Morgan Stanley’s appeal of the billionaire Ron Perelman’s $600 million judgment means the bank faces a $2.45 billion liability, when it had the chance to settle the whole mess for as little as $20 million. What’s behind all this?

Now Morgan Stanley has another fight on its hands, and it all comes down to its failure to settle when it could have–or still might.

Morgan Stanley said it’s appealing Monday’s $604 million jury verdict in a case brought by billionaire Ron Perelman, who claimed Morgan Stanley misled him in 1998 when he was selling a substantial stake in one of his companies in exchange for shares of Sunbeam Corp. But it may still be seeking some settlement.

The problem is that now the floor of that settlement may well be $604 million. With the potential for triple punitive damages, Morgan Stanley faces a $2.45 billion liability in the case as the penalty phase kicks off.

But sources close to Perelman say the judge asked them to seek some kind of settlement a week ago. Now, the jury verdict may very well concentrate Morgan Stanley’s mind.

“We believe a nine-figure settlement is the most likely outcome,” says David Trone, an analyst at Fox Pitt Kelton. “Before the sanction, we expected a mere eight-figure settlement.”

On Monday, a nine-person jury voted unanimously in favor of Perelman after barely two days of deliberation. Perelman’s legal team got a boost from the judge, Elizabeth Maass, who told the jury it could assume Morgan Stanley aided in a financial fraud at Sunbeam that eventually led it to file for bankruptcy protection in Feb. 2001. Perelman, who sold his share in Coleman to Sunbeam for company stock, said he relied on Morgan Stanley’s good faith that the company was in good shape. It wasn’t. Soon after the deal, it declared bankruptcy and the stock became worthless.

Most lawsuits like this would never have made it to trial. After Monday’s verdict, Morgan Stanley is now relying on a couple of decisions by the Florida state court judge presiding over the trial to win an appeal. What is clear is that Morgan Stanley, which has reserved about $360 million for losses related to the Perelman suit, will end up paying far more than it might have had it reached a settlement earlier.

“It reinforces the fear of corporate executives,” said Adam C. Pritchard, a professor at University of Michigan Law School. The verdict “will be bandied about by corporate counsel for five years” as a lesson in when to settle.

The WorldCom securities litigation is another notable example. In May 2004, Citigroup became the first of 13 underwriting firms to settle its part of the case, in which the banks were accused of arranging the sale of billions of dollars in stocks and bonds for client WorldCom and failing to uncover the financial problems that led to WorldCom’s collapse into bankruptcy in June 2002.

Citi paid $2.575 billion, but the 12 other banks balked and held out for trial. In the weeks leading up to the opening arguments, most of the other banks fell in line. On the eve of the March trial, J.P. Morgan Chase (nyse: JPM – news – people ) announced it would settle its part of the case for $2 billion. Morgan might have paid just $1.37 billion had it agreed to settle using Citi’s formula in May 2004–a difference of more than $600 million.

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