The opinion of the court was delivered by: HAROLD BAER, JR., District Judge[fn*] [fn*] Robert Zak, a spring 2005 intern in my Chambers, and currently a third-year law student at Fordham University School of Law, provided substantial assistance in the research and drafting of this Opinion.
On May 25, 2004, Plaintiff, Kenneth Byrne ("Byrne"), withdrew
all claims against Defendant, Richard Lusk ("Lusk"), in which he
alleged securities fraud, unpaid wages, and common law fraud.
(Dckt. 12.) Pursuant to Fed.R.Civ.P. 11 and 15 U.S.C. § 78u-4,
Lusk filed the instant motion for sanctions and alleged that the
lawsuit was frivolous and filed for the improper purpose of
intimidation and harassment. The motion was sub judice on
February 15, 2005. For the reasons set forth below, Lusk's motion
is GRANTED in-part and DENIED in-part.
On December 17, 1999, Defendants Lusk and David Chester
("Chester") formed "Buy This Fast Network, Inc." ("Company"), to
develop distribution channels for major Internet merchants.
(Hunter Aff., Att'y for Def. ("Hunter"), Ex. I at 5). The
Company's first project was an "Online Convenience Store," but
implementation of the project was dependent upon the licensed use
of certain proprietary software. Id.
On or about April 5, 2000, Lusk and Chester hired Byrne as the
Company's Chief Operational Officer and Chief Technical Officer,
with an annual salary of $175,000. (Compl. at ¶ 12; Def's Mem.
Supp. Summ. J. at 3-4). Byrne's employment with the Company ended
no later than October 2000. (Hunter Aff. Ex. G, Resume of
Byrnes). By early-May 2000, Byrne had invested $90,000 of his
personal funds in the Company. (Dep. of Byrne at 103:5-7).
Approximately three months after he invested $90,000 of his
personal funds in the Company, Lusk informed Byrne that the Company "would not be
securing the [necessary] `proprietary technology' or
`patent-pending business models'" and, as a result, the Company
was unable to commence operations and Byrne lost the value of his
investment. (Compl. at ¶¶ 17-18.)
On March 21, 2003, approximately thirty-one months after he
discovered the alleged fraud, Byrne filed the instant action, and
sought damages for alleged: (1) violation of §§ 10(b), 20, and
Rule 10b-5 of the Securities Exchange Act of 1934; (2) violation
of 15 U.S.C. § 77l; (3) common law fraud; and (4) unpaid wages.
(Compl. at ¶¶ 19-25.) In the Complaint, Byrne alleged that his
decision to invest in the Company was based on Lusk's materially
false and misleading oral representations. (Compl. at ¶ 14.)
On June 5, 2003, Lusk filed an Answer in which he denied any
liability and invoked the statute of limitations as an
affirmative defense. (Dckt. 4.) Throughout the duration of
discovery, Byrne never sought to depose Lusk, and indeed, made no
discovery demands. Lusk filed a motion for summary judgment on
April 2, 2004 and maintained, among other things, that Byrne's
securities fraud claims were barred by the applicable statute of
limitations. (Def's Mem. Supp. Summ. J. at 20). Subsequently, on
May 25, 2004, Byrne withdrew all claims against Lusk. (Dckt. 12.)
Lusk now moves for sanctions in an amount equal to the attorney's
fees and costs incurred to defend the allegedly frivolous
Pursuant to Federal Rule of Civil Procedure 11 ("Rule 11"), an
attorney or party may be sanctioned if a pleading is presented
"for any improper purpose, such as to harass [another
party] . . .," or where the claims are not "warranted by existing
law or by a [non-frivolous] argument for the extension,
modification, or reversal of existing law or the establishment of
new law. . . ." Fed.R.Civ.P. 11(b)-(c).
The PSLRA altered the Rule 11 landscape in that a district
court is now required, upon final adjudication of any private
action for securities fraud, to make "specific findings regarding
compliance by each party and each attorney representing any party
with each requirement of Rule 11(b). . . ."
15 U.S.C. § 78u-4(c)(1); see e.g., Rombach v. Chang, 355 F.3d 164
(2d Cir. 2004). In accordance with the PSLRA, if the court finds
that a violation has occurred, the imposition of sanctions is
mandatory. 15 U.S.C. § 78u-4(c)(2). The PSLRA removed the judicial discretion of Rule 11 ("the court may . . . impose
sanctions") in favor of a rebuttal presumption:
[C]ourts shall adopt a presumption that the
appropriate sanction . . . for substantial failure
of any complaint to comply with any requirement of
Rule 11 . . . is an award to the opposing party of
the reasonable attorneys' fees and other expenses
incurred in the action.
15 U.S.C. § 78u-4(c)(3)(A)(ii) (emphasis added). There are two
ways to rebut the presumption:
 [U]pon proof by the party or attorney against
whom sanctions are to be imposed that . . . [such an
award] will impose an unreasonable burden on that
party or attorney and would be unjust, and the
failure to impose such an award would not impose a
greater burden on the party in whose favor sanctions
are to be imposed; or  the violation of Rule 11 . . .
was de minimis.
15 U.S.C. § 78u-4(c)(3)(B). The PSLRA's stricter sanctions
procedure was designed to reduce the economic incentive to bring
abusive claims of securities fraud. Gurary v. Nu-Tech Biomed,
Inc., 303 F.3d 212
, 219-20 (2d Cir. 2002).
In Gurary, the Second Circuit articulated a three-step
sanction inquiry for district courts to follow in situations
where a plaintiff, like Byrne, has brought multiple claims. See
Gurary, 303 F.3d at 223. First, the court must determine
whether frivolous claims have been brought. Id. Second, if such
claims have been brought, the court shall determine whether
non-frivolous claims have also been joined. Id. Third, the
sanctions presumption may be rebutted if the court determines
that the ...