November 1, 2006

Morgan Stanley's Recipe for Disaster

It had been a long day for Jeffrey Davidson. It was already past 5 p.m. on March 22, 2005, and the Kirkland & Ellis partner had spent hours questioning potential jurors. His client, Morgan Stanley & Co. Inc., was about to go on trial in state court in West Palm Beach, Fla., charged with defrauding billionaire Ronald Perelman. Perelman wanted $2.7 billion for being stuck with a bunch of worthless securities in Sunbeam Corp., the residue of a deal that Morgan Stanley had concocted. As the long day in court drew to a close, Davidson was surprised when his co-counsel from a local Florida firm stepped forward and handed the lawyers and the judge a three-page document. Davidson had not seen it before. It had been prepared in such haste that it was missing its attachments.

Davidson was stunned by what he read. Asserting that the trial judge had "lost all confidence in any statement" made by Kirkland, Morgan Stanley was firing the firm as lead counsel. Davidson kept reading, and it got worse. His client was also putting Kirkland on notice of a potential malpractice claim.

A man in the back of the courtroom stood to address Circuit Court Judge Elizabeth Maass. "Your Honor, I'm Don Kempf. I'm the general counsel of Morgan Stanley. Your Honor, I made this decision today. I didn't even talk to Mr. Davidson about it." Donald Kempf Jr. explained that he had no idea that the problems with Kirkland in the courtroom were so bad until he saw them with his own eyes. "There is nothing like real-time listening to the court and following the transcript, which I've been doing the last two days, to drive home reality in this situation," he explained.

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