The opinion of the court was delivered by: Denise Cote, District Judge
The Private Securities Litigation Reform Act of 1995 ("PSLRA") requires, upon final adjudication of any securities fraud lawsuit, that the court make specific findings regarding compliance by each party and each attorney with Rule 11 of the Federal Rules of Civil Procedure. The PSLRA further mandates that if any violations of Rule 11 are found, sanctions are mandatory. For the following reasons, sanctions will be imposed against plaintiff's counsel for a substantial violation of Rule 11 with respect to the original complaint filed in this action.
The factual background to this lawsuit was addressed in the Opinion and Order of December 14, 2009, dismissing the suit for failure to state a claim. See In re Austl. & N.Z. Banking Group Ltd. Sec. Litig., No. 08 Civ. 11278 (DLC), 2009 WL 4823923 (S.D.N.Y. Dec. 14, 2009) (the "December Opinion"). Familiarity with the December Opinion is assumed, and only the facts necessary to the PSLRA sanctions inquiry are described here.
On December 29, 2008, the original complaint in this action (the "Original Complaint") was filed by an individual investor, Linda Levine ("Levine" or "plaintiff"), on behalf of herself and a purported class of persons who purchased American Depositary Receipts ("ADRs") of the corporate defendant over a seventeen month period between March 2, 2007 and July 27, 2008 (the "Class Period").*fn1 Named as defendants in the Original Complaint were Australia and New Zealand Banking Group Limited ("ANZ") and four ANZ officers or directors: Michael Roger Pearson Smith, Charles B. Goode, Ian J. Macfarlane, and Peter Marriot (collectively, the "Individual Defendants"). The twenty-four-page Original Complaint alleged violations of Exchange Act § 10(b) and Rule 10b-5 by all defendants and violations of Exchange Act § 20(a) by the Individual Defendants. The Original Complaint was signed by Jules Brody, an attorney for Stull, Stull & Brody, and also identifies as attorneys for the plaintiff James Henry Glavin ("Glavin") of Stull Stull & Brody and Kenneth J. Vianale ("Vianale") of Vianale & Vianale LLP.
The Original Complaint alleged that, throughout the Class Period, defendants made a series of false and misleading statements concerning ANZ's financial results, its projected future performance, its commitment to delivering value to shareholders, and the absence of any material threats to its business. The Original Complaint asserted that these statements were false and misleading because they failed to disclose the financial risk posed by ANZ's relationship with Opes Prime Group Limited ("Opes Prime"), an Australian margin lending and stock brokerage firm of whom ANZ was the largest secured creditor. When Opes Prime went into receivership on March 27, 2008, it owed ANZ approximately $650 million. The Original Complaint claimed that ANZ ultimately lost approximately $850 million in "soured loans" to various companies in "the deteriorating property market," including but not limited to Opes Prime. The Original Complaint explained that the plaintiff's allegations about ANZ, made upon information and belief, were "based upon her attorneys' investigation which included, among other things... analysis of publicly-available news articles and reports."
In a section of the Original Complaint entitled "The False and Misleading Statements," Levine asserted that fifteen public statements by ANZ or the Individual Defendants were false and misleading, fourteen of which were issued before Opus Prime entered receivership.*fn2 The Original Complaint explained that each of those fourteen statements was deceptive for the reasons set out in Paragraphs 25, 26, and/or 29 of the Original Complaint. Of these three paragraphs, however, the only one that concerned ANZ's advance knowledge of Opes Prime's financial difficulties was Paragraph 25. That paragraph stated:
In March 2007, in a series of internal emails, executives of ANZ recognized that Opes was in financial difficulties and that as a result, ANZ's loans to Opes Prime would be in jeopardy. Nevertheless, no public disclosure was made by ANZ. (Emphasis supplied.) Thus, Paragraph 25 was the only basis for alleging a contemporaneous inference of scienter with respect to ANZ's knowledge of Opes Prime's financial troubles.*fn3
By Order of March 12, 2009, the Court scheduled a conference on March 27 to consider any motions for the appointment of lead plaintiff and lead counsel pursuant to the PSLRA. See 15 U.S.C. § 78u-4(a)(3)(B). Also on March 12, a stipulation was executed between Levine and the defendants (the "March 12 Stipulation") providing, in pertinent part, that the time for the defendants to answer, move or otherwise respond to the complaint... is hereby extended until no less than sixty (60) days following (i) the filing of a consolidated amended complaint by such plaintiff as the Court may hereafter appoint to serve as lead plaintiff, or (ii) the receipt of written notice to all defendants from the Court-appointed lead plaintiff that a consolidated amended complaint will not be filed.
As of the March 27 conference, no additional lawsuit had been filed in this District against ANZ regarding its involvement with Opes Prime. At the conference, Glavin and Vianale appeared jointly on behalf of three proposed lead plaintiffs -- Levine, Legacy Solutions Inc. ("Legacy"), and John B. Ponte -- and moved for Stull Stull & Brody and Vianale & Vianale LLP to be appointed as co-lead counsel. At the conference, the Court appointed Legacy as the sole lead plaintiff, and since Legacy had an attorney-client relationship with Stull Stull & Brody, that law firm was appointed as lead counsel.*fn4 The resulting April 1 Case Management Order also provided that Legacy would file an amended complaint in this action on or before May 21, 2009.
On May 21, Legacy filed its consolidated amended complaint (the "Amended Complaint"). The Amended Complaint abandoned the theory asserted in the Original Complaint and omitted the allegation contained in Paragraph 25. It asserted § 10(b) and § 20(a) claims premised on the findings recited in a securities lending review that ANZ published in August 2008, in the aftermath of the failure of Opes Prime and another brokerage business, Primebroker Securities ("Primebroker"). Its core allegation was that ANZ had failed to disclose in its public statements from 2006 to 2008 that it had inadequate internal controls for its Equity Finance unit. The Amended Complaint identified around two dozen false statements that were either general statements about the quality of ANZ's risk management practices and controls, statements about the performance of one ANZ division, or disclosures concerning ANZ's financial exposure to Opes Prime and Primebroker. Instead of clearly identifying why each of these statements was false, the Amended Complaint relied largely on a single paragraph that listed twelve separate reasons for the statements' alleged falsity. Those twelve reasons were essentially that ANZ's public statements were false because ANZ lacked appropriate internal controls, because it did not effectively address deficiencies that it had identified in its internal controls, and because its internal audits had given adverse ratings to a particular unit within ANZ. December Opinion, 2009 WL 4823923, at *8.
Defendants thereafter moved to dismiss the Amended Complaint on July 2, 2009, arguing that it failed to state a § 10(b) claim with respect to the elements of materiality, scienter, and loss causation. In accordance with the provisions of the March 12 Stipulation, the defendants never answered, moved, or otherwise responded to the Original Complaint, as they were under no duty to do so. Defendants' motion to dismiss was granted by the December Opinion, which ruled that none of the statements alleged to be false and misleading was sufficient to serve as the basis for a § 10(b) claim. Id. at *14-*15. The December Opinion did not reach the other putative flaws of the Amended Complaint asserted by defendants with respect to scienter and loss causation.
As instructed by the Court in an adjoining December 14 scheduling order, the lead plaintiff submitted its proposed findings of fact and conclusions of law on January 22, 2010, addressing the investigations undertaken prior to filing the Amended Complaint and concluding that the Amended Complaint was not sanctionable. Defendants filed an opposition statement on February 4 arguing that both the Original Complaint and the Amended Complaint violated Rule 11(b). Defendants' opposition focuses, in particular, on the inclusion of Paragraph 25 in the Original Complaint. Based on the serious concerns raised by defendants' opposition, on February 9, the Court directed an additional round of briefing to enable the lead plaintiff to respond to defendants' submission (the "February 9 Order").
Thereafter, the lead plaintiff and lead counsel made several additional submissions. First, on February 9, Vianale submitted a declaration (the "Vianale Declaration") to explain how Paragraph 25 came to be included in the Original Complaint.*fn5
The Vianale Declaration explains that the source of Paragraph 25's allegation concerning March 2007 internal emails was a news article entitled "Did ANZ light the fuse?" published in an Australian periodical called Business Spectator on June 6, 2008 (the "June 2008 Article").*fn6 The June 2008 Article referenced a series of emails between an Opes Prime director, Julian Smith, and an ANZ director, Ben Steinberg, which the Article identifies as having occurred on "Friday, March 7."*fn7 The Vianale Declaration explains that he "mistook the article's 'March 7' reference as one to March 7, 2007, instead of March 7, 2008, which is the correct reading." Vianale thereby concedes that the allegation in Paragraph 25 was false. Vianale asserts, however, that this mistake was "inadvertent, not intentional" and "was not 'concocted' or made in bad faith, but was the result of an honest mistake on [his] part." Other than asserting that he acted in good faith, Vianale does not explain why he mistook the June 2008 Article to be referencing the year 2007, nor does he explain why this error was not caught prior to filing the Original Complaint.*fn8
On February 26, lead counsel submitted supplemental proposed findings of fact and conclusions of law and a separate response by the lead plaintiff to the defendants' February 4 submission, each of which reaffirmed the account contained in the Vianale Declaration. On March 12, defendants filed a surreply continuing to oppose the plaintiff's proposed findings.
"The PSLRA mandates that, at the end of any private securities action, the district court must 'include in the record specific findings regarding compliance by each party and each attorney representing any party with each requirement of Rule 11(b).'" Rombach v. Chang, 355 F.3d 164, 178 (2d Cir. 2004) (quoting 15 U.S.C. § 78u-4(c)(1)); see also ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 579 F.3d 143, 152 (2d Cir. 2009) ("ATSI"). "If the court makes a finding... that a party or attorney violated any requirement of Rule 11(b) of the Federal Rules of Civil Procedure as to any complaint... the court shall impose sanctions on such party or attorney in accordance with Rule 11 of the Federal Rules of Civil Procedure." 15 U.S.C. § 78u-4(c)(2). "The express congressional purpose" of this provision of the PSLRA is "to increase the frequency of Rule 11 sanctions in the securities context, and thus tilt the 'balance' toward greater deterrence of frivolous securities claims." ATSI, 579 F.3d at 152; see also Gurary v. Nu-Tech BioMed, Inc., 303 F.3d 212, 222 (2d Cir. 2002). "The PSLRA does not in any way purport to alter the ...