The opinion of the court was delivered by: Bucklo, District Judge.
On February 11, 1999, Magistrate Judge Morton Denlow recommended
that defendant's Consulting Services Group et al. motion for
Sanctions [95-1] be denied. No objections have been received. I
have reviewed Judge Denlow's well reasoned report &
recommendation. I agree with both its reasoning and conclusions,
The motion [95-1] is therefor denied.
REPORT AND RECOMMENDATION
Rule 11 motions do not bring out the best in lawyers. This case
is no exception.
Unfortunately, the Court expects more from counsel in their
dealings with one another than they have shown to date.
Plaintiffs' counsel filed a complaint alleging that Defendants
engaged in securities fraud, breach of fiduciary duty, common law
fraud and negligence. Counsel for three defendants ("CSG
defendants") responded with a letter demanding that Plaintiffs
dismiss the complaint because it contains "substantive factual
errors" and "baseless allegations." The CSG defendants followed
up with a motion for Rule 11 sanctions demanding the complaint be
withdrawn against them within twenty-one days. Plaintiffs'
counsel responded with a letter accusing CSG's counsel of being
in the process of "committing criminal extortion and blackmail"
and of filing a "frivolous motion for sanctions based on a
purported `Declaration' obtained through intimidation, extortion
and blackmail" and threatening to "file a cross-motion for
sanctions against you and your law firm." The lawsuit was
voluntarily dismissed against the CSG defendants, but seeking
complete vindication, the CSG defendants filed their motion for
sanctions, as amended, which is now before the Court. Hundreds of
pages of documents and two oral arguments later, the Court
concludes that the motion for sanctions, as amended, should be
On October 24, 1997, Plaintiffs filed a thirteen-count
complaint in the United States District Court for the Eastern
District of Texas against twelve defendants arising out of an
investment that went bad. The case was subsequently transferred
to this court. On March 2, 1998, counsel for defendants
Consulting Services Group, L.P., Kurt Voldeng and Roy Moore
(collectively "CSG defendants") wrote to Plaintiffs' Texas
counsel, Leo C. Michaud ("Texas counsel"), pointing out purported
factual errors in the complaint, demanding that the complaint be
dismissed against the CSG defendants, and threatening to file a
Rule 11 sanctions motion if an immediate dismissal was not
forthcoming. Plaintiffs did not blink.
It was not until July 24, 1998, that the CSG defendants served
their motion seeking sanctions against Plaintiffs, their Texas
counsel, and the Toptani Law Offices and Gabriel J. Fischbarg
("New York counsel"). The motion was served along with a letter
stating that pursuant to Rule 11 the motion will not be filed
with the Court for twenty-one days. The motion was supported in
part by a declaration from Joe Hurley, who was the registered
representative who worked with Plaintiffs in connection with
their investments. In the declaration, he contradicted certain
key allegations alleged in the complaint which formed the basis
for joining the CSG defendants as parties.
On August 11, 1998, Plaintiffs' New York counsel wrote to CSG's
counsel stating that "Plaintiffs will not be withdrawing their
lawsuit" because "the complaint is well pleaded and based upon an
investigation of the relevant facts in this case." New York
counsel accused CSG's counsel of having obtained the declaration
from Joe Hurley by means of "criminal extortion and blackmail,"
asserting that they "forced Mr. Hurley to sign your self-serving
document that you drafted for him after you and Mr. Meals
threatened to sue him if he did not sign it." New York counsel
accused CSG's counsel of engaging in "strong arm tactics" and
then threatened to have CSG's counsel "arrested on federal and
state extortion charges" and to "file a grievance against you
with the attorneys' disciplinary committee seeking to have you
disbarred for your illegal conduct." In addition, New York
counsel stated that if a sanctions motion were filed, he would
file a cross motion for sanctions. CSG's counsel did not blink
and continued to seek dismissal from Plaintiffs' Texas counsel.
Not content with the dismissal order, on October 2, 1998, the
CSG defendants filed their amended motion for sanctions directed
solely against Plaintiffs' New York counsel. The motion for
sanctions was brought pursuant to Rule 11 of the Federal Rules of
Civil Procedure and 15 U.S.C. § 78u-4(c)(1) and (2) of the
Private Securities Litigation Reform Act of 1995. The matter was
fully briefed, including supplemental briefs, and oral arguments
were held on December 8, 1998 and January 20, 1999. Despite the
factual issues presented by the conflicting affidavits, the
parties agreed to submit this matter for resolution on the
papers, without the need for live testimony. The parties agreed
that the Court could draw inferences and decide factual disputes
from the papers. This case presents the following issues: 1)
Whether allegations contained in Plaintiffs' complaint violate
Rule 11; 2) Whether a party must serve a motion for sanctions in
order to trigger the twenty-one day safe harbor provision of Rule
11; and 3) Whether the Rule 11 motion was timely filed when
Plaintiffs had voluntarily dismissed the CSG defendants over
three weeks before the motion was filed.
A. RULE 11 WAS NOT VIOLATED
1. Plaintiffs' Counsel Performed a Pre-Suit Investigation
The first issue raised by the CSG defendants' Rule 11 motion is
whether the ten challenged statements contained in the complaint
violated Rule 11. The Court holds that the ten statements
contained in Plaintiffs' complaint do not violate Rule 11 because
Plaintiffs' New York counsel performed a reasonable investigation
prior to filing the complaint.
The CSG defendants point to ten factual allegations contained
in seven paragraphs of Plaintiffs' 135 paragraph complaint as a
basis for the imposition of Rule 11 sanctions. On December 28,
1998, New York counsel filed a Supplemental Declaration which
explained the factual basis for each of the ten factual
allegations. In addition, during the telephonic oral argument
held on January 20, 1999, New York counsel faxed to the Court
copies of his handwritten interview notes which he claims
provides support for the proposition that he interviewed
prospective witnesses and defendants in September, 1997, prior to
filing suit in October, 1997. These interview notes were produced
in camera to the Court and copies were shown to CSG's counsel
during the hearing and returned.
The first two factual allegations are contained in paragraphs 3
and 4 of the complaint, where Plaintiffs allege upon information
and belief that defendants Moore and Voldeng were partners and
employees of CSG. The Court finds that New York counsel had a
factual basis for this allegation ...