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May 17, 2005.

BUYTHISFAST NETWORK, INC., et. al., Defendants.

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.


  A. Factual History

  On December 17, 1999, Defendants Lusk and David Chester ("Chester") formed "BuyThisFast 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 StoreTM," 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.)

  B. Procedural History

  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. § 771; (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 lawsuit.


  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, 178 (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:
[1] [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 [2] 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 ...

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