Morgan Stanley (MS) recently announced that it has won a legal case for breach of contract against its former subsidiary, Discover Financial Services (DFS) along with a compensation amount of about $800 million that the latter owed to Morgan Stanley.
 
The case was filed by Morgan Stanley in 2008 when Discover refused to pay a specified amount to the former as part of their spin-off agreement in 2007. The agreement entitled Morgan Stanley to a share of $1.2 billion from the $2.75 billion that Discover would receive from a suit filed for breach of trust against Visa Inc. (V) and MasterCard Inc. (MA).
 
In its turn, Discover counter-sued Morgan Stanley for violating the agreement and entering the negotiations, paying $100 million to Visa and MasterCard, which hampered the bargaining position of Discover in the final settlement. This suit has not yet been resolved.
 
Morgan has finally won the trial against Discover, claiming its right on the entitled share and the accrued interest thereon. This comes to about $785 million post tax, which Morgan can now straightaway include in its profit statements as the taxes have been paid. This will be accretive to Morgan’s earnings in the upcoming quarter.
 
Additionally, on Jan 6, 2009, in an out-of-court settlement, Morgan Stanley settled a legal suit with China Haisheng Juice Holdings over certain disputed hedge contracts. Morgan had sued the Chinese company in May 2009 when the latter failed to place its renminbi-dollar collateral hedge payments in time, accusing the foreign investment bank for making unprofitable derivative deals. However, Morgan stood its ground stating that the losses in hedged deals were due to the economic downturn and not because of the company’s faulty practice. The trials were being carried on in both the U.K. and China courts.
 
As a result of the settlement, China Haisheng Juice Holdings will pay $7 million to Morgan Stanley and will also release it from the counter-case that was filed in the Chinese court. Though Morgan Stanley had claims worth $26 million on the company, it settled for the paltry sum as pursuing the case in China would benefit it little, given the communist-controlled judicial system that may offer biased rulings. Moreover, Morgan Stanley’s chief competitor, Goldman Sachs Group Inc. (GS) has a 20% stake in this Chinese company, a fact that could again act to Morgan’s detriment.
 
Morgan Stanley holds an industry leading position for being diversified by both geography and product. Although, certain risks prevail due to diverse regulations, internationally, the company continues to focus on right-sizing its risk appetite. We believe, given the state of situations, Morgan Stanley has managed its lawsuits with intelligence and competence.
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