March 22, 2005
Remember "Chainsaw" Al Dunlap?
Posted by Gordon Smith

Chainsaw Al seems so "last century," but his company (Sunbeam) is in the news again. Ron Perelman is suing Morgan Stanley, Sunbeam's investment advisor, for $2.7 billion in damages in connection with the sale of Perelman's Coleman Inc. to Sunbeam in 1998. In exchange for his stake in Coleman, Perelman received shares of Sunbeam stock, which turned out to be grossly overvalued as a result of Chainsaw Al's accounting fraud. According to the W$J:

The case, which could go to trial as early as this week, took a turn earlier this month when a Florida state judge ruled that Morgan Stanley had been "grossly negligent" in turning over documents to Mr. Perelman's legal team. As a result, the judge shifted the burden of proof in the case: Morgan Stanley, the defendant, now has to prove to a jury that it didn't help Sunbeam defraud Mr. Perelman. Typically, the burden of proving fraudulent behavior lies with a plaintiff.

Obviously, this is trouble for Morgan Stanley. Proving fraud is hard, and flipping the burden to the defendant is like allowing Andy Roddick to serve every game in a tennis match.

The disputed documents in this case are emails that might show when Morgan Stanley learned of the problems at Sunbeam, and the W$J story linked above is reporting that the SEC is now involved.
Morgan Stanley recently set aside $260 million for potential losses in the case, and it looks like it will need that money.

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