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WEINRAUB v. GLEN RAUCH SECURITIES

December 9, 2005.

MARK B. WEINRAUB, Plaintiff,
v.
GLEN RAUCH SECURITIES, INC., BEAR STEARNS & CO., NASD DISPUTE RESOLUTION, INC., VALLEY NATIONAL BANK, MARK MENDLEY, DAVID C. CARTER, and DAVID R. BOLNICK, Defendants.



The opinion of the court was delivered by: SHIRA SCHEINDLIN, District Judge

OPINION AND ORDER

I. INTRODUCTION

On October 11, 2005, I dismissed with prejudice an action brought by plaintiff Mark Weinraub, asserting various federal and state claims against his former brokers, a bank, and arbitrators associated with the National Association of Securities Dealers ("NASD").*fn1 All defendants now ask the Court to impose sanctions pursuant to the Private Securities Litigation Reform Act of 1995 ("PSLRA") and Rule 11 of the Federal Rules of Civil Procedure.*fn2 For the following reasons, I am obliged to impose monetary sanctions on plaintiff's attorney, Alan Paul Weinraub.*fn3

  II. BACKGROUND

  The facts of this case are discussed at some length in my October 11 Opinion granting defendants' motion to dismiss.*fn4 Familiarity with that Opinion is assumed, and only the most pertinent facts will be repeated here.

  The dispute began when plaintiff sustained a loss of over $500,000 in a margin account he maintained for several years with broker Glen Rauch Securities ("Glen Rauch").*fn5 In June 2000, plaintiff commenced an arbitration proceeding, conducted by the NASD's dispute resolution subsidiary, against Glen Rauch and its clearing broker Bear Stearns & Company ("Bear Stearns") (collectively, the "Broker Defendants").*fn6 Plaintiff argued that, by allowing him to maintain a "highly leveraged" and "unreasonably risky" margin position, the Broker Defendants were negligent and had breached their fiduciary duty to him.*fn7 In 2002, the NASD arbitrators found against plaintiff, and also awarded damages to the Broker Defendants for debt still outstanding in plaintiff's margin account.*fn8 A proceeding in the New York Supreme Court confirmed the arbitration award and denied plaintiff's cross-motion to vacate the award,*fn9 and this order was affirmed by the Appellate Division.*fn10

  Plaintiff then filed suit in this Court, asserting several causes of action against the Broker Defendants and Valley National Bank ("Valley"), as well as NASD Dispute Resolution, Inc. and the three individual arbitrators who heard his case (collectively, the "Arbitrator Defendants"). These claims included: securities laws violations, breach of fiduciary duty, violation of section 1983 of Title 42, United States Code ("section 1983"), breach of contract, defamation and conspiracy.*fn11

  Following the filing of plaintiff's original Complaint on April 22, 2005, both groups of defendants brought motions to dismiss, detailing the Complaint's defects in their briefs. On August 12, 2005, after having had a chance to review defendants' papers, plaintiff filed an amended complaint. The only change from the original Complaint was a new breach of contract claim against the Arbitrator Defendants, accusing them of failing "to provide a fair and adequate Dispute Resolutions forum."*fn12

  I dismissed this Complaint in its entirety as "woefully deficient on both jurisdictional and substantive grounds."*fn13 First, plaintiff failed to state any valid federal claim. His "violations of securities laws claim," which I necessarily construed as a securities fraud claim,*fn14 was deficient for a plethora of reasons: it was barred by res judicata, it was brought outside the applicable statute of limitations, it failed to comply with the pleading requirements of the PSLRA, it failed to make any specific allegation against defendant Bear Stearns, and its allegations of violations of New York Stock Exchange ("NYSE") rules did not give rise to a private right of action.*fn15 Additionally, despite repeated warnings that the claim was frivolous,*fn16 plaintiff insisted on suing the Arbitrator Defendants for a violation of section 1983, despite well-settled law establishing that NASD arbitrators are not state actors and that an NASD arbitration is not state action.*fn17

  Second, with the dismissal of all federal claims, I found no other basis for federal jurisdiction. This court lacked diversity jurisdiction because plaintiff, a New Jersey resident, sued Valley, a New Jersey corporation. I found no basis for exercising supplemental jurisdiction over the remaining state law claims.*fn18 Finally, in light of my preliminary conclusion that Rule 11 was violated, I ordered plaintiff and his attorney to show cause why sanctions should not be imposed.

  III. LEGAL STANDARD

  Upon final adjudication of a securities fraud action, the PSLRA requires the court to make findings regarding each attorney's compliance with Rule 11(b).*fn19 Rule 11(b) provides in pertinent part:
By presenting to the court . . . a pleading, written motion, or other paper, an attorney or unrepresented party is certifying that to the best of the person's knowledge, information, and belief, formed after an inquiry reasonable under the circumstances . . . [that] the claims, defenses, and other legal contentions therein are warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law. . . .
In determining whether a Rule 11 violation has occurred, a court applies an objective standard of reasonableness.*fn20

  To be sure, the Supreme Court has cautioned that Rule 11 "must be read in light of concerns that it will . . . chill vigorous advocacy."*fn21 Thus, "[w]hen divining the point at which an argument turns from merely losing to losing and sanctionable" courts must "resolve all doubts in favor of the signer of the pleading."*fn22 Sanctions should only be imposed "`where it is patently clear that a claim has absolutely no chance of success."'*fn23 Normally, "the principal objective of the imposition of Rule 11 sanctions is not compensation of the victimized party but rather the deterrence of baseless filings and the curbing of abuses."*fn24

  In a securities fraud case, once the court has determined that Rule 11 has been violated, the PSLRA requires that the court impose "sanctions in accordance with Rule 11."*fn25 Where the violation of Rule 11 is "substantial," the PSLRA creates a rebutable presumption that the appropriate sanction is an award to the opposing party of the full amount of its reasonable fees and expenses.*fn26 Congress enacted this presumption due to concerns that district courts were limiting the amount of the sanction "`to an amount that the court deem[ed] sufficient to deter repetition of the sanctioned conduct, rather than imposing a sanction that equals the costs imposed on the victim of the violation.'"*fn27 The PSLRA, therefore, limits the district court's discretion regarding Rule 11 sanctions in the case of a substantial violation.*fn28 Where a complaint combines frivolous with non-frivolous (albeit non-meritorious) claims, the court must determine whether the non-frivolous claims "are of a quality sufficient to make the suit as a whole nonabusive and the Rule 11 violation not substantial."*fn29 If this is the case, sanctions need not be imposed under the PSLRA. However, even if the violation is not substantial, "partial sanctions might still be assessable under ordinary Rule 11 standards to punish not the bringing of the whole suit, but only of the frivolous claim."*fn30 And ...


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