Three attorneys were recently sanctioned under the Private Securities Litigation Reform Act of 1995 (PSLRA). The PSLRA requires, among other things, that at the conclusion of a securities litigation, courts must determine whether the parties complied with Rule 11 of the Federal Rules of Civil Procedure, and, if Rule 11 has been violated, impose mandatory sanctions. Further, the PSLRA creates a presumption that an award of attorneys’ fees and costs is the most appropriate sanction.
In general, Rule 11 requires attorneys to certify that information contained in a pleading or other paper is accurate, is supported by evidence and the law, and is not being presented for an improper purpose.
The complaint at issue alleged fraud based on a series of false and misleading statements concerning Australia and New Zealand Banking Group Limited’s financial results and future performance. The allegations in the original complaint were made upon information and belief, and were based upon plaintiffs’ attorneys’ analysis of publicly available news articles and analyst reports. Following submission of the original complaint, a lead plaintiff for the class was appointed, who subsequently filed an amended complaint. The amended complaint abandoned certain allegations contained in the original complaint and identified new misleading statements.
The court found that the original complaint violated Rule 11 because one paragraph containing material allegations central to the viability of the entire pleading was “utterly lacking in [evidentiary] support.”
The key paragraph alleged that “in a series of internal emails” dated in March 2007 (the beginning of the class period), executives for the issuer recognized that a borrower was in financial difficulty and the company’s loans to the borrower were in jeopardy. The basis for this allegation was a news article referencing internal emails from one year later, in March 2008. Plaintiffs’ counsel asserted that he mistakenly read the article to refer to March 2007 emails (which would have implied knowledge by senior executives early in the class period) rather than March 2008 emails.
The attorneys further argued that Rule 11 was not violated, because: (1) the remainder of the original complaint, as a whole, was grounded in fact; (2) alternative news sources similarly suggested scienter; (3) the objectionable paragraph was included in the original complaint in good faith; and (4) the amended complaint, which abandoned the erroneous allegations, effectively cured the error by superseding the original pleading.
The court rejected these arguments, finding that good faith alone is not a defense to sanctions under most circumstances, even where a factual error is isolated, and that the filing of an amended complaint did not cure the defects in the original complaint because the PSLRA demands that courts perform a Rule 11 analysis on any complaint.
Both attorneys who signed and filed the original complaint, as well as their respective law firms, were found jointly and severally liable for the fees and costs. The imposition of full fees and costs, however, is a rebuttable presumption, and the court gave the parties further opportunity to prove why an award of full attorney’s fees would be an unreasonable burden. (In re Australia and New Zealand Banking Group Limited Securities Litigation, 2010 WL 1875728 (S.D.N.Y. May 11, 2010))