hansen of Kellogg, Huber, Hansen, Todd, Evans & Figel as Morgan Stanley’s main counsel in addition to local Palm Beach counsel Carlton Fields. Daniel B. Strickler Jr., who owns 3.8 million Morgan Stanley shares, or roughly over 3 percent, wrote an April 5 letter to Morgan Stanley’s board citing the Sunbeam case as part of the reason that Purcell should go. “In a case involving Perelman vs. Sunbeam, the judge has sharply criticized Morgan Stanley for its obstructionist tactics,” Strickler wrote. “Purcell’s handling of these matters suggests an ethical grounding less than desirable.” Indeed, the case has been a black eye for Morgan Stanley, as the firm failed to produce e-mails and other potential evidence, in the court’s judgment. In fact, most of Morgan Stanley’s setbacks have come on procedural issues, even though the case is supposed to concern an investment-banking deal. As a result, Judge Maass has stacked the deck against Morgan Stanley with recent orders all targeted against the bank. In March, Maass issued an order shifting the burden of proof to Morgan Stanley, requiring the firm to prove that it had no knowledge of Sunbeam’s weak financial condition. Usually, the burden of proof would fall on the plaintiff, in this case, Perelman. The judge has also instructed that the jury be read a statement of fact, known as Exhibit A, a damning account of how Morgan Stanley fumbled the process of digging its e-mails out of backup tapes stores in a Brooklyn warehouse and making them available and searchable for the case. With none of the tapes searched, Morgan Stanley fired the person managing the process, Arthur Riel. The firm replaced him with Allison Gorman Nachtigal but, according to Exhibit A, failed to inform her of the existence of the Sunbeam litigation until five months after she joined. The searches, ordered by the court in April 2004, had not been completed and were terminated when the trial began. The Group of Eight retired executives have also cited the Sunbeam case as a major motivation for their public relations campaign to remove Purcell. “This bizarre suit boils down to a claim that Morgan Stanley defrauded itself,” a spokesman for the firm said Wednesday, via e-mail. “The fact is, Ron Perelman had a host of advisers and any due diligence failures were theirs, not Morgan Stanley’s.” Copyright �2005 TDD, LLC. All rights reserved.

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