No. 03 Civ. 5384 (SAS).
August 5, 2005
Raymond J. Dowd, Esq., Dowd Marotta LLC, New York, New York, Attorney for Plaintiffs and for Dowd Marotta LLC and Raymond J. Dowd.
Menachem O. Zelmanovitz, Esq., Rachelle M. Barstow, Esq., Amanda R. Waller, Esq., Morgan, Lewis Bockius LLP, New York, New York, Attorney for Defendants J.P. Morgan Chase Bank and J.P. Morgan Securities, Inc.
Kevin J. Toner, Esq., Heller Ehrman White McAullife LLP, New York, New York, Attorney for Defendant Intralinks, Inc.
Harold Hirshman, Esq., Sonnenschein Nath Rosenthal LLP, Chicago, Illinois, Attorney for Defendant William Blair Company, L.L.C.
Marshall Beil, Esq., Christine M. Fecko, Esq., McGuire Woods LLP, New York, New York, Attorney for Defendant Banc of America Securities, L.L.C.
Frank H. Wohl, Esq., Lankler Siffert Wohl LLP, New York, New York, Attorney for Defendant Heller Ehrman White McAuliffe LLP.
MEMORANDUM OPINION AND ORDER
This suit arose out of the failed initial public offering of IntraLinks, Inc. ("IntraLinks"). Plaintiffs Adams and Muldoon, with others, co-founded and incorporated IntraLinks in 1996, and served as officers of the company until 2000. In 2000, defendants J.P. Morgan Chase Bank and J.P. Morgan Securities, Inc. (collectively, "J.P. Morgan") and Banc of America Securities, L.L.C., and William Blair Co., L.L.C. agreed to underwrite Intralinks's IPO. On July 26, 2000, Intralinks filed a registration statement for the IPO with the Securities Exchange Commission ("SEC"). J.P. Morgan subsequently refused to price and sell the IPO, and the IPO never took place. On July 21, 2003, plaintiffs brought this suit.
Plaintiffs' complaint made numerous allegations of fraud, based in part on J.P. Morgan's refusal to price the planned IPO, and in part on a subsequent round of private financing, which — allegedly — fraudulently diluted the value of plaintiffs' stock. Among other claims, plaintiffs asserted a claim for securities fraud, pursuant to Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. In an Order dated July 20, 2004, I dismissed the complaint, in its entirety and with prejudice. Plaintiffs subsequently moved, pursuant to Federal Rule of Civil Procedure 60(b), to vacate the July 20 Order on the basis of an alleged fraud on the Court. In an Opinion Order dated February 22, 2005, I denied plaintiffs' motion.
See 15 U.S.C. § 78j(b).
See 17 C.F.R. § 240.10b-5.
Adams v. Intralinks, Inc., No. 03 Civ. 5384, 2004 WL 1627313 (S.D.N.Y. July 20, 2004).
Adams v. Intralinks, Inc., No. 03 Civ. 5384, 2005 WL 427878 (S.D.N.Y. Feb. 22, 2005) (" Adams II").
In the meantime, plaintiffs brought a second action, Adams v. Buck-Luce, before Judge Jed Rakoff of this Court, raising numerous allegations, including some similar to those made here, in an attempt to enjoin a proposed recapitalization of IntraLinks. Judge Rakoff dismissed that action on October 22, 2004. Plaintiffs also brought a third action, Adams v. Banc of America Securities, LLC, in New York state court, before Justice Bernard Fried, challenging the proposed recapitalization and making various allegations of fraud against substantially the same defendants as in this case. Justice Fried dismissed that action on March 31, 2005.
No. 04 Civ. 1485.
See Adams v. Buck-Luce, No. 04 Civ. 1485, 2005 WL 822910 (S.D.N.Y. Apr. 8, 2005).
See Adams v. Banc of America Securities, LLC, No. 602297/04, 2005 WL 1148693 (Sup.Ct. N.Y. Co. Mar. 31, 2005).
Defendants now move for sanctions against plaintiffs' counsel, Raymond Dowd, Esq. and Dowd Marotta (collectively, "Dowd"). Dowd has already been sanctioned by both Judge Rakoff and Justice Fried. Judge Rakoff held that the central allegation of plaintiffs' complaint in Buck-Luce was not frivolous; although the theory of liability underlying that claim had been rejected by the Second Circuit in Grace v. Rosenstock, the theory "was not irrational on its face, nor can it be said that plaintiffs lacked a reasonable basis for arguing that the doctrine of Grace should be distinguished, modified, or even reversed in this case." Although Judge Rakoff did "not condone the frequently overzealous advocacy in which plaintiffs' counsel engaged," Dowd's conduct for the most part "fell short, barely, of violating Rule 11."
228 F.3d 40, 49 (2d Cir. 2000).
Adams v. Buck-Luce, 2005 WL 822910, at *1.
However, Judge Rakoff held that "[t]here is one area where plaintiffs' conduct clearly crossed the line, and that is in their repeated and wholly unjustified pursuit of claims against IntraLinks' counsel, Heller Ehrman." Judge Rakoff found "that plaintiffs' claims against Heller Ehrman, and their conduct toward that firm, in general, were intended simply to harass that firm in a manner forbidden by Rule 11(b)(1)." Consequently, Judge Rakoff ordered Dowd (jointly and severally with plaintiffs) to reimburse Heller Ehrman for its expenses in defending plaintiffs' claims and bringing its motion for sanctions.
Id. at *2.
Justice Fried awarded sanctions for Dowd's conduct in bringing a motion for a preliminary injunction against certain defendants which "was completely without merit in law, and cannot be supported by a reasonable argument for an extension, modification, or reversal of existing law." Pursuant to 22 N.Y.C.R.R. § 130-1.1, Justice Fried awarded attorneys' fees and costs incurred in defending against that frivolous motion.
Adams v. Banc of America Sec. LLC, 2005 WL 1148693, at *2.
II. LEGAL STANDARD
Upon final adjudication of a securities fraud action, the Private Securities Litigation Reform Act ("PSLRA") requires the court to make findings regarding each attorney's compliance with Rule 11(b). Rule 11(b) provides in relevant part:
See 15 U.S.C. § 78u-4(c)(1). "The PSLRA does not in any way purport to alter the substantive standards for finding a violation of Rule 11, but functions merely to reduce courts' discretion in choosing whether to conduct the Rule 11 inquiry at all and whether and how to sanction a party once a violation is found." Simon DeBartolo Group, L.P. v. Richard E. Jacobs Group, Inc., 186 F.3d 157, 167 (2d Cir. 1999).
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 . . . it is not being presented for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation [and] the claims, defenses, and other legal contentions therein are warranted by existing law . . . [and that] the allegations and other factual contentions have evidentiary support or, if specifically so identified, are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery.
A pleading, motion or other paper violates Rule 11 either when it "has been interposed for any improper purpose, or where, after reasonable inquiry, a competent attorney could not form a reasonable belief that the pleading is well-grounded in fact and warranted by existing law or a good faith argument for the extension, modification or reversal of existing law." "Although arguments for a change of law are not required to be specifically so identified, a contention that is so identified should be viewed with greater tolerance under the rule." In determining whether a Rule 11 violation has occurred, the court should use an objective standard of reasonableness. Although the standard is an objective one, "the extent to which a litigant has researched the issues and found some support for its theories even in minority opinions, in law review articles, or through consultation with other attorneys should certainly be taken into account."
Kropelnicki v. Siegel, 290 F.3d 118, 131 (2d Cir. 2002).
Simon DeBartolo Group, L.P., 186 F.3d at 166 (quoting Rule 11 Advisory Committee Note).
See id. (Rule 11 "`establishes an objective standard, intended to eliminate any `empty-head pure-heart' justification for patently frivolous arguments.'") (quoting Rule 11 Advisory Committee Note).
Id. at 166.
The Supreme Court has cautioned that Rule 11 "must be read in light of concerns that it will . . . chill vigorous advocacy." 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." Sanctions should only be imposed "`where it is patently clear that a claim has absolutely no chance of success.'"
Cooter Gell v. Hartmarx Corp., 496 U.S. 384, 393 (1990).
Rodick v. City of Schenectady, 1 F.3d 1341, 1350 (2d Cir. 1993).
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." Where the violation of Rule 11 is "substantial," the PSLRA imposes a rebuttable presumption that the appropriate sanction is an award to the opposing party of the full amount of its reasonable fees and expenses. 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." 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."
See 15 U.S.C. § 78u-4(c)(3)(A)(i)-(ii).
Gurary v. Nu-Tech Bio-Med, Inc., 303 F.3d 212, 223 (2d Cir. 2002).
"If no such weighty nonfrivolous claims are attached, the statutory presumption applies." However, that presumption may be rebutted upon proof by the party against whom sanctions are to be imposed that (i) the award of full fees and costs would impose an unreasonable burden and be unjust, and the failure to make such an award would not impose a greater burden on the party in whose favor sanctions are to be imposed, or (ii) the violation was de minimis. If the presumption is rebutted, the court should impose "the sanctions the court deems appropriate." "[T]he 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."
See 15 U.S.C. § 78u-4(c)(3)(B)(i)-(ii).
Caisse Nationale De Credit Agricole-CNCA, 28 F.3d at 266.
As I have noted in my previous opinions, plaintiffs' Complaint, and other papers, are strikingly and frustratingly disorganized and difficult to parse. However, their central claims, although not meritorious, were not wholly frivolous. For example, plaintiffs' Count Five, a Rule 10b-5 claim based on the Exit Agreements entered into by Adams and Muldoon and the subsequent G financing of IntraLinks was dismissed as time-barred. The Court found that plaintiffs were on inquiry notice of the fraud in March 2001. Dowd's theory was that plaintiffs were not sufficiently aware, at that time, of the full extent of the alleged fraud to be considered to be on inquiry notice. Dowd argues that the Second Circuit's recent decision in Levitt v. Bear Stearns Co., supported his view that "there was a higher standard of proof necessary to trigger inquiry notice following the enactment of the PSLRA." Although not persuasive, this argument was not frivolous.
See Adams II, 2005 WL 427878, at *5.
340 F.3d 94 (2d Cir. 2003) (noting that "It makes little sense from a policy perspective to require specific factual allegations — on pain of dismissal in cases of this sort — and then to punish the pleader for waiting until the appropriate factual information can be gathered by dismissing the complaint as time barred.").
Declaration of Raymond Dowd in Opposition to Sanctions ¶ 100.
The same can be said for plaintiffs' other securities claims. Plaintiffs' claims relating to the withdrawn IntraLinks registration statement were dismissed for failure to allege any purchase or sale of a security. Dowd argued that plaintiffs' actions in reliance on the expected registration statement resulted in a sufficient surrender of control, or a sufficient change in the nature of plaintiffs' investment, that it constituted a "purchase or sale" within the meaning of Rule 10b-5. This was a colorable argument for the extension or modification of existing law.
Dowd cites to Boone v. Carlsbad Bancorporation, Inc., 972 F.2d 1545 (10th Cir. 1992) for this proposition, but the language Dowd relies on appears to be a quotation from Sacks v. Reynolds Sec., Inc., 593 F.2d 1234, 1240 (D.C. Cir. 1978) ("lower federal court interpretations of purchase and sale, although encompassing many transactions that bear little overt resemblance to conventional cash sales, require some surrendering of control, change in ownership, or change in the fundamental nature of an investment before a transfer will be deemed within the ambit of Rule 10b-5.").
Plaintiffs' ERISA claims were dismissed because the stock incentive plan on which they were based was not an employee pension benefit plan within the meaning of ERISA. Plaintiffs argued that because the plan systematically defers compensation, involves managerial discretion, and is a written plan intended to protect the employees' options, it qualifies as an ERISA plan. This argument was strained, but not frivolous.
Plaintiffs' decision to name Heller Ehrman as a defendant was also not sanctionable. There was a weak, but nevertheless colorable basis for those claims. Plaintiffs' claims were premised on Heller Ehrman's role as counsel to IntraLinks during the relevant period, and on the fact that a shareholder of Heller Ehrman served as IntraLinks's corporate secretary. While these allegations are not sufficient to support plaintiffs' theory of control person liability, it is possible that plaintiffs could have developed a legal theory on which those claims could proceed. Although I share Judge Rakoff's suspicions regarding Dowd's motives, it is not clear from the evidence before me that the claims against Heller Ehrman were merely intended to harass Dowd's opponents. To be too quick to find an improper purpose, in the absence of stronger evidence of impropriety, would chill vigorous advocacy.
Cf. In re Global Crossing, Ltd. Sec. Litig., 322 F. Supp. 2d 319, 332 (S.D.N.Y. 2004) (adopting legal theory on which outside professionals may be held liable for substantial participation in fraud).
Cooter Gell, 496 U.S. at 393. The mere fact that Heller Ehrman was Dowd's opposing counsel is not sufficient evidence of improper purpose. Although these plaintiffs' claims were not meritorious, some plaintiffs may have a valid case against opposing counsel, where opposing counsel were also counsel to the primary defendants during the transactions underlying such plaintiffs' suit. Plaintiffs' counsel should not be deterred from bringing such valid claims by the fear of sanctions.
Although none of the claims in the original or amended complaint were meritorious, they do not warrant the imposition of sanctions. However, the Court has no choice but to sanction Dowd for bringing the Rule 60 motion to vacate the Court's Order dismissing plaintiffs' complaint. Plaintiffs' Rule 60 motion to vacate was based — to the extent that the Court was able to fathom plaintiffs' papers — on purported "newly discovered evidence" that was not only publicly available at the time of the Court's previous Order granting defendants' motion to dismiss, but was clearly referred to in Dowd's brief in opposition to that motion; and which was, in any case, of no particular relevance to the Court's prior Order. Plaintiffs also asked that the Court vacate findings of fact that it had never made, and asked that this Court, in essence, issue an advisory opinion to the effect that Judge Rakoff had wrongly decided Adams v. Buck-Luce. Finally, plaintiffs sought leave to add a clearly meritless 10b-5 claim, on the basis of an alleged fraud on the court by defendants and defendants' counsel.
Adams II, 2005 WL 427878, at *2-3.
See id. at *4.
See id. at *5. Although I do not follow Judge Rakoff in holding that plaintiffs' decision to name Heller Ehrman as a defendant was sanctionable, I concur with his criticism of Dowd's apparent habit of flinging baseless accusations of fraud on the court at opposing counsel merely for taking a position adverse to Dowd's.
Dowd should have been aware that this elaborate tissue of frivolities had no chance of success. If he was not able to see this for himself, the Court gave him ample warning. At a conference in December, 2004, I warned Dowd:
If you want to make a Rule 60 motion, I don't know that a Court can say you have no right to make it. It seems like you suffer the consequences if yet again it is another frivolous proceeding taking the Court's time and everybody else's time . . . [Defendants' counsel] is trying to tell you it is suicidal . . . If you lose this strange new idea, the new 10b-5, and your own ears should tell you it doesn't sound like a 10b-5 there is no way I cannot do what I have to do [under] the PSLRA. I will have to. The statute doesn't invite me — it compels me. You are going to get hit with some huge judgment and then the crying will start.
See Transcript of December 16, 2004 Conference at 26-28.
Despite this clear warning, Dowd persisted in bringing a frivolous Rule 60 motion. The consequences cannot come as a surprise: the Court must sanction Dowd for the bringing of that motion. However, no sanctions will be imposed in connection with the claims in the original or amended complaint, or in connection with Dowd's other conduct during this litigation. This should not be taken to imply approval of Dowd's conduct. The Court has considered defendants' extensive catalogue of criticisms of Dowd, and agrees that Dowd's conduct was generally unprofessional. With the exception of the Rule 60 motion, however, it was not sanctionable.
The appropriate sanction is the reasonable costs and fees incurred by defendants in response to the Rule 60 motion. It may be appropriate to reduce this sanction if Dowd is able to show that the imposition of such a sanction would cause an unjust hardship. Dowd claims that the imposition of any sanction over $5,000 would render him and his firm insolvent. In support of this claim, Dowd has submitted certain documents, including his firm's 2004 federal tax return, but, as defendants observe, he "proffers no financial statements and no other documentary support or information concerning his firm's accounts receivable, or other firm or personal assets." Conclusory statements, without a backing of "hard data," do not suffice to show that the imposition of sanctions in the amount necessary to compensate defendants would be unjust. However, because Dowd's failure to provide the appropriate documents may be a simple mistake, the Court will give Dowd one more opportunity to provide documents that demonstrate both his and his firm's inability to pay the full cost of defendants' costs and fees incurred in defending the Rule 60 motion.
See Supplemental Declaration of Raymond J. Dowd to Show Undue Burden ¶ 25.
J.P. Morgan Chase Bank's Memorandum of Law in Support of the Imposition of Sanctions at 30.
De La Fuente v. DCI Telecom., Inc., 269 F. Supp. 2d 229, 237 (S.D.N.Y. 2003).
Defendants are awarded sanctions against Dowd for bringing the Rule 60 motion, but not for Dowd's other conduct. The sanction will be in the amount of defendants' reasonable costs and fees incurred in defending the Rule 60 motion, unless Dowd is able to produce documentation to demonstrate that he is unable to pay such a sanction, in which case the Court will impose an appropriate sanction. Defendants should submit a detailed statement of their costs and fees no later than August 19, 2005. Dowd may submit objections to any item of that statement — as opposed to rearguing his contention that sanctions should not be imposed — no later than September 15, 2005. At the same time, Dowd may submit documentation to support his claims regarding his finances.