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The Green Sheet Online Edition

January 12, 2009 • Issue 09:01:01

Morgan Stanley sues Discover

Wall Street investment firm Morgan Stanley filed a lawsuit against its former subsidiary, Discover Financial Services, accusing the card brand of not honoring its original agreement from Discover's June 2007 spinoff. The agreement specified the proceeds Discover would pay Morgan Stanley once the antitrust lawsuit Discover filed against Visa Inc. and MasterCard Worldwide in 2004 had been resolved.

On Oct. 27, 2008, Discover settled its lawsuit - which alleged the two biggest card brands barred their member banks from issuing Discover cards - for a reported $2.75 billion. Morgan Stanley is suing Discover to hand over in excess of $1.2 billion from that settlement.

But Discover contends Morgan Stanley undermined its antitrust case and violated the terms of the spinoff agreement. Therefore, Discover balked at paying its former parent company that settlement money. Now, both companies are digging in to fight over the spoils.

Behind closed doors

When Discover spun off from Morgan Stanley in 2007, the two entities signed an agreement governing the manner in which the antitrust case was to be pursued and how the proceeds of the litigation were to be shared.

Discover agreed to pay Morgan Stanley the first $700 million it received and half of any proceeds above $1.5 billion, but the total was not to exceed $1.5 billion.

As part of the spinoff agreement, Discover was given sole negotiating power with the card brands in the antitrust case and could accept or reject any deal Visa and MasterCard threw its way. The negotiations between Discover and the card brands dragged on into 2008, and the two sides were set for an October trial.

But on Oct. 13, the day before the trial was to begin, Discover claimed that it learned Morgan Stanley was secretly negotiating with the card brands to settle the case, which violated the spinoff agreement.

Discover was seeking more than $6 billion in its antitrust lawsuit. But when it found out Morgan Stanley had allegedly gone behind its back to the card brands and potentially compromised information Discover felt was critical to its success at the trial, Discover believed it was compelled to settle the case for much less than it would have received if Morgan Stanley had not interfered.

Discover said the company was afraid of risking a trial without knowing whether privileged and confidential information had been disclosed to its opponents, permanently damaging Discover's ability to get a fair trial.

Out in the open

Morgan Stanley claims Discover knew the investment firm had been speaking with Visa and MasterCard. But when Discover settled the antitrust case, Morgan Stanley said it potentially lost billions that could have been won had the trial been successfully litigated in Discover's favor.

Discover said this statement is false and has countersued Morgan Stanley, claiming that since the firm wouldn't receive any monies over $1.5 billion in the spinoff agreement, it had no interest in seeing the case go to trial. But, legal analysts believe, Discover may need to explain why it chose to settle rather than go to trial despite the alleged illegal arbitration by Morgan Stanley.

The discovery process of the litigation between Discover and Morgan Stanley has yet to begin, and if both companies are unable to reach an agreement, it will likely go to trial in 2009.

Discover and Morgan Stanley officials could not be reached for comment at press time. end of article

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