Michael Fishoff sued his former employer, Coty Inc., for alleged violations of the federal securities laws arising from Mr. Fishoff’s attempt to exercise options awarded to him pursuant to the company’s Long Term Incentive Plan. Mr. Fishoff alleged that Coty’s executives exercised their options in advance of a predicted decline in the company’s stock value, but improperly prevented him from exercising his options under the same conditions. The U.S. District Court for the Southern District of New York dismissed Mr. Fishoff’s securities fraud claims in June 2009, finding that he failed to meet the heightened pleading standards for fraud under the Private Securities Litigation Reform Act (PSLRA) and Federal Rule of Civil Procedure 9(b). Coty subsequently sought sanctions against Mr. Fishoff pursuant to Federal Rule of Civil Procedure 11 and the PSLRA.
Under Rule 11, when an attorney presents a pleading, written motion or other paper to a court, that attorney certifies that the claims, defenses and other legal contentions contained therein are warranted by existing law or by a non-frivolous argument for extending, modifying or reversing existing law, or for establishing new law. An attorney who does not comply with Rule 11 is subject to sanctions. The PSLRA requires that, at the conclusion of a securities class action, the court must include specific findings in the record as to whether each party and each counsel complied with Rule 11. If Rule 11 was violated, sanctions under the PSLRA are mandatory.
In its sanctions motion, Coty argued that Mr. Fishoff’s securities fraud claim and opposition to its motion to dismiss were “frivolous” because, under an objective standard of reasonableness, it was clear that there was “no chance of success and no reasonable argument to extend, modify or reverse the law as it stands.” Although the court dismissed Mr. Fishoff’s securities fraud argument, it did not find the claim “frivolous,” concluding that while Mr. Fishoff failed to adequately plead scienter, scienter is the most difficult and controversial aspect of a securities fraud claim. Accordingly, the court concluded that sanctions against Mr. Fishoff under Rule 11 and the PSLRA were unwarranted. (Fishoff v. Coty Inc., No. 09 Civ. 628 (SAS), 2010 WL 305358 (S.D.N.Y. Jan. 25, 2010))