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Financial services giant Morgan Stanley claims in an appeal that Palm Beach County Circuit Judge Elizabeth T. Maass made several critical errors that led to the record $1.5 billion civil fraud verdict against the New York-based company earlier this year. Last June, Manhattan billionaire businessman Ronald O. Perelman won the huge verdict — which included $850 million in punitive damages — based on Morgan Stanley’s role in a 1998 deal. The award is thought to be the largest non-class action judgment in Florida history. Morgan Stanley claims it would constitute 30 percent of the company’s net worth. Before trial, Judge Maass issued an order for partial summary judgment based on a violation of her discovery order. Her ruling prevented Morgan Stanley from disputing any of the facts alleged by Perelman. In 1998, Perelman sold the Coleman camping equipment company to Delray Beach, Fla.-based Sunbeam Corp. Perelman claimed that Morgan Stanley, acting as the investment banker for Sunbeam, took part in a conspiracy to defraud him by advising him to accept Sunbeam stock as partial payment, even though it knew Sunbeam had inflated the stock’s value. The stock later became worthless when Sunbeam filed for bankruptcy in 2001. In an initial brief filed with the 4th District Court of Appeal last week, Morgan Stanley alleged that Maass improperly held that the sale of Coleman was governed by Florida law, even though both Morgan Stanley and Perelman’s Coleman Parent Holdings were located in New York. If New York law had applied, Perelman’s company would have had to show that it thoroughly investigated Sunbeam’s finances before agreeing to the sale, Morgan Stanley contends. Florida law has no such “due diligence” standard; it allows buyers to rely on any representations by the seller without conducting an investigation. “The record is clear that [Coleman Parent Holdings] did not take a look at the books and records that were made available to them,” said Morgan Stanley’s appellate attorney, Bruce Rogow of Fort Lauderdale, Fla., in an interview. “The record is clear that there were red flags that put [Coleman] on notice of a need to investigate. The record is clear that [Coleman] had very sophisticated and talented advisers.” Sylvia Walbolt, a shareholder at Carlton Fields in Tampa, is the appellate co-counsel for Morgan Stanley. In addition, New York law also would have calculated Perelman’s award differently, allowing Perelman to recoup less money for his alleged losses, Morgan Stanley argued in the appellate brief. Rogow added that even under Florida law, Maass improperly instructed the jury on Perelman’s acceptance of Sunbeam’s misrepresentations. Morgan Stanley also argues that it could not mount a proper defense because of the discovery sanction imposed by Maass. “The judgment was not the result of a full trial on the merits,” Morgan Stanley said in its brief. “Instead, as a sanction for discovery misconduct, the trial court barred Morgan Stanley from disputing its complicity in the fraud.” Morgan Stanley said it, too, was a victim of Sunbeam misrepresentations, losing $340 million that it had loaned to Sunbeam in the process. “Why would a company engage or participate in activity that ended up costing them money unless the company was itself a victim?” Rogow asked. “I am optimistic about Morgan Stanley’s opportunity to reverse the judgment, both compensatory and punitive,” Rogow said. If there were a new trial, he said, “Morgan Stanley would have a very compelling defense on every front.” But a Perelman spokeswoman said the appeal is doomed. “We had a solid case and the jury agreed,” said Christine Taylor, reading from a prepared statement. “The judge was measured and fair, the system worked, and the appeal will fail.”

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