The United States District Court for the District of New Jersey recently dismissed a securities class action complaint as a sanction for conduct by the lead plaintiff and class counsel. Guy Del Giudice v. S.A.C. Capital Management, LLC, et al., 06-cv-1413 (February 19, 2009).

The complaint in the case alleged that the defendants spread false information about Canadian pharmaceutical company Biovail. According to the amended complaint, filed in January 2007, the hedge fund defendants, who had short positions in Biovail, disseminated false information about Biovail's financial condition, accounting practices and business prospects. Plaintiff alleged that hedge fund defendants ghost wrote analyst reports, which were then published by the securities analyst defendants in order to drive down the share price of Biovail.

Defendants filed a motion for sanctions arguing that plaintiff's counsel had signed the amended complaint in the suit without performing any inquiry into the factual allegations therein. According to defendants, the attorney who had filed the original complaint had done nothing more than file a complaint provided to him by Biovail's counsel without investigating the factual basis for the complaint. Furthermore, the defendants alleged that plaintiff's amended complaint contained information that was the subject of a protective order in another matter as to which fact plaintiff's counsel had been notified. According to the defendants memorandum in support of their motion for sanctions, plaintiff conceded that 128 of the 143 fact-based paragraphs in the amended complaint were derived, in some manner, from the "tainted" information.

The Court noted in its opinion that an attorney may not rely solely upon an inquiry conducted by another attorney to discharge his or her obligations under Rule 11. The Court found that plaintiff counsel's misconduct went beyond simply lack of reasonable investigation, however, when they filed an amended complaint despite knowing that it contained information obtained from "tainted" materials. The Court held that "any sanction short of dismissing the Amended Complaint without prejudice would reward [plaintiff counsel's] misconduct." Furthermore, the Court held that the lead plaintiff was also "liable for the same lack of adequate pre-filing investigation and prosecution of claims he knows are based on a deliberate violation of [a] protective order." Accordingly, the Court dismissed the amended complaint without prejudice and without leave to amend, meaning that a new suit may be brought concerning the alleged securities fraud. This new suit, however, would not benefit from the tolling of the statute of limitations by the prior suit and also may not be based on any information obtained from "tainted" materials.

For a copy of the decision, please click here.