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GURARY v. WINEHOUSE

August 1, 2001

MORDECHAI GURARY, PLAINTIFF,
V.
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 accordingly, 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. at 800.

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 proves that 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 ...


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