Morgan Stanley, the second-largest American securities firm by market value, won a reversal of a $1.57 billion jury award, a defeat for billionaire Ronald Perelman, who sued the bank over the 1998 sale of Coleman Co. to Sunbeam Corp.

The Florida Court of Appeal in West Palm Beach today threw out Mr. Perelman’s victory after finding a judge erred in not making the billionaire produce the proper evidence proving his damages from Morgan Stanley’s actions on behalf of Sunbeam. Mr. Perelman will appeal the 2-1 ruling, his spokeswoman Christine Taylor said.

The decision, coming on a day when Morgan Stanley reported record earnings, may free $360 million the New York-based firm set aside to pay Mr. Perelman. The 2005 verdict was a humiliation for Morgan Stanley, then led by chief executive officer Philip Purcell, because the company was found to have defrauded Mr. Perelman, the financier who controls Revlon Inc.

“This sets the bar for how much due diligence is required by an investment bank,” the president of Seacliff Capital LLC, who manages about $100 million including Morgan Stanley shares, James Ellman, said. “If the finances end up being fraudulent, then is it the investment bank held responsible? The court seems to have said no.”

Morgan Stanley, now led by chief executive officer John Mack, hired new lawyers to overturn the 2005 verdict. The company has moved to resolve its legal difficulties by paying regulatory fines stemming from the tenure of Mr. Purcell, who led the firm from 1997 until Mr. Mack, 62, took over in 2005.

Morgan Stanley’s legal team at the time of the 2005 verdict was headed by Donald Kempf, a former Kirkland & Ellis partner. He was replaced after the verdict by Gary Lynch, general counsel of Credit Suisse and a former head of enforcement for the U.S. Securities and Exchange Commission.

“This is clearly a victory,” the chief financial officer of Morgan Stanley, David Sidwell, said yesterday in a conference call with analysts. “Obviously we have to go through it in detail and work it out, and obviously there are additional steps the other party could take.”

Shares of Morgan Stanley rose $3.68, or 4.8%, to $79.79 yesterday in New York Stock Exchange composite trading. The company yesterday said first-quarter profit rose 70% to an all-time high on trading gains and a jump in investment-banking fees.

Net income climbed to $2.67 billion, or $2.51 a share, in the three months ended Feb. 28 from $1.57 billion, or $1.48, a year earlier.

Before the Perelman trial began, Judge Elizabeth Maass sanctioned Morgan Stanley for failing to turn over e-mail related to the Coleman deal. She ruled that, to recover damages, Mr. Perelman had to prove only that he relied on Morgan Stanley’s misstatements of Sunbeam’s financial health.

Mr. Perelman accused Morgan Stanley of conspiring with Sunbeam to mislead him about that company’s financial health. Mr. Perelman said he was fooled into accepting Sunbeam shares in exchange for selling Coleman in 1998. Sunbeam restated earnings before the year was out and filed for bankruptcy in 2001.

Jurors in West Palm Beach awarded Mr. Perelman $604 million in actual damages and $850 million in punitive damages in May 2005. Judge Maass added $123 million in interest. The original verdict was the second-largest of 2005 and is the 21st largest of all time.

Morgan Stanley targeted the sanctions in its appeal, saying that Judge Maass “handcuffed” the bank and kept it from presenting a defense to Mr. Perelman’s claims.

The appeals court majority focused on whether Perelman produced proper evidence to show he was damaged by accepting Sunbeam stock in exchange for his Coleman stake.

“Because there was no proof presented at trial on the correct measure of damages, the trial court should have granted Morgan Stanley’s motion for directed verdict,” Judges Carole Taylor and George Shahood wrote.

Judge Gary Farmer dissented, saying he would leave the compensatory damages in place and send the case back for a new trial on punitive damages.

Judge Farmer also noted because Judge Maass barred Morgan Stanley from presenting a defense to Mr. Perelman’s claims for liability purposes as part of the sanction for destroying the e-mail; she also barred the bank from presenting the information during the damages phase.

Morgan Stanley should have been allowed “the right to offer admissible evidence” for “mitigating its blameworthiness” with regard to damages, Mr. Farmer said.