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HARDING UNIVERSITY v. CONSULTING SERVICES GROUP

March 10, 1999

HARDING UNIVERSITY, RICHARD GIBSON, W.W. MCALLISTER, III AND LOURAINE WILBORN TRUST, PLAINTIFFS,
v.
CONSULTING SERVICES GROUP, L.P., KURT VOLDENG, ROY MOORE, CHECKERS SIMON ROSNER, DAVID KNEE, SAM CHABLI, SANFORD HOLZER, HOLZER, HUM & JACOBY, L.L.P., THOMAS J. DWYER & ASSOCIATES, THOMAS J. DWYER, FISHMAN & MERRICK, P.C. AND MATTHEW WAYNE, DEFENDANTS.



The opinion of the court was delivered by: Bucklo, District Judge.

ORDER

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

I. BACKGROUND FACTS

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.

II. RULE 11

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 ...


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