Sanctions are being leveled at attorneys for plaintiffs in a securities class action who based their complaint on a mistaken reading of a business magazine that they later withdrew.
Southern District Judge Denise Cote ordered Kenneth J. Vianale of Vianale & Vianale in Boca Raton, Fla., and a second plaintiffs lawyer to pay all the defendants' attorney fees and costs after rejecting Vianale's defense that he misread a news article on internal e-mails that allegedly incriminated the defendant company.
To the degree that the news article was the "inspiration" for a central allegation in the original complaint, Judge Cote said, "plaintiff's misreading of that news article -- and subsequent lack of diligence or further inquiry -- was an act of gross negligence bordering on recklessness."
Cote, who dismissed the suit in December, also ordered Jules Brody of Stull Stull & Brody in New York, who signed the complaint, and the law firms of both attorneys, to pay the sanctions in In re Australia and New Zealand Banking Group Limited Securities Litigation, 08 Civ. 11278.
The plaintiffs were investors who purchased American Depository Receipts in Australia and New Zealand Banking Group Limited (ANZ) between March 2, 2007, and July 27, 2008.
They claimed ANZ made false and misleading statements on its financial results -- chiefly by failing to disclose the risk posed by its relationship with Opes Prime Group Limited, an Australian margin lending and stock firm that owed ANZ $650 million when it went into receivership on March 27, 2008.
The original complaint filed in December 2008 stated in paragraph 25 that "In March 2007, in a series of internal emails, executives of ANZ recognized that Opes was in financial difficulties and that as a result, ANZ's loans to Opes Prime would be in jeopardy. Nevertheless, no public disclosure was made by ANZ."
But in a consolidated amended complaint filed May 21, 2009, the allegation about the internal e-mails was not included. Instead, Cote said, the new "core allegation" was that ANZ failed to disclose in public statements that it had inadequate internal controls for its equity finance unit.
Vianale submitted a declaration in February 2010 that conceded the source of the original paragraph 25 allegation was an article in the June 2008 edition of the Australian periodical Business Spectator, entitled, "Did ANZ light the fuse?"
The article states that, following Opes' collapse in March 2008, ANZ told the magazine it was exiting the securities lending business, "but emails obtained by Business Spectator suggest this process was happening much earlier," as early as March 7.
Vianale's declaration, Cote said, explained that he "mistook the article's 'March 7' reference as one to March 7, 2007, instead of March 7, 2008."
"Vianale thereby concedes that the allegation in paragraph 25 was false," Cote said.
While Vianale insisted that his mistake was not "concocted" or made in bad faith, Cote said the attorney did not explain why he misread the article or why the error was not caught before the original complaint was filed.
The judge was proceeding under the Private Securities Litigation Reform Act of 1995's requirement that she make specific findings on the compliance of attorneys with Rule 11 of the Federal Rules of Civil Procedure.
"Plaintiff can identify no evidence whatsoever for the allegation that internal emails were exchanged at ANZ in or about March 2007 concerning Opes Prime's financial difficulties," Cote said.
And the error in paragraph 25, she said, "was not an isolated misstatement concerning a collateral or trivial fact, but rather, a material allegation central to the viability of the entire pleading."
The complaint's "spurious" allegation, she said, allowed the class period to start 12 months earlier than it otherwise could have.
"Such indifference to the truth of the pleading's single most important factual allegation -- coming, ironically, in the context of initiating a lawsuit that accuses another party of making reckless misstatements of material fact -- is the sort of conduct that Rule 11 and the PSLRA seek to deter," she said.
While Vianale took responsibility for his error, Cote said, "he does not explain how he came to rest his entire case on a misread news article."
Vianale declined comment, as did an attorney with Stull Stull & Brody.
Samuel W. Seymour, Penny Shane and Daniel R. Margolis of Sullivan & Cromwell represented the defendants. They declined comment.
On May 28, Sullivan & Cromwell is due to submit "an application for attorney fees and costs, supported by contemporaneous time records" to Cote.
