Sanctions May Be in Plaintiffs’ Future

I’ve fought about a lot of things in my ten years as a class action litigator, but this one has to take the cake. I mean, you simply are not going to believe this. In the Transaction Systems Architects action, the “defendants filed a motion to compel for the following specific deficiencies in the plaintiffs’ responses to interrogatories:

1. The ‘verification’ offered by the plaintiffs is not made under oath because it is neither notarized nor declared under penalty of perjury.

2. The ‘verification’ offered by the plaintiffs impermissibly excludes those matter that Mr. Martini [who signed on behalf of the plaintiffs] ‘averred upon information and belief.’”

Well, I bet you know where this is going, but keep this in mind. You might think there’s not much for Nebraska Judges to do, but you’d be wrong. Dead wrong. In fact, the District only has three Magistrate Judges, and weighs in with the seventh heaviest per-judge criminal felony case load in the nation. Clue: might not want to bother these Magistrates, who spend the bulk of their time handling these felony cases, with shall we say, trivial civil matters.

So with that in mind, you can imagine the frustration level of Magistrate Judge Thomas D. Thalken (D. Neb.), while probably just finishing the unenviable task of dealing with twenty arraignment and sentencing hearings that morning, when he had to shift his attention to this hugely important issue. As he noted, “had the plaintiffs merely corrected the defect, the proceeding may have gone more smoothly without the necessity of additional motions and other documents filed by the parties.” But alas, they didn’t correct them, so Judge Thalken had to waste a perfectly good sheet of paper on these warriors.

He concluded that “the defendants need not show prejudice before compliance with the federal rules is required. In fact, even litigants proceeding without counsel must comply with these rules. Accordingly, the plaintiffs will not be exempt. The defendants’ motion to compel verification that the responses were signed under oath is granted.”

Oh, and since “the plaintiffs gave no explanation for their failure to comply with the rules,” “the court shall, after the plaintiffs have a chance to respond, grant the defendants’ reasonable expenses for filing the motion to compel on those issues, unless the plaintiffs show substantial and legal justification for the failure to comply with Rule 33 or just cause why sanctions should not be imposed.”

I couldn’t resist looking at Plaintiffs’ response to this, and sure enough, Plaintiffs admit (in a brief submitted on June 5, 2006 in response to the show cause order), that “the Court’s Order makes clear, in hindsight, that Plaintiffs would have been better served by not submitting this particular dispute to the Court for resolution.”

Yah’ think?

You can read Desert Orchid Partners v. Transaction Systems Architects, issued May 25, 2006, at 2006 U.S. Dist. LEXIS 34547.

Nugget: “The verification does not contain a notary mark or comply with 28 U.S.C. § 1746.”

Plaintiffs Seek Contempt Order

True, this decision is a bit dated, but in the Nugget’s defense it just popped up in Lexis the other day — and it’s gets juicy. Seems Plaintiffs in the CV Therapeutics Inc securities class action want defense counsel held in contempt for allegedly revealing confidential witness information. Here’s how Judge Susan Illston (N.D. Cal.) sorted it all out.

“Plaintiff asks the Court to hold defendants in contempt and impose sanctions based on their alleged violation of this Court’s December 7, 2004 order restricting disclosure of the identities of the confidential witnesses (“CWS”) in this case. According to plaintiff, defendants’ counsel disclosed to CW3 the identities of CW1 and CW2; plaintiff submits the declaration of CW3 attesting to this fact. In that declaration, CW3 also states that defense counsel made the potential threat that, if he did not provide a declaration retracting his prior statements to plaintiff, he would be deposed. Plaintiff asks the Court to hold defendants in contempt and, as a sanction, to foreclose defendants from deposing any of the CWs.”

“Defendants submit a declaration from their counsel stating that he has no recollection of making this disclosure and that he believes it never occurred. They suggest that CW3 instead learned the identities of CW1 and CW2 through the biographical information in the CW statements, which defense counsel provided to CW3. In addition, defendants deny that defense counsel’s statement constituted a threat of deposition, and argue that counsel was merely explaining that an affidavit would avoid the need for a deposition. Defendants speculate that plaintiff’s proposed sanction is merely an attempt to gain a litigation advantage in light of the recent refutation of the complaint’s CW statements by two of the four CWs.”

“Taking CW3’s and Jay Pomerantz‘s declarations together, the Court concludes that counsel did disclose the identities of CW2 and CW1 to CW3. CW3 states unequivocally that Mr. Pomerantz did so; counsel states merely that he does not recall revealing the names and does not believe he did so. However, the Court does not find that defense counsel’s disclosure was a willful or blatant violation of its order. In addition, it does not consider defense counsel’s statement about a deposition of CW3 to be a threat.”

“Accordingly, the Court declines to make the requested contempt finding or to impose the drastic sanction proposed by plaintiff. Plaintiff’s motion is DENIED.”

You can read Crossen v. CV Therapeutics, issued August 10, 2005, at 2005 U.S. Dist. LEXIS 41396.

Nugget: “The Court hereby GRANTS plaintiff’s motion to certify the class and appoint Crossen as lead plaintiff.”

Discovery Stay Overstaying Welcome

As reported right here at the Nugget, Plaintiffs won the motions to dismiss in the McDonald’s (NYSE MCD) securities class action last September. So why are Plaintiffs still fighting to lift the PSLRA discovery stay? Actually, it turns out that even though Plaintiffs won, Judge Blanche M. Manning (N.D. Ill.) took the unusual step of ordering Plaintiffs to amend their complaint. Why? Because she “considered certain facts not alleged in the complaint but raised instead by plaintiffs’ response to the motion to dismiss,” so she wanted them to include those facts in a revised complaint.

So here Plaintiffs are, six months later, trying to get Magistrate Judge Sidney I. Schenkier (N.D. Ill.) to lift the discovery stay. Judge Schenkier concluded “at bottom, plaintiffs’ argument is that the stay should not apply because the current motion to dismiss is meritless — a point they press vigorously in seeking to lift the stay. Certainly, plaintiffs’ argument about the strength of the original motion to dismiss would not be a basis to lift the stay before the motion is decided — and plaintiffs do not argue otherwise. Plaintiffs have not cited any authority to support the proposition that we may preview the outcome of a second motion to dismiss in deciding whether to lift the stay. Moreover, it is not our province to rule on the merits of defendants’ second motion to dismiss, which is pending before the district judge; and we therefore express no view as to the outcome of that motion.”

Result? The stay remains in place.

You can read Selbst V. McDonald’s, issued March 1, 2006, at 2006 U.S. Dist. LEXIS 8862.

Nugget: “The gist of plaintiffs’ argument before this Court is that defendants’ current motion to dismiss pending before the district judge is frivolous. However, we note that plaintiffs have not availed themselves of the procedural tools to raise that contention with the district judge: they have not sought sanctions on the ground that the motion to dismiss is being brought for an improper purpose or lacks a basis in law or fact, FED.R.CIV.P. 11(b), or that the motion “multiplies the proceedings in . . . [the] case unnecessarily and vexatiously.”

PSLRA Sanctions Decision Delayed Pending Appeal Outcome

So will there be PSLRA sanctions in the ATSI Communications v. Shaar Fund litigation? Nobody knows, but Plaintiffs can breath a little easier – at least for now. You see, after tossing the action back in February, Judge Lewis A Kaplan (S.D.N.Y.) “invited the parties to submit papers on the issue of the appropriateness of sanctions.” Being “invited” almost makes it seem like it’s going to be something fun, doesn’t it? Look, our invitation finally arrived! Hurray! But fun doesn’t appear to have entered into the equation here, as the parties responded with briefing numbering “in the hundreds of pages.”

Instead of deciding the sanctions issue, the court noted that “if the Court of Appeals were to overturn this Court’s dismissal, all of the effort that has been and remains to be devoted to the sanctions issue will have been for naught,” and “even if the Court of Appeals affirms, the sanctions may appear in a different light.” “Furthermore, the ruling on the motions to dismiss is not dependent in any way upon the Court’s view of the sanctions issue. Finally if plaintiff, contrary to this Court’s view, has filed a legally sufficient complaint, delay of resolution of the merits of the controversy for the time necessary to determine the sanctions would be needlessly prejudicial to the plaintiff.” Judge Kaplan then directed the clerk “to enter judgment dismissing the action, thus rendering the dismissal appealable.” As for “the motions for sanctions,” they “are denied without prejudice to reinstatement” after the appeal is over.

You can read ATSI v. Shaar Fund, issued September 6, 2005, at 2005 U.S. Dist. LEXIS 19235.

Nugget: “There also remains pending a counterclaim by defendant Corporate Capital Management. There have been no proceedings on the counterclaim, however, CCM has represented that it does not presently intend to pursue the counterclaim, and all parties other than plaintiff are prepared to stipulate to dismissal of the counterclaim without prejudice. Under these circumstances, the counterclaim provides no just reason for delay in the entry of judgment dismissing plaintiff’s claims.”

PSLRA Sanctions Request Denied

Judge Shira A. Scheindlin (S.D.N.Y.) has stymied Defendants’ request for PSLRA and Rule 11 sanctions in one of the consolidated cases related to the In re IPO Litigation actions. Although the case was included in the coordinated In re Initial Public Offering Securities Litigation proceedings, it arose from a very different set of allegations. Essentially, Plaintiffs alleged that Defendants, an investment bank (CSFB) and several issuers of securities (Efficient Networks, eMachines, Lightspan Partnership, Tanning Technology, and Tumbleweed Communications — all of which, except for Tumbleweed, have since been acquired) that went public during the technology boom of the late 1990s, defrauded investors by setting their earnings estimates below their true estimates, and thereby created excitement in the marketplace when the stocks at issue beat estimate after estimate, conditioning the market to expect superior performance from those stocks and artificially inflating their prices. Nice try, but Judge Scheindlin dismissed the investors’ claims in an order issued a few months ago (See 2005 U.S. Dist. LEXIS 5339).

After the dismissal, Judge Scheindlin was faced with Defendants’ sanctions request, which argued that “Plaintiffs’ claims rested on factual assertions the falsity of which was evident from publicly available information — namely, the stock prices of the relevant issuers — and Plaintiffs’ hypothesized securities fraud scheme, even if true, would have benefited, not harmed, the named Plaintiffs.” In denying the request, the judge found that “Plaintiffs alleged a complicated scheme,” and “though ultimately deficient, plaintiffs’ claims were not frivolous.” She also said that Plaintiffs argument “rested on the nonfrivolous argument that victims of securities fraud should be entitled to all damages attributable to alleged artificial inflation, even if those victims sold securities for a profit.”

You can read the decision, issued July 28, 2005, at 2005 U.S. Dist. LEXIS 15162.

Nugget: “There is no evidence of any improper purpose or conduct on the part of plaintiffs’ counsel in pursuing novel theories that were ultimately rejected.”