June 28 (Bloomberg) -- Morgan Stanley asked a Florida appeals court to throw out a jury's $1.57 billion award in a lawsuit by financier Ronald Perelman, saying a lower court ruling punishing the firm for mishandling e-mails unfairly disadvantaged it at trial.

Perelman sued the world's No. 2 securities firm over its role in his 1998 sale of camping equipment maker Coleman Co. to Sunbeam Corp. In arguments to the Florida Court of Appeal in West Palm Beach, Morgan Stanley lawyers said they were unable to mount a full defense after Judge Elizabeth Maass told jurors to assume the firm misled Perelman about Sunbeam's finances.

``We were handcuffed,'' Morgan Stanley lawyer Bruce Rogow told the three-judge panel. The penalty, that jurors were to assume the firm helped Sunbeam inflate earnings before Perelman accepted its shares as payment, was a ``catastrophic sanction,'' Rogow said.

Morgan Stanley, now led by Chief Executive Officer John Mack, hired new lawyers to overturn the 2005 verdict in favor of Perelman, who controls makeup company Revlon Inc. A reversal of a pre-trial ruling is rare, legal experts said, as appeals courts generally give broad discretion to a lower court on such matters.

Presumed Correct

``Even if the judge's decision means evidence is excluded in a case, the appellate courts will still treat that ruling as if its presumed to be correct,'' said Jack Reiter, a partner at Miami-based Adorno & Yoss and former head of the Florida Bar's appellate rules committee. ``They traditionally are very reluctant to go back and second-guess the person making those decisions in the heat of battle.''

Rogow said after today's argument that rulings barring one side from presenting its case at trial get extra scrutiny from appeals courts.

The trial judge ``is given less deference because of the loss of opportunity to defend the case,'' he said.

Morgan Stanley has moved to resolve some of its legal difficulties as it pays for regulatory problems that arose under former Chairman and CEO Philip Purcell, who led the firm from 1997 until Mack, 61, took over last year.

In February, the firm said it would pay $15 million to settle a Securities and Exchange Commission probe into its failure to save e-mails, the largest fine ever paid for that type of violation. Yesterday, the SEC fined it $10 million for failing to guard against insider trading for at least eight years.

Conspiring

Perelman's suit accused Morgan Stanley of conspiring with Sunbeam to mislead him about that company's financial health. Perelman, 63, said he was fooled into accepting Sunbeam shares in exchange for selling Coleman. Sunbeam stock became worthless after it admitted misstating revenue and filed for bankruptcy.

Maass, a state judge in Palm Beach, properly punished Morgan Stanley after finding it ``undertook a campaign of deception'' by destroying and withholding evidence about the Coleman sale, Paul Smith, one of Perelman's lawyers, told the appeals court.

The securities firm helped Sunbeam commit ``the largest fraud in the history of Florida,'' and it ``got what it richly deserved'' when the jury rendered its verdict, Smith said.

Morgan Stanley faces a difficult task in overturning the Perelman verdict under Florida law, Reiter said. The state legislature limited most punitive damage awards to three times actual damage verdicts, a fact that Reiter said shouldn't have much effect on Perelman's award given that the punitive verdict was only 1.4 times more than the actual damages awarded.

``It seems unlikely that, in that situation, the appellate court would disturb the jury's conclusions,'' he said.

Throw Out

Rogow urged the appellate judges today to throw out the punitive award, saying the jury's decision to order Morgan Stanley to pay $604.3 million in actual damages was sufficient.

Morgan Stanley spokesman John Franklin declined to comment on whether the bank has offered to settle the case since the verdict. Christine Taylor, Perelman's spokeswoman, also declined to comment on whether the billionaire had settlement talks.

The company has reserved $360 million to deal with the case, according to regulatory filings. On June 21, the firm said second-quarter earnings more than doubled to $1.96 billion because of higher-than-expected trading revenues.

During the trial, Maass decided to impose the sanction on Morgan Stanley after learning its lawyers had lied about turning over all relevant e-mails to Perelman's lawyers.

Perelman's attorneys claimed Morgan Stanley helped Sunbeam orchestrate the fraud to protect its fees. After a two-month trial, jurors awarded Perelman $850 million in punitive damages on his fraud and misrepresentation claims in addition to the actual damage figure. Interest on the award pushed the total verdict to $1.57 billion.

Unfairly Barred

In its appeal, Morgan Stanley argued that Maass' order unfairly barred it from trying to convince jurors that it played no role in Sunbeam's fraud. The firm had evidence that one of its units lost $340 million as part of the Coleman sale, its lawyers said in court filings, ``more than 10 times the fee'' that Perelman alleged was the motivation for wrongdoing.

Morgan Stanley's appeal also attacks the punitive damage award as ``out of proportion,'' saying it's 17 times larger than any punishment award ever upheld by Florida's courts.

Perelman's lawyers noted in court papers that Maass punished Morgan Stanley only after finding the company repeatedly ignored her orders to turn over the e-mails.

``The trial court found Morgan Stanley had engaged in massive and systemic litigation abuse,'' Perelman's lawyers said.

`Not Excessive'

They also contend jurors appropriately awarded punitive damages based on Morgan Stanley's misdeeds.

``That award, which is 1.4 times the compensatory award, was not excessive,'' the filing said. The U.S. Supreme Court has ruled that punitive damage awards generally shouldn't exceed 10 times actual damages.

In court today, Rogow also argued that Maass should have applied New York law because the transaction was completed there and both parties are based in the state. New York law is more favorable to Morgan Stanley's defense, he argued.

Perelman's lawyers responded that the fraud actually occurred in Florida, where former Sunbeam CEO Albert Dunlap made statements at a Palm Beach meeting with Perelman assuring him Sunbeam was financially healthy before the deal.

Morgan Stanley shares rose 10 cents to $60.14 in New York Stock Exchange composite trading.

The case is Morgan Stanley & Co. v. Coleman Holdings Inc., No. 4D05-2606, Fourth District Court of Appeal, Palm Beach, Florida.

To contact the reporter on this story: Jef Feeley in the 4th District Court of Appeals in West Palm Beach, Florid at jfeeley@bloomberg.net.

Last Updated: June 28, 2006 18:01 EDT