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A district judge’s sanctions against two law firms for pursuing frivolous securities claims have been upheld by the 2nd U.S. Circuit Court of Appeals. The court found that federal Judge Shira A. Scheindlin of the U.S. District Court for the Southern District of New York did not abuse her discretion in finding that New York’s Schoengold & Sporn and Philadelphia’s Berger & Montague should be sanctioned a total of $84,153 for violations of Rule 11 of the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act of 1995 (PSLRA). The bulk of the sanction, $73,634, was assessed by Scheindlin against Schoengold & Sporn for a claim asserted on behalf of its client, Polar International Brokerage Corp., lead plaintiff in Corroon v. Reeve, 00-9301, a case involving a tender offer in the insurance industry. The judge had found that the claim, founded on Section 14(e) of the Securities and Exchange Act of 1934, “was both legally frivolous and without factual support.” Scheindlin also found that Schoengold & Sporn made inconsistent statements to the court and to the plaintiff class about the fairness of the tender offer at issue. “[E]ither plaintiffs’ counsel violated Rule 11(b)(3) in March 1999 [in advocating settlement] when they repeatedly stated — based upon their examination of documents and consultation with financial experts — that the tender offer was fair … ,” Judge Scheindlin said, “or counsel violated Rule 11(b)(3) in October 1999 by filing an amended complaint alleging that the tender offer was unfair.” Scheindlin’s decision was based in part on the fact that under the settlement advocated by Schoengold & Sporn, the plaintiffs would have received nothing, while the firm would have been paid $200,000 in fees. “Lead counsel was either pursuing meritless litigation in order to force a settlement with respect to attorneys’ 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 attorneys’ fees,” she said. In August 2000, Scheindlin ordered that $31,557 in sanctions be paid by Berger & Montague. But on a motion for reconsideration last September, she reduced those sanctions to $10,519, finding that she had not, initially, “fully appreciated” the degree to which Berger & Montague acted at the direction of Schoengold & Sporn, and that Berger & Montague was “not made privy to … certain matters relevant to the imposition of sanctions.” The 2nd Circuit had several problems with the form in which the appeal of the sanctions was presented. One problem was that the appeal was not filed in the name of the sanctioned firms or their attorneys, but in the name of its client, Polar International. And instead of directly appealing, Berger & Montague filed an intervenor’s brief with the 2nd Circuit. Writing for the court, Judge Amalya Kearse said that “having declined to file an appeal from the August and September orders, and its appeal deadline having passed, Berger & Montague could not secure the resurrection of its appeal time, which is jurisdictional and strictly enforced … by simply seeking to intervene.” The appeals court, she said, granted the firm’s motion to intervene for the sole purpose of allowing it to “defend the district court’s reduction of its liability for sanctions,” but the court found that the $10,519 sanction “is not properly before us.” SCHOENGOLD’S APPEAL As to Schoengold & Sporn’s appeal, the court dismissed some of the firm’s claims for procedural infirmities. Turning to the merits, Kearse said that “the PSLRA required the court to impose sanctions if it found any violation of Rule 11.” “Rule 11 is violated when it is clear under existing precedents that a pleading has no chance of success and there is no reasonable argument to extend, modify, or reverse the law as it stands,” Kearse said. “We see no error of law or clear error of fact in the district court’s determination that the Section 14(e) claim was without factual support and was legally frivolous, and that its assertion violated Rule 11.” Senior Judge Ellsworth A. Van Graafeiland and Eastern District Judge Joanna Seybert, sitting by designation, joined in the 2nd Circuit opinion. Samuel P. Sporn and Joel P. Laitman of Schoengold & Sporn represented that firm. Lawrence Deutsch and Debora Fliegelman of Berger & Montague represented that firm. Telephone inquiries to both firms requesting comment about the 2nd Circuit’s decision were made, but not returned. Paul C. Curnin and Felecia B. Stern of Simpson Thacher & Bartlett represented the investment banks and individuals sued in the initial class action. Robert C. Myers and Paul B. Carberry of Dewey Ballantine represented the insurance companies sued in the case.

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