Just When You Thought It Couldn’t Get Worse …

I wrote yesterday about the bad day the lawyers at Kirkland & Ellis and the folks at Morgan Stanley were having. Well, it got worse.

Matthew McCarrick, the blogger who has the excellent blog I cited yesterday, was kind enough to let me know of a recent development in the case.

Judge Maass has now granted a partial default judgment against Morgan Stanley and has disciplined several K&E lawyers. Perelman need now only prove that he relied on information from Morgan Stanley in connection with the Coleman – Sunbeam sale and that he suffered damages.

Here is the article the discusses the new order. An excerpt from the article:

“For months, Morgan Stanley and Kirkland have been the subject of a number of strongly worded rulings and scathing in-court comments by the judge, who has called Morgan Stanley’s behavior ‘grossly negligent’ and has suggested the firm has purposely withheld information from the court and Mr. Perelman. She has said that in many cases the firm’s actions ‘were done knowingly, deliberately and in bad faith.'”

Morgan Stanley has notified K & E that it may file a malpractice case against it. Molrgan Stanley has also notified investors of the action, telling them that it may be necessary to increase the $260M reserve it established for the case less than 10 days ago. Perelman is seeking $2.7B in damages.

It is also reported that K&E has been fired and that the judge granted a one week continuance so that Morgan Stanley could get new counsel.

It is a challenge to make some clients do the right thing. The results in this case can help those types of clients understand the risk of not following the rules.