Analysts' Woes Take a French Twist


By Michael France Analyst-bashing appears to be going global. Witness the lawsuit filed on Nov. 26 in Paris. LVMH Moet Hennessy Louis Vuitton (LVMHY), the French luxury-goods conglomerate, has accused Morgan Stanley of giving its stock unfairly harsh ratings. LVMH argues that Morgan Stanley was biased in favor of archrival Gucci Group NV (GUC), one of Morgan-Stanley's investment banking clients. The giant New York brokerage house denies any wrongdoing.

Even in the era of Eliot Spitzer, LVMH's claim is unusual. Wall Street analysts have gotten into hot water for issuing sunny forecasts about certain companies for mom-and-pop shareholders, knowing the truth to be much cloudier. But none of them have been hauled into court on charges of being unreasonably critical of the companies they cover.

POTENTIAL TO BACKFIRE. Is a trend starting in Paris that will catch on in the U.S.? Don't bet on it. While it's possible for a company to bring a defamation action against a financial-services firm for unduly critical analysis, such cases have been few and far between. Most have been brought by obscure companies against obscure short sellers. For a large, publicly traded company, filing a defamation suit against an analyst isn't just a legal longshot. It's a move that could backfire, inviting additional scrutiny by the financial press.

Besides, U.S. courts have already held that the First Amendment of the Constitution extends freedom-of-speech protections to financial analysts who express their opinions about stocks. "In order to win, a company would almost have to demonstrate that there was some kind of quid pro quo or that [its rival] purchased the opinion," says Burt Neuborne, a Constitutional law expert at New York University Law School.

Even if there were no First Amendment, suing an analyst carries other risks under American jurisprudence. If LVMH were to sue Morgan Stanley in the U.S., the defendant would have the right to conduct extensive discovery. Morgan Stanley's lawyers could fish around in LVMH's computer hard drives, for example, in order to try to convince a jury that the company really did deserve a bad rating. That's an appalling prospect for any company -- especially with legions of trial lawyers thirsting to get their hands on the same documents. "It is hard to imagine a situation where a company would want to sue an analyst," says Henry T.C. Hu, a securities law expert at the University of Texas. "All your dirty laundry would come out."

GALLIC CHARMS. Of course, there's no telling how this lawsuit will fare in France. Perhaps U.S.-based companies with French operations could do some venue shopping and sue their least favorite analysts in, say, a Paris court. "In a global world," says Hu, "you can't rule that kind of thing out."

At this point, however, there are only allegations -- unproven charges. Analysts on Wall Street, who have had many travails of late, can sleep well tonight, knowing that there is no new threat to their livelihood. France covers legal issues for BusinessWeek in New York


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