Morgan Stanley wins appeal over telecom merger

By Jonathan Stempel

NEW YORK (Reuters) - A federal appeals court on Tuesday threw out a lawsuit accusing Morgan Stanley (MS.N) of costing the former chairman of 21st Century Telecom Group Inc and other shareholders millions of dollars over a telecommunications merger.

A three-judge panel of the U.S. Seventh Circuit Court of Appeals in Chicago found that Morgan Stanley owed no fiduciary duty to shareholders of 21st Century, which it represented in the company's April 2000 acquisition by RCN Corp (RCNI.O), just as the telecommunications bubble was beginning to burst.

RCN filed for Chapter 11 protection from creditors in 2004, causing its shares to become worthless, but has since emerged from bankruptcy. Once based in Princeton, New Jersey, it is now based in Herndon, Virginia.

The lead plaintiff in the case is Edward Joyce, the former 21st Century chairman. Joyce also is a principal at the Chicago law firm Edward T. Joyce & Associates PC. He was not available for immediate comment. In a 2006 interview with Crain's Chicago Business, he said he and his family lost $20 million from RCN's collapse.

The former 21st Century shareholders had accused Morgan Stanley of failing to suggest hedging strategies to cushion any potential decline in the value of RCN shares, which by April 2000 had fallen significantly since the stock-for-stock merger was announced four months earlier.

These shareholders alleged that such strategies would have caused RCN shares to fall, posing a conflict of interest for Morgan Stanley because RCN also had been a client of the bank.

In its 11-page ruling, however, the appeals court panel found that while Morgan Stanley owed a fiduciary duty to 21st Century, there was no evidence it agreed to owe a similar duty to the shareholders. It also found no special circumstances giving rise to an "extra-contractual" fiduciary duty.

Alternatively, the panel said the plaintiffs took too long to sue by waiting until August 2006 to bring the lawsuit.

It said Illinois' five-year statute of limitations began to run in April 2000 when the merger closed and the stock price had already begun to fall, not when the plaintiffs said they later learned that hedging might have helped.

(Editing by Carol Bishopric)