The opinion of the court was delivered by: CARTER
The Nature of the Motion and the Issues Involved
This litigation commenced on March 25, 1977, with the filing of a complaint against Alan Abelson, Meyer Berman, Lawrence and Robert Bleiberg, Boxwood and Cumberland Associates, Marc Howard, Marc Howard Associates, Walter Mintz, Robert Wilson, Robert Wilson Associates, and Dow Jones & Co., Inc., alleging violations of §§ 9(a) and 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78i(a) and 78j(b). Abelson, Robert Bleiberg, and Dow Jones ("publishing defendants") are respectively: the author of Up and Down Wall Street, a column regularly published in Barron's analyzing stock traded on the various exchanges; the editor of Barron's National Business and Financial Weekly ("Barron's"), a weekly journal covering financial news; and corporate owner-publisher of Barron's and other publications. The other defendants will be called the short sellers. The complaint alleged that the short sellers engaged in a conspiracy with the publishing defendants pursuant to which the publishing defendants would advise the short sellers of the forthcoming publication in Barron's of unfavorable or disparaging news about Technicare Corporation ("Technicare"). The articles were allegedly intended to depress the price of Technicare stock, enabling the short sellers to take a short position on Technicare and, after the articles were published, to cover their purchases at a lower price.
Shortly after the commencement of the litigation, plaintiff discontinued with prejudice the action against Lawrence Bleiberg, Boxwood Associates, Marc Howard and Marc Howard Associates. On January 6, 1978, an amended complaint with materially altered allegations was filed against the remaining defendants. The short sellers were now alleged to have solicited the publishing defendants to write and publish negative and disparaging news about Technicare, and the Barron's publications containing the negative articles were cited as those dated May 3, June 14, July 19, August 16, and October 11 in 1976 and January 10, January 17, and February 14 in 1977.
On May 3, 1978, a stipulation and order of dismissal with prejudice of the entire action was filed. It provided that the dismissal would be effective on June 15, 1978, unless prior to that date defendants moved for an order seeking costs, reasonable expenses and attorneys' fees, in which case the dismissal would be effective on the date the court issued its order determining the motion. The defendants filed the instant motion seeking costs, expenses and attorneys' fees on June 14 and oral argument was heard on the motion in September. Additional documents and memoranda were filed thereafter,
and the defendants have filed affidavits detailing the fees and expenses which they seek to recover as follows: Berman $ 12,210 in fees and $ 2,149.26 in disbursements; the publishing defendants $ 194,629 in fees (of which $ 53,058 constitutes costs in connection with their fee application) and $ 6,163.37 in disbursements; Cumberland Associates and Mintz $ 32,428.75 in fees and $ 2,781.85 in disbursements for defense of the action and $ 4,413.25 in fees and $ 175.18 in disbursements in connection with the fee application; Robert Wilson and Robert Wilson Associates $ 43,744 in fees and $ 4,132.33 in disbursements in defense of the action and $ 9,434 in fees in connection with this motion.
Defendants contend that this suit was instituted without any basis for the damaging allegations made herein. They argue that the claims are frivolous and that the plaintiff's real purpose in bringing this action was attempted use of the judicial process to silence the publishing defendants. Defendants further allege that plaintiff was guilty of dilatory and wasteful tactics during the course of the litigation causing defendants needless expense,
and that the circumstances of this case conclusively demonstrate the bad faith of plaintiff and his counsel in instituting the lawsuit. Defendants urge that they are entitled to an award of attorneys' fees and expenses pursuant to Rules 11 and 54(d), F.R.Civ.P., § 9(e) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78i(e) and the inherent equitable power of the court.
Plaintiff maintains that the action was based on a legitimate perception of a manipulative scheme by defendants and was commenced in good faith to redress injuries to him and to other Technicare shareholders. He argues that any reliance on the First Amendment is misconceived since the press is not protected if it engages in illegal activities.
Three threshold points should be made. First, while this is not a First Amendment case, it is not inappropriate for the publishing defendants to argue that the court should not allow a party to misuse judicial processes as a vehicle for restricting the exercise of defendants' First Amendment rights. Second, although the basic issue in this case is whether plaintiff had any colorable good faith basis for instituting this action in March, 1977, when the lawsuit was commenced, the defendants' motion must fail if plaintiff had such a colorable claim at any point during the life of this litigation. Finally, the showing of a lack of an adequate foundation for bringing defendants into court is not in and of itself sufficient to warrant taxing the plaintiff and his counsel with expenses and attorneys' fees.
The Genesis of this Litigation
In an article published in May, 1976, Alan Abelson questioned whether Technicare's high priced medical technology could continue to be marketed successfully enough to warrant future growth in the value of the company's stock. Thereafter Abelson's articles contained additional negative comments on Technicare's capacity for accretion. Herbert Stein, a client of Hale & Dorr, counsel for plaintiff in this action, held a large position in Centronics Data Computer Corporation ("Centronics"), another company about which Abelson was beginning to write negatively. Stein, in the belief that Centronics was being manipulated by Abelson and various short sellers, sought advice from Hale & Dorr on how to put a stop to this. Gordon Walker, the member of the firm handling this litigation, undertook an investigation of that matter sometime in January, 1977, and in the course of that investigation met Howard Roth, a broker at Prescott, Ball & Turbin. Roth and several of his clients including plaintiff had substantial holdings in Technicare. The stock had risen spectacularly at first and then had begun to level off. Roth was convinced that Abelson's negative comments published in Barron's in 1976 (and subsequently in 1977) were not honest appraisals but part of a conspiracy to depress Technicare's stock. Plaintiff shared this conviction, and Roth and Nemeroff consulted Edward Costikyan of Paul, Weiss, Rifkind, Wharton & Garrison in December, 1976, to discuss the possibility of litigation. Costikyan would not take the suit.
Stein suggested Hale & Dorr as an alternative, and Roth suggested Nemeroff to Walker as a possible plaintiff in whose name class action litigation could be instituted. Walker and the plaintiff talked by telephone but never met face to face prior to March 25, 1977, the date this complaint was filed.
Plaintiff alleges that although "virtually every knowledgeable person with whom counsel spoke believed Technicare to have strong "fundamentals,' . . . the stock was being besieged, without objective reason" by both Abelson's negative articles and "an extraordinary program of short selling in Technicare stock." (Pl.Mem. p. 7). As a justifiable basis for instituting this litigation, Walker points to an ongoing investigation by the New York Stock Exchange ("N.Y.S.E.") and the Securities & Exchange Commission ("Commission") in 1977. He states that he was told by an official of the N.Y.S.E. that there was no doubt of the relationship between Abelson and the short sellers and that N.Y.S.E. had charted Wilson's sales against Abelson's columns from which one could conclude some correlation.
"In addition to the above, plaintiff's counsel interviewed or spoke to numerous Technicare investors, Technicare officials, knowledgeable journalists, and attorneys for and investors in companies other than Technicare which had experienced the same "bear raid' by the same funds and short sellers and which had experienced the same negative treatment in Mr. Abelson's column." (Pl.Mem. p. 11).
In his affidavit, Walker states that his involvement began on January 14, 1977, at the behest of Herbert Stein. Stein had been told that Wilson had solicited Abelson to write a number of negative articles on Technicare in 1976 and that Wilson and others had established short positions in Technicare. At the time, Wilson had also established a substantial short position in Centronics. The affidavit goes on to say that Walker and his partner, Norman Asher, called the N.Y.S.E. and the Commission, and each agency advised them that Abelson's relation to Wilson and other short sellers was being investigated. Stein indicated that Gale Donovan and Roth had a great deal of information on Technicare. When Walker spoke to Donovan and Roth, they confirmed the belief of a working relationship between the short sellers and Abelson and stated that they had complained to the N.Y.S.E. and the Commission. Donovan stated that she had knowledge that Lawrence Bleiberg, managing partner at Boxwood Associates and brother to the editor of Barron's, had sold Technicare short through Boxwood, and had covered Boxwood's position at a profit after Abelson's negative column appeared.
Walker then called Robert Bleiberg at Barron's and said that he had information that a forthcoming issue of Barron's was going to contain negative comments on Centronics and asked that such adverse comment be deleted. Bleiberg was abusive and referred him to the firm that is his counsel in this litigation. Walker then spoke to Robert Potter, a member of the firm who, Walker says, refused to take any action. Potter indicates that he asked Walker to meet with him to discuss the matter, but Walker never acted on this invitation.
In January, Walker talked to Richard S. Grimm, President of Technicare, and subsequently to Allan Somer, Technicare counsel. On February 3, 1977, he spoke to Jeffrey Haas of N.Y.S.E. who told him that N.Y.S.E. had prepared a chart correlating the relationship between Abelson's columns and the build up of the positions by the short sellers. Haas is said to have told Walker in that conversation that there was no doubt of the relationship between the short sellers and Abelson, and that Wilson's trading and Abelson's columns were correlated. On February 8, 1977, Walker met with Haas and other N.Y.S.E. personnel engaged in investigating the allegations against the defendants. At this meeting, the N.Y.S.E. official in charge of the investigation stated that he was satisfied that ...