United States District Court, Southern District of New York
August 1, 2001
MORDECHAI GURARY, PLAINTIFF,
ISAAC WINEHOUSE D/B/A WALL & BROAD EQUITIES AND NU-TECH BIO-MED, INC., DEFENDANTS.
The opinion of the court was delivered by: Stanton, District Judge.
OPINION and ORDER
This case is here on remand from the United States Court of
Appeals for the Second Circuit, which affirmed the dismissal of
Mr. Gurary's federal complaint alleging securities market
manipulation in violation of section 10(b) of the Securities
Exchange Act of 1934 and the SEC's Rule 10b-5, Gurary v.
Winehouse, 190 F.3d 37 (2d Cir. 1999) (Gurary I), and
directed the imposition of sanctions with respect to claims
predicated on his first two purchases, but not with respect to
his remaining two purchases, id. 235 F.3d 792 (2d Cir. 2000)
(Gurary II). Familiarity with those opinions is assumed.
Mr. Gurary claimed that the value of Nu-Tech shares he had
purchased was depressed by a short-selling conspiracy initiated
by the defendant Winehouse, and tolerated or concealed by the
defendant Nu-Tech. However, his four purchases failed to support
his federal securities-law claim: the first took place before
the market manipulation began, the second (being at a lower
price than the fair value of the stock, because of the
artificial depression of the price) failed to present a
cognizable damage claim, and he did not plead that Nu-Tech's
chairman Feigenbaum was lying when, before Gurary made the final
two purchases, Feigenbaum told him that he could and would
compel Winehouse to stop the short sales. Thus, the summary
dismissal of his claim was affirmed. Gurary I, 190 F.3d 37.
With respect to sanctions, Gurary II held that no colorable
argument could be made for a change in existing law which would
justify the claims based on the first two transactions, and
sanctions must be imposed. However, since Gurary might possibly
have made out a fraud claim with respect to the final two
purchases, the Court of Appeals held that claims predicated on
them were not sanctionable. Gurary II, 235 F.3d 792. It
remanded for "the district court to determine appropriate
sanctions pursuant to 15 U.S.C. § 78u-4(c)(3)(A) — (C)." Id.
The substantial failure of Gurary's complaint to comply with
Fed.R.Civ.P. 11(b) invoked the presumption required by the
Private Securities Litigation Reform Act of 1995 ("PSLRA"),
15 U.S.C. § 78u4(c)(3)(A), which provides that
. . . the court shall adopt a presumption that the
appropriate sanction —
(i) . . .
(ii) for substantial failure of any complaint to
comply with any requirement of Rule 11(b) of the
Federal Rules of Civil Procedure is an award to the
opposing party of the reasonable attorneys' fees
and other expenses incurred in the action.
(B) Rebuttal Evidence. The presumption described in
subparagraph (A) may be rebutted only upon proof by
the party or attorney against whom sanctions are to
be imposed that —
(i) the award of attorneys' fees and other expenses
will impose an unreasonable burden on that party or
attorney and would be unjust, and the failure to
make such an award would not impose a greater
burden on the party in whose favor sanctions are to
be imposed; or
(ii) the violation of Rule 11(b) of the Federal
Rules of Civil Procedure was de minimis.
(C) Sanctions. — If the party or attorney against
whom sanctions are to be imposed meets its burden
under subparagraph (B), the court shall award the
sanctions that the court deems appropriate pursuant
to Rule 11 of the Federal Rules of Civil Procedure.
Thus when the failure to comply with Rule 11 is substantial,
the whole costs and attorneys' fees of the adversary are awarded
as the sanction, unless plaintiffs attorney*fn1
the burden on him will be unreasonable and unjust, or that the
violation was de minimis.
This represents a change from the general law concerning
sanctions, and the creation by Congress of a special rule
"strengthening the application of Rule 11 of the Federal Rules
of Civil Procedure in private securities actions" (H.R. Conf.
Rep. No. 104-369, p. 39 (Nov. 28, 1994)) in light of Congress'
perception that courts often failed to impose sanctions when
they were warranted, and that even when sanctions were awarded —
. . . they are generally insufficient to make whole
the victim of a Rule 11 violation: the amount of the
sanction is limited to an amount that the court deems
sufficient to deter repetition of the sanctioned
conduct, rather than imposing a sanction that equals
the costs imposed on the victim by the violation.
Finally, courts have been unable to apply Rule 11 to
the complaint in such a way that the victim of the
ensuing lawsuit is compensated for all attorneys'
fees and costs incurred in the entire action.
As stated in Simon DeBartolo Group v. Richard E. Jacobs
Group, 186 F.3d 157, 166-167 (2d Cir. 1999), a federal
securities action is no longer an ordinary case for sanctions:
Ordinarily, courts are under no particular obligation to make
findings with regard to the compliance of litigants and their
counsel with Rule 11 or to impose sanctions once a violation is
found. See Fed.R.Civ.P. 11(c)(1). This is no longer the case,
however, in the securities litigation context. Recognizing what
it termed "the need to reduce significantly the filing of
meritless securities lawsuits without hindering the ability of
victims of fraud to pursue legitimate claims," and commenting
that the "[e]xisting Rule 11 has not deterred abusive securities
litigation," the 104th Congress included in the Private
Securities Litigation Reform Act of 1995 ("PSLRA") a measure
intended to put "teeth" in Rule 11. H.R.Conf. Rep. No. 104-369
(1995), reprinted in 1995 U.S.C.C.A.N. 730. In relevant part,
the PSLRA added Section 21D(c) to the Securities Exchange Act of
1934 ("Exchange Act"), requiring courts, at the conclusion of
all private actions arising under the Exchange Act, to make
specific findings as to the compliance by all parties and
attorneys with Fed.R.Civ.P. 11(b). See
15 U.S.C. § 78u-4(c)(1). Section 21D(c) requires also that the court impose
sanctions if it determines the rule has been violated, and
adopts a rebuttable presumption that the appropriate sanction
for a complaint that substantially fails to comply with
Rule 11(b) "is an award to the opposing party of the reasonable
attorneys' fees and other expenses incurred in the action."
15 U.S.C. § 78u4(c)(3)(A)(ii). The PSLRA thus does not in any way
purport to alter the substantive standards for finding a
violation of Rule 11, but functions merely to reduce courts'
discretion in choosing whether to conduct the Rule 11 inquiry at
all and whether and how to sanction a party once a violation is
In DeBartolo, the Court of Appeals held that the district
court was required to impose sanctions with respect to
DeBartolo's claim under SEC Rule 10b-13, but not for the claim
under Rule 10b-5. Id. at 168-176. Expressing doubt whether
"when a single claim in an action is frivolous, the proper
sanction is reasonable attorneys' fees and other expenses
incurred in the entire action" (id. at 178) (emphasis in
original), it remanded for the district court to determine
whether the complaint represented "a substantial failure" to
comply with Rule 11. If it did not, the statute's rebuttable
presumption in favor of attorney's fees would be inapplicable.
In Inter-County Resources, Inc. v. Medical Resources, Inc.,
49 F. Supp.2d 682 (S.D.N.Y. 1999), the court determined that a
frivolous 10b — 5 claim required sanctions and invoked the
presumptive award of the opposing party's attorneys' fees (Id.
at 685), but found that plaintiffs counsel had rebutted the
presumption by showing that such an award would be unjust and
impose an unreasonable burden on her, since her four other
claims were not so patently defective and might have required
defense in federal court. Accordingly, the court imposed
sanctions of approximately one fifth of the total expenses
incurred (id. at 686).
In a more complex situation, Polar Int'l Brokerage Corp. v.
Reeve, 196 F.R.D. 13 (S.D.N.Y. 2000), on reconsideration,
120 F. Supp.2d 267 (S.D.N.Y. 2000), affd, 258 F.3d 86 (2d Cir.
2001), involving five claims and two firms of counsel for
plaintiff, the court discounted the award of attorneys' fees and
expenses by 20% because one of the five claims was colorable.
196 F.R.D. at 19.
None of those cases requires, and no party has brought to our
attention any case construing the statute as requiring, a
plaintiff who has stated a potentially
non-frivolous claim to reimburse the whole of his adversary's
costs and attorneys' fees. Indeed, to impose the whole costs of
the case on such a plaintiff would in the statutory language
"impose an unreasonable burden on that party or attorney and
would be unjust, and the failure to make such an award would not
impose a greater burden on the party in whose favor sanctions
are to be imposed. . . ."
In DeBartolo, the district court had held that both of
plaintiffs two claims, one under the SEC's Rule 10b-5 and the
other under its Rule 10b-13, were frivolous and imposed
sanctions totalling $100,000. 985 F. Supp. 427 (S.D.N.Y. 1997).
The Court of Appeals affirmed as to the 10b-13 claim, but
reversed as to the 10b-5 claim, holding it non-frivolous, 186
F.3d at 174-78. Since one of the two claims was
non-sanctionable, the Court of Appeals recommended reduction of
the amount of monetary sanctions (id. at 178):
If the district court decides that monetary sanctions
are still warranted, we note our understanding that
the proper level of an award for the firm's assertion
of a frivolous claim is likely to be substantially
less than was the level of sanctions the court
actually awarded on the basis of what we now hold to
be its mistaken conclusion that the action was
frivolous in its entirety.
In the instant case, reducing Nu-Tech's total costs and fees
by half is particularly appropriate since the Court of Appeals
concluded, as to two of plaintiffs four purchases:
that Gurary's failure to sufficiently plead the
necessary elements of a cognizable 10b — 5 claim does
not warrant sanctions under the PSLRA in this
instance because the district court could have,
within its broad discretion, afforded Gurary leave to
amend his complaint, which would have resulted in a
cognizable 10b-5 claim.
235 F.3d 792, 801.
With respect to the amount of sanctions, even removing all
unrelated or duplicative time charges and resolving against
Nu-Tech all reservations expressed by plaintiff, Nu-Tech
expended $125,112.57 in defending this case and obtaining
sanctions, including two full appeals in the Court of Appeals.
Half of that sum is $62,556.28, which is a reasonable and just
amount of sanctions to impose under the circumstances and in
conformity with law.
Plaintiffs counsel's arguments to the contrary are
unacceptable. His assertion that the violation was de minimis
because defense of the "non-frivolous" claim would be necessary
anyway would turn the statute and the Court of Appeals decision
on their heads. As the Court of Appeals made clear, the
violation was substantial. His argument that his adversary
should have maintained separate time records for the work on
each of the four purchases is absurd: Nu-Tech's counsel was
defending a single securities-law claim, and had no need to
allocate separately the work on each element on which the claim
foundered. His suggestion that a ratio be struck between the
frivolous and non-frivolous elements by counting the number of
pages in the briefs devoted to each disregards the statutory
presumption that all costs and fees are awarded, unless the
violation is found to be de minimis or such an award is shown
to be unreasonable and unjust. Finally, although he says his is
a small law firm and he is ill, he offers no facts concerning
his financial position, income, expenses, assets or liabilities,
profits or losses, medical expenses, or the like.
David Jaroslawicz, Esq. and Jaroslawicz & Jaros, 150 William
Street, New York, New York, jointly and severally, shall
promptly pay the sum of $62,556.28 to defendant Nu-Tech Bio-Med,
Inc., now known as United Diagnostic, Inc. If submitted, a
judgment to that effect may be entered, with execution to issue
thereon according to law.