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In passing the Private Securities Litigation Reform Act of 1995 (PSLRA), [FOOTNOTE 1]Congress expressed the need for legislation to curb baseless federal securities claims, particularly in class actions. [FOOTNOTE 2]The Senate and the House Conference reports referred to abusive litigation, insufficient sanctions and the unwillingness of courts to impose sanctions. [FOOTNOTE 3] In order to “give[] teeth” [FOOTNOTE 4]to Rule 11(b) of the Federal Rules of Civil Procedure, [FOOTNOTE 5]�101 of the PSLRA imposes an affirmative duty on courts, upon final adjudication, to record specific findings regarding compliance by each party and attorney with each requirement of Rule 11(b). [FOOTNOTE 6]If a court finds a violation, it shall impose sanctions on the party or attorney in accordance with Rule 11. [FOOTNOTE 7]There is a presumption in favor of awarding reasonable attorney’s fees and other expenses. [FOOTNOTE 8]Section 101 of the PSLRA does not change Rule 11 or interpretive case law, but, in federal securities cases, compels a Rule 11 review after final adjudication. Although the 2nd U.S. Circuit Court of Appeal’s recent decision Corroon v. Reeve, [FOOTNOTE 9]upholding an award of monetary sanctions in the amount of $84,153 against plaintiffs’ counsel, serves as a reminder of the harsh consequences of Rule 11, its use in federal securities cases has been rare despite �101. DECISIONS WITHIN THE 2ND CIRCUIT Only four cases in the 2nd Circuit have finally imposed Rule 11 sanctions after conducting the mandatory review required by the PSLRA — but the Rule 11 violations found in those cases were egregious. [FOOTNOTE 10]In Simon DeBartolo Group LP v. Richard E. Jacobs Group Inc., [FOOTNOTE 11]the district court sanctioned the plaintiff and its attorneys in the amount of $100,000 for bringing frivolous claims under SEC Rules 10b-13 [FOOTNOTE 12]and 10b-5 [FOOTNOTE 13]. Reviewing the district court’s decision under an abuse of discretion standard, the 2nd Circuit reversed in part, concluding that although the plaintiff’s claim under SEC Rule 10b-13, which “prohibits a person making a cash tender offer � from buying � outside the tender or exchange offer,” [FOOTNOTE 14]violated Rule 11 [FOOTNOTE 15](finding, inter alia, there was no tender offer and there was no offer for any equity security [FOOTNOTE 16]), “there were non-frivolous allegations and arguments supporting each element of appellants’ Rule 10b-5 cause of action.” [FOOTNOTE 17] In Gurary v. Winehouse, [FOOTNOTE 18]a Rule 10b-5 action, the 2nd Circuit held that the district court abused its discretion in not awarding sanctions against the plaintiff’s attorney for bringing a 10b-5 claim for two of plaintiff’s four purchases. Plaintiff’s first purchase occurred six days before the alleged manipulation. [FOOTNOTE 19]“This is not a case � [where] a particularly trenchant argument for rejecting existing precedent might be availing. Rather, the statute � [is] incapable of judicial revision and thus precluded the district court from adopting any theory that would impose liability for a purchase entirely unconnected with alleged fraud.” [FOOTNOTE 20]The Court of Appeals also found the plaintiff’s claim relating to the second purchase was not sustainable under any existing legal theory because no damages were suffered. [FOOTNOTE 21]The plaintiff in Guraryfailed to make any argument before the district court for modification or extension of the law, and the 2nd Circuit could not conceive of a nonfrivolous argument for a change in the law to save the plaintiff’s claim. [FOOTNOTE 22] Similarly, in Inter-County Resources Inc. v. Medical Resources Inc., [FOOTNOTE 23]the district court imposed a $5,000 sanction against an attorney because the plaintiff lacked standing because it “neither purchased nor sold the relevant securities during the relevant period.” [FOOTNOTE 24]The district court found the precedents cited by the plaintiff were entirely inapposite, none of the plaintiff’s “more imaginative theories” remotely comported with established law and no factual allegations in the complaint supported the plaintiff’s “newly-hatched theories.” [FOOTNOTE 25] Most recently, in Corroon v. Reeve, [FOOTNOTE 26]the 2nd Circuit found no abuse of discretion by the district court in sanctioning the plaintiffs’ attorneys who brought a �14(e) [FOOTNOTE 27]claim, because the plaintiffs failed to explain how or why certain statements were fraudulent, a violation of the pleading requirements of Rule 9(b). [FOOTNOTE 28]The district court concluded that the plaintiffs’ repeated attempts to bolster their “objectively unreasonable claims” by exaggerating, mischaracterizing and ignoring the “plain language of relevant documents” was sanctionable conduct under Rule 11(b)(3). [FOOTNOTE 29] INCONSISTENT STATEMENTS BY THE PLAINTIFF’S COUNSEL IN SETTLEMENT The district court in Corroonconsidered the attorney’s inconsistent statements a “troubling ground” for sanctions. [FOOTNOTE 30]The district court found that the plaintiffs’ lead counsel made inconsistent statements to the court and to the class about the fairness of the tender offer at issue. “Either plaintiffs’ counsel violated Rule 11(b)(3) in � [in advocating settlement] when they repeatedly stated — based upon their examination of documents and consultation with financial experts — that the Tender Offer was fair, or counsel violated Rule 11(b)(3) in October 1999 by filing an amended complaint alleging that the Tender Offer was unfair.” [FOOTNOTE 31]Under the settlement advocated by the plaintiffs’ lead counsel, the plaintiffs would have received nothing while the plaintiffs’ attorneys would have received $200,000 in fees. The court stated, “Lead Counsel was either pursuing meritless litigation in order to force a settlement with respect to attorney’s fees — precisely the behavior the securities laws and Rule 11 abhor — or, equally abhorrent, Lead Counsel was willing to jettison the meritorious claims of its clients in order to obtain attorney’s fees.” [FOOTNOTE 32] AMENDMENTS In Gurary, the district court failed to grant leave to amend the complaint, and, as a result, the 2nd Circuit found that no sanctions were warranted for plaintiff’s second two purchases “because the district court could have, within its broad discretion, afforded [plaintiff] leave to amend his complaint, which would have resulted in a cognizable 10b-5 claim.” [FOOTNOTE 33] Conversely, in Corroon, the district court warned the plaintiffs that their 14(e) claim “appear[ed] weak” and was unlikely to survive dismissal. [FOOTNOTE 34]Despite this warning, the plaintiffs included identically flawed allegations in their amended complaint. Understandably, the district court found this circumstance significant in deciding to impose sanctions. [FOOTNOTE 35] OTHER ISSUES The 2nd Circuit has also cautioned that the imposition of sanctions against a plaintiff for the improper actions of counsel may be inappropriate. In Simon DeBartolo Groupthe district court granted sanctions against the plaintiff (under Rule 11(b)(1)) and its attorneys by simply referring to its determination of frivolousness under Rule 11(b)(2). The district court gave no other explanation for its conclusion that Rule 11(b)(1) was violated by the plaintiff. The 2nd Circuit rejected this analysis finding it renders a client responsible for the frivolous claims asserted by its attorneys. [FOOTNOTE 36] Further, the 2nd Circuit has stated that the amount of plaintiff’s research and the finding of even minority opinion support or law review article support for his theory should be taken into consideration. [FOOTNOTE 37] CONCLUSION That there have been only four instances in which sanctions have been imposed against attorneys in the six years since the PSLRA was passed neither confirms nor disproves that the sanctions provision is necessary to deter frivolous federal securities litigation. Perhaps the plaintiffs’ bar is being less aggressive and more considered in their pleading and the deterrent is working. However, the absence of reported federal securities cases in which sanctions are imposed might be explained by (a) defendants settling arguably frivolous claims, (b) courts remaining reluctant to grant sanctions, (c) there being far fewer frivolous federal securities complaints than Congress suspected and Rule 11 needed no strengthening, or (d) the securities markets having been so strong during the last six years that damages were sustained less frequently and fewer lawsuits were brought. Leon P. Gold is a partner and Richard L. Spinogatti is a senior counsel in the Litigation and Dispute Resolution Department of at Proskauer Rose. Ann Marie Bowler, an associate at the firm, assisted in the preparation of this article. ::::FOOTNOTES:::: FN1Pub. L. 104-67, 109 Stat. 737 (1995). FN2 SeeS. Rep. No. 104-98, 104th Cong. 1st Sess. (1995), reprinted in 1995 U.S.C.C.A.N. at 689. FN3 SeeS. Rep. No. 104-98, 104th Cong. 1st Sess. (1995), reprinted in 1995 U.S.C.C.A.N. at 692-693; H.R. Conf. Rep. No. 104-39, 104th Cong. 1st Sess. (1995), reprinted in 1995 U.S.C.C.A.N. at 738. FN4H.R. Conf. Rep. No. 104-369, 104th Cong. 1st Sess. (1995), reprinted in 1995 U.S.C.C.A.N. at 738. FN5Rule 11(b) provides, in pertinent part: (b) By presenting to the court � a pleading, written motion, or other paper, an attorney � is certifying that to the best of the person’s knowledge, information and belief, formed after an inquiry reasonable under the circumstances, (1) it is not being presented for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation; (2) the claims, defenses and other legal contentions therein are warranted by existing law or by a nonfrivolous argument for the extension, modification or reversal of existing law or the establishment of new law; (3) the allegations and other factual contentions have evidentiary support or, if specifically so identified, are likely to have evidentiary support �. FN6Section 27(c) of the 1933 Act (15 U.S.C. �77z-1(c)(1)-(3)) and �21D(c) of the 1934 Act (15 U.S.C. �78u-4(c)(1)-(3)). FN715 U.S.C. �77z-1(c)(2) & 15 U.S.C. �78u-4(c)(2). FN815 U.S.C. �77z-1(c)(3) & 15 U.S.C. �78u-4(c)(3). FN9No. 00-9301, 2001 U.S. App. LEXIS 15591 (2d Cir. July 12, 2001). FN10 See Corroon v. Reeve, No. 00-9301, 2001 U.S. App. LEXIS 15591 (2d Cir. July 12, 2001); Gurary v. Winehouse, 235 F.3d 792 (2d Cir. 2000), petition for cert. filed, May 29, 2001; Simon DeBartolo Group, L.P. v. Richard E. Jacobs Group, Inc., 186 F.3d 157, 166 (2d Cir. 1999); Inter-County Resources, Inc. v. Medical Resources, Inc., 49 F. Supp. 2d 682 (S.D.N.Y. 1999). see also Baltia Air Lines, Inc. v. CIBC Oppenheimer Corp., 2001 WL 431528 (2d Cir. April 25, 2001) (vacating district court’s decision not to impose sanctions and remanding the case for findings regarding the imposition or denial of sanctions). Other cases in the 2nd Circuit that have reviewed a claim for a Rule 11 violation under the PSLRA, but failed to find a Rule 11 violation, include: Caiola v. Citibank, N.A., 137 F. Supp. 2d 362, 374 (S.D.N.Y. 2001) (holding plaintiff’s 10b-5 complaint “was not frivolous, and there was some support for his assertions in law review articles and other sources”); Kalnit v. Eichler, 99 F. Supp. 2d 327, 345 (S.D.N.Y. 2000) (holding plaintiff’s 10b-5 claim was not “wholly frivolous” for failure to plead scienter when the remaining elements were adequately alleged and, plaintiff’s subsequent attempt to replead scienter, although without merit, was not necessarily “unreasonable” and did not have “absolutely ‘no chance’ of success”); Richter v. Achs, 174 F.R.D. 316, 318-319 (S.D.N.Y. 1997) (holding plaintiff’s 10b-5 claim was not frivolous because of plaintiffs’ failure to allege the use of the telephone or mails and, “[t]hough plaintiff’s arguments were unconvincing, they were not entirely frivolous”). FN11985 F. Supp. 427 (S.D.N.Y. 1997), aff’d in part, rev’d in part, remanded by, 186 F.3d 157 (2d Cir. 1999). FN1217 C.F.R. �240.10b-13, redesignated as, 17 C.F.R. �240.14e-5. FN1317 C.F.R. �240.10b-5. FN14186 F.3d at 174. (internal quotations omitted). FN15 Id.at 174-176. FN16 Id. FN17 Id.at 174. FN18235 F.3d 792 (2d Cir. 2000), petition for cert. filed, May 29, 2001. FN19235 F.3d at 799. FN20 Id. FN21 Id.at 799-800. FN22 Id.at 800. FN2349 F. Supp. 2d 682 (S.D.N.Y. 1999). FN24 Id.at 684. FN25 Id.at 685. FN26 Corroon v. Reeve, No. 00-9301, 2001 U.S. App. LEXIS 15591 (2d Cir. July 12, 2001). FN2715 U.S.C. �78n(e). FN28 Polar Int’l Brokerage Corp. v. Reeve, 196 F.R.D. 13, 16 (S.D.N.Y. 2000), reconsidered in part by, 120 F. Supp. 2d 267 (S.D.N.Y. 2000), aff’d in part, dismissed in part sub nom., Corroon v. Reeve, (2d Cir. July 12, 2001). FN29 Polar Int’l Brokerage Corp. v. Reeve, 196 F.R.D. at 16. FN30 Id.at 18. FN31 Id. FN32 Id. FN33235 F.3d at 802. FN34196 F.R.D. at 16. FN35 Id. FN36186 F.3d at 176-177. FN37 Gurary v. Winehouse, 235 F.3d at 797-798.

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