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United States District Court, S.D. New York

December 9, 2005.

MARK B. WEINRAUB, Plaintiff,

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



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


  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.


  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 the presumptive award of full fees and expenses may be rebutted either by demonstrating "that the award of attorneys' fees and other expenses will impose an unreasonable burden on that party or attorney and would be unjust" or by showing that the frivolous claims made up such a small portion of the complaint as to render the violation de minimus.*fn31


  A. The Claims Against the Broker Defendants

  Plaintiff sued the Broker Defendants for "violations of federal securities laws," breach of fiduciary duty, "defamation of credit" against Glen Rauch (and Valley), and "conspiracy."*fn32 For the following reasons, these allegations constitute a "substantial" violation of Rule 11.

  1. The Frivolous Securities Fraud Claim Constitutes a Substantial Violation of Rule 11

  A federal court must accord the same preclusive effect to a state court decision that a state court would give it.*fn33 New York has adopted a transactional approach to res judicata: "`once a claim is brought to a final conclusion, all other claims arising out of the same transaction or series of transactions are barred [by res judicata], even if based upon different theories or if seeking a different remedy.'"*fn34 Even a cursory comparison between the arbitration record, the state court proceedings, and plaintiff's Amended Complaint reveals that the claims now referred to as "securities law violations" involve plaintiff's Glen Rauch margin account, a transaction that has already been the subject of litigation in other courts of competent jurisdiction on multiple occasions.*fn35

  No reasonable attorney — especially an attorney who was involved in the arbitration proceedings*fn36 — could fail to realize that any claims arising out of the margin account, even if repackaged as "securities claims," were clearly barred by res judicata.*fn37 Nothing in plaintiff's Rule 11 submission attempts to explain how a reasonable attorney could have pursued this claim.*fn38 Although my October 11 Opinion noted that plaintiff's securities claim was deficient in several other respects, counsel's failure to recognize the res judicata bar by itself constitutes a substantial violation of Rule 11.*fn39

  2. Plaintiff's Remaining Claims Against the Broker Defendants

  Because plaintiff's securities claim is a substantial violation of Rule 11, I must next consider "whether nonfrivolous claims have been joined and, if so, whether these claims — whatever their number — are of a quality sufficient to make the suit as a whole nonabusive and the Rule 11 violation not substantial."*fn40 All of the remaining claims against the Broker Defendants were brought under state law, and were dismissed on various grounds.*fn41 As I noted in my October 11 Opinion, none of these remaining claims would have survived dismissal even if I had exercised supplemental jurisdiction. Thus, the remaining claims do not render the suit as to the Broker Defendants "non-abusive."*fn42

  The breach of fiduciary duty claim, as well as any other claim against the Broker Defendants relating to the margin account, are barred by res judicata because all such claims arise from the same transaction as the securities claim, and are therefore equally frivolous for the reasons already stated.*fn43

  The defamation claim against Glen Rauch and the conspiracy claim against all defendants fall into the category of claims that, although not frivolous, "patently lacked merit and only narrowly avoided being frivolous themselves."*fn44 The defamation claim was dismissed because plaintiff failed to allege that any defendant made a false statement,*fn45 and the conspiracy claim was dismissed because New York law does not recognize the tort of conspiracy.*fn46

  The defamation and conspiracy claims are not frivolous largely because they were not completely beyond repair: had I allowed plaintiff a third opportunity to state a valid claim, and if plaintiff could articulate a valid basis for federal jurisdiction, then perhaps plaintiff could have alleged that a defendant made a false statement about him, and could also have pled a conspiracy to commit defamation claim.*fn47

  Finally, none of the claims against other defendants in this action render the suit against the Broker Defendants nonabusive. The Second Circuit has reserved judgment on whether "the presence of a nonfrivolous claim against one defendant might keep frivolous claims against another defendant from being viewed as a substantial violation of the PSLRA."*fn48 But there is no need to consider this issue here, because the claims against the Arbitrator Defendants and Valley were themselves frivolous.*fn49

  Accordingly, I find that the suit against the Broker Defendants constituted an abusive securities lawsuit, and the PSLRA's presumptive sanction of full attorneys' fees incurred in defending this action must apply.

  B. The Claims Against the Arbitrator Defendants Plaintiff alleged that the arbitration proceeding constituted a violation of his constitutional rights, and that the Arbitrator Defendants breached their contract with plaintiff to provide a fair arbitration forum.*fn50 Additionally, the Arbitrator Defendants appear to be included in the conspiracy claim.*fn51 As these claims do not implicate the PSLRA, I will conduct a standard Rule 11 analysis. For the following reasons, I find that the claims against the Arbitrator Defendants were completely frivolous.

  1. The Section 1983 Claim

  The Arbitrator Defendants repeatedly warned Weinraub that he could not bring a section 1983 claim against them.*fn52 In addition, at a conference on June 23, 2005, I warned Weinraub that filing an opposition to the Arbitrator Defendants' motion to dismiss "would be to risk court-initiated sanctions under Rule 11."*fn53 I directed the Arbitrator Defendants to provide plaintiff with case law demonstrating that his section 1983 claim against them would fail.*fn54 Instead of heeding these warnings, Weinraub amended the complaint without deleting the section 1983 claim. Not surprisingly, I dismissed the section 1983 claim for lack of state action.*fn55 In light of Weinraub's disregard of controlling law, failure to offer a colorable argument for the modification of that law, and failure to heed warnings by the Court and his opponents, I have no choice but to impose Rule 11 sanctions.

  The breach of contract claim was also frivolous because any reasonable attorney would have recognized that such a claim was barred by arbitral immunity.*fn56 As with the section 1983 claim, it was made abundantly clear to plaintiff and his attorney that the well-settled law in this area compelled dismissal of the breach of contract claim.*fn57 Nothing in any of plaintiff's papers regarding the arbitral immunity issue can be construed as a nonfrivolous argument for the modification or reversal of existing law.*fn58

  Moreover, because both of plaintiff's federal claims — the securities claim and the section 1983 claim — were frivolous, and because there was no basis for diversity jurisdiction,*fn59 the Arbitrator Defendants should never have been named in this lawsuit, regardless of the merits of the breach of contract claim.*fn60 Accordingly, Rule 11 sanctions for the entire lawsuit against the Arbitrator Defendants are warranted.

  C. The Claims Against Valley National Bank

  Valley was involved in collecting the arbitration judgment obtained by the Broker Defendants.*fn61 Plaintiff alleged "defamation of credit," and "conspiracy" against certain defendants, including Valley.*fn62 I have found these claims to be nonfrivolous, albeit barely so.*fn63 However, as publicly-available documents clearly state, Valley is a resident of New Jersey.*fn64 The Amended Complaint pled the corporate citizenship of the other defendants, but studiously avoids mentioning that Valley is a New Jersey banking association.*fn65 Moreover, because both of the federal claims were frivolous, Weinraub could have no reasonable expectation that a court would exercise supplemental jurisdiction over the state law claims.*fn66 Accordingly, naming Valley as a defendant is itself sanctionable.*fn67

  D. Measure of Sanctions

  1. Sanctions Are to be Imposed Only Against Alan Weinraub

  The numerous violations of Rule 11 detailed above represent failures to advance "claims, defenses, and other legal contentions . . . warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law."*fn68 Both groups of defendants assert that sanctions are properly assessed only against Alan Weinraub, as opposed to plaintiff.*fn69 I agree. Under Rule 11(c)(2)(A), monetary sanctions should be leveled against plaintiff's counsel alone for failure to comply with Rule 11(b)(2).*fn70 Therefore, all sanctions are directed against Alan Weinraub.*fn71

  2. Nature of Sanctions

  a. Broker Defendants/Valley

  Glen Rauch, Bear Stearns and Valley were represented by Smith Campbell, LLP.*fn72 Smith Campbell has submitted billing records and time entries, covering the period from May-October 2005, revealing a total of $32,943.88 in attorneys' fees and expenses in connection with this matter.*fn73 This figure represents a total of 114.5 hours of legal work by one partner and one associate, as well as $558.88 in expenses.*fn74

  Having carefully reviewed Smith Campbell's billing statements, I find that these fees and expenses were warranted, especially considering the efforts by Smith Campbell at an early stage of this litigation to convince plaintiff to withdraw his allegations.*fn75 Furthermore, the rates charged by Smith Campbell are comparable to those typically charged by attorneys at law firms in the Southern District of New York.*fn76

  b. Arbitrator Defendants

  Although Rule 11 does not require an award of full attorneys' fees incurred in defending the action, I find this to be the proper sanction, considering the extent of the Rule 11 violation. Any lesser sanction would not advance the goals of Rule 11, especially in light of the efforts by the Arbitrator Defendants and the Court to dissuade counsel from pursuing these claims.*fn77

  The Arbitrator Defendants were represented throughout this litigation by attorneys from the NASD's general counsel's office.*fn78 These attorneys do not bill by the hour.*fn79 Nevertheless, the NASD has estimated that this litigation cost it $7,200.65 in attorney time and expenses.*fn80 This figure derives from the following elements: 1) a "conservative estimate" of 42.5 hours that two of its attorneys devoted to this litigation; 2) an estimated hourly rate of $156.25, derived from the average NASD attorney salary, and the value of each attorney's benefits; and $560.02 in expenses, chiefly consisting of the airfare for two attorneys to fly from Washington D.C. to New York for a conference on June 23.*fn81 Having carefully reviewed the NASD's figures, I find that an award of $7,200.65 is warranted. In particular, the hourly rate claimed by the NASD attorneys is much lower than what would have been charged by New York counsel.

  c. Unreasonable Burden

  The record is incomplete in one respect — the Court has no information regarding the burden that would be incurred by Alan Weinraub if required to pay the full award of $40,144.53. As noted above, the PSLRA allows a court to reduce a sanctions award if the sanctioned party can show an "unreasonable burden" from an award of full attorneys' fees.*fn82 Similarly, under ordinary Rule 11 standards, "[a]s a final matter of the sanctions determination, courts must take into account the financial circumstances of the sanctioned party."*fn83

  Accordingly, I will afford Alan Weinraub the opportunity to demonstrate that the sanctions set forth above will be an unreasonable burden. Specifically, he can submit to the Court, within thirty days of this Opinion and Order, an affidavit supported by personal financial records (including tax returns), financial records of his legal practice, and any other relevant evidence, to demonstrate that he cannot pay the full amount of the sanctions awarded in this Opinion.*fn84 This submission may not reiterate Weinraub's arguments in relation to the motion to dismiss, or the issue of whether Rule 11 sanctions are warranted. If defendants wish to respond to Weinraub's submission, they must do so in letter form within seven days of receipt of such submission.


  For the foregoing reasons, monetary sanctions against plaintiff's attorney, Alan Weinraub, are provisionally awarded in the following amounts: $32,943.88 to defendant Glen Rauch Securities, Inc., and $7,200.65 to defendant National Association of Securities Dealers Dispute Resolution Inc. Weinraub may submit documentation regarding his finances, and objections to defendants' statements of fees and expenses, as set forth above.



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