Attorney Sanctioned for Bringing Time-Barred Securities Fraud Suit


Vesselin Mitev
New York Law Journal
May 28, 2009
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A Long Island, N.Y., attorney faulted by a magistrate judge for not having "learned his lesson" from previous sanctions and his client have been ordered to pay $94,854 in costs and attorney fees for knowingly bringing a time-barred securities fraud claim against a North Shore hunting preserve.

In levying the sanctions against Northport attorney Mitchell A. Stein and his client, John H. Libaire, Eastern District Judge Denis R. Hurley cited a Jan. 17, 2008, report by Magistrate Judge E. Thomas Boyle criticizing Libaire's attempt, through Stein, to "circumvent the obvious statute of limitations issue by arguing that the payment of annual dues constituted the purchase of a security, a claim [with] 'absolutely no chance of success under existing precedents.'"

Magistrate Judge Boyle noted in his 2008 report that sanctions had been lodged against Stein in two previous instances.

"This is not the first time [Mr. Stein] has flouted his professional obligations and engaged in sanctionable behavior, a fact which Stein does not even attempt to dispute. It is clear that Stein has not 'learned his lesson' from these prior impositions and that further sanctions are necessary to prevent Stein from engaging in such behavior in the future," the magistrate judge said.

Stein said that he would appeal the sanctions.

The underlying dispute in Libaire v. Kaplan, 06-1500, stemmed from a March 2006 suit by Libaire, who claimed he was defrauded into buying a single share of the members-only hunting preserve, as the preserve was "not operated in the ordinary course of business" and was inadequate in 2005, rendering Libaire's security "worthless," according to Boyle's report.

In 1981, partners Myron Kaplan and Robert Krudop founded the 333-acre Riverhead preserve and funded its development through a private stock offering of 75 shares at $10,000 apiece.

Libaire bought his share in January 1988 for $12,500. In November 2003, he and other minority shareholders sued the partnership in state court alleging waste, fraud, corporate mismanagement and breach of fiduciary duty. Those claims were eventually dismissed, but Libaire also sued in federal court, claiming his annual $9,000 membership fee represented the purchase of a second security.

In his January 2008 report, Boyle rejected that claim, ruling that under the Securities Exchange Act, the applicable statute of limitations was "clearly" exceeded by the 18-year delay in filing the action.

Further, he found, annual dues were not securities but an "obligation of membership ... in exchange for use and enjoyment" of the hunting preserve, which offers deer, ducks and pheasants as game to its 51 members.

Boyle also noted that Libaire did not expect to earn a profit from paying his membership dues, a key factor in determining whether an investment is a security. He recommended that the case be dismissed, noting that "it appears that the securities fraud claim ... was brought solely to harass the defendants in federal court."

SANCTIONABLE CONDUCT

Magistrate Judge Boyle also recommended that Stein and Libaire be held liable for reasonable attorney fees and costs incurred by defendants in connection with the suit.

Under Rule 11 of the Federal Rules of Civil Procedure, an attorney may be sanctioned for advancing claims without a good-faith belief that they have a basis in fact.

The magistrate judge listed Margo v. Weiss, 213 F.3d 55, where Stein and co-counsel Stephen J. King were sanctioned because their clients gave false affidavits in the authorship dispute over the song "The Lion Sleeps Tonight". He also referred to Alkoff v. Gold, 702 F. Supp. 429 (SDNY 1988), imposing sanctions against Stein for filing a "baseless motion for sanctions."

Judge Hurley, who sits in Central Islip, adopted the magistrate judge's findings in their entirety and set the final sanctions award at $94,845.55.

"[T]he Court finds that, even if the state claims are not frivolous, because the sole basis for federal jurisdiction was the frivolous securities fraud claim, there was no good faith basis for the commencement of this federal action, rendering the complaint noncompliant with Rule 11," Hurley wrote.

In an interview, Stein said the definition of a security is "rather broad."

In 2005, he said, his client had the option to pay the annual dues or forfeit the right to use the preserve. That, "in and of itself, is a security," he said. But he claimed the partnership fraudulently induced his client to pay his dues by publishing non-reviewed financial statements, failed to provide adequate game and did not sufficiently maintain traps.

Stein said he is considering "every opportunity to fix the error within the boundaries of the law. There is not a case anywhere in this country that supports this outcome."

The decisions, he said, "are a horrible violation of every sensible due process right and every statutory boundary meant to preserve those rights," Stein said. "The underlying merits of the fraud would never be adjudicated because what lawyer, or what client, would ever take the risk?"

In court papers Stein said the magistrate judge's report was based on "Machiavellian logic" that automatically dismissed the complaint without actually examining each claim on its merits.

In court documents, Stein took issue with Boyle's phrasing that he needed "to be taught a lesson," which Stein said "has all the bells and whistles of a post-trial criminal conviction, with sentencing shortly."

It would be "beyond serious error to find a 'substantial' violation of Rule 11 ... with no consideration or adjudication of any merits of the claims," Stein argued.

Ronald J. Rosenberg of Rosenberg, Calica & Birney in Garden City represented the partnership.

In an interview, Rosenberg called the lawsuit "completely frivolous" with "preposterous claims."



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