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It was bad enough when Morgan Stanley found itself the target of a securities fraud lawsuit worth $2.7 billion. But things got even worse in mid-March when a Florida judge decided Morgan Stanley has to shoulder the burden of proof in defending itself from those allegations.

Coleman Parent Holdings Inc. and Ronald Perelman, a New York financier and chairman of Revlon Inc., brought the suit in 2003. They alleged Morgan Stanley colluded with Sunbeam Products Inc. to hide the appliance company's precarious financial state in 1998 when Perelman sold his majority stake in CPH to Sunbeam in return for cash and Sunbeam stock. Months after the deal, Sunbeam filed for bankruptcy, rendering Perelman's newly acquired stock worthless. Morgan Stanley had valued the stock at $680 million.

"Morgan Stanley is to blame," Solovy says. "They were constantly lying to the court. While they were destroying documents internally, they also failed to disclose that they had this archive that contained much of the information we were looking for, and made us go through extremely time-consuming and arcane procedures to retrieve the documents. This is a strategy to distract attention from how tremendously they dissembled."

Regardless of who was really responsible for failing to produce the tapes, Morgan Stanley's dismissal of Kirkland is shocking given the close relationship between the firm and the company. Morgan Stanley's general counsel, Donald Kempf, is a former partner at Kirkland, and the firm reportedly has a meeting room named after Kempf in its headquarters. The dismissal by a major client would be an embarrassment to any firm, but some believe a firm of Kirkland & Ellis' size and stature won't feel many aftershocks from one case that went awry.

Both Morgan Stanley and Kirkland & Ellis declined to comment directly on the matter.

staff Writer

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