United States District Court, N.D. Illinois, Eastern Division
CITY OF LIVONIA EMPLOYEES' RETIREMENT SYSTEM, individually and on behalf of all others similarly situated, Plaintiff,
THE BOEING COMPANY, W. JAMES McNERNEY, JR., and SCOTT E. CARSON, Defendants.
MEMORANDUM OPINION AND ORDER
RUBÉN CASTILLO, Chief District Judge.
City of Livonia Employees' Retirement System ("Plaintiffs") brought this putative class action securities fraud case against The Boeing Company ("Boeing"), its chairman, president, and chief executive officer W. James McNerney, Jr., and its former executive vice president, president, and chief executive officer of the commercial airplanes segment Scott E. Carson (collectively, "Defendants"), under sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t(a), and Rule 10-5, 17 C.F.R. § 240.10b-5. (R. 1, Compl.) Judge Conlon dismissed Plaintiffs' second amended complaint with prejudice and entered judgment on March 7, 2011. (R. 200, Min. Order; R. 201, Mem. Op. & Order; R. 202, Judgment.) Plaintiffs appealed the dismissal, and on May 6, 2013, the Seventh Circuit affirmed the dismissal of the suit with prejudice, but vacated and remanded the judgment for consideration of whether to impose sanctions on Plaintiffs' attorneys, pursuant to Federal Rule of Civil Procedure 11 and the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. §§ 78u-4(c)(1), (2). That question is presently before this Court. For the reasons stated below, the Court imposes sanctions on Plaintiffs' attorneys.
The Court assumes familiarity with the facts of this case as set forth in Judge Conlon's opinions dismissing Plaintiffs' first amended complaint and second amended complaint. See City of Livonia Employees' Ret. Sys. v. The Boeing Co. (" City of Livonia I "), No. 09 C 7143, 2010 WL 2169491 (N.D. Ill. May 26, 2010); City of Livonia Employees' Ret. Sys. v. The Boeing Co. (" City of Livonia II "), No. 09 C 7143, 2011 WL 824604 (N.D. March 7, 2011). The facts are repeated here only as they pertain to the Court's decision on whether to impose sanctions. On November 13, 2009, Robbins Geller Rudman & Dowd LLP ("Robbins Geller"), as counsel for Plaintiffs, filed its original securities fraud complaint against Defendants. (R. 1, Compl.) On February 16, 2010, Ramsey Stewart, an investigator retained by Robbins Geller, interviewed Bishnujee Singh, Plaintiffs' one and only confidential witness, over the telephone. (R. 264, Pls.' Sealed Resp. at 5.) Singh told Mr. Stewart that he worked for Boeing from 2004 through mid-January 2010 and that he reported to vice president Larry Hall. (R. 152, Ramsey Stewart Decl. ¶ 10.) Singh said that he worked on the 787-8 and 787-9 test planes and had knowledge of the stress testing on the 787 wing. ( Id. ) On February 19, 2010, investigator Elizabeth Stewart, also retained by Robbins Geller, interviewed Singh at his home for two hours. (R. 264, Pls.' Sealed Resp. at 5.) Two days later, Ms. Stewart documented her interview with Singh in an e-mail-memorandum to Plaintiffs' lead attorney, Thomas Egler. (R. 153, Ex. A, Feb. 21, 2010 E-Mail at 19-22.) Ms. Stewart reported that Singh told her that he worked for Boeing in 2009 as a Chief Engineer for the Mid-Body Fuselage/Wing Integration Team on the 787 Program. ( Id. at 19.) Ms. Stewart noted in her e-mail-memorandum that her follow-up research on the 787 wing management team that Singh had identified revealed that Singh's information was not reliable. ( Id. ) On February 22, 2010, the day after Ms. Stewart sent her e-mail-memorandum to Egler, Robbins Geller filed an amended complaint adding vague references to internal e-mails among Boeing employees and the individual defendants, suggesting that the individual defendants knew about the poor wing stress test results. (R. 23, First Am. Compl. ¶ 75.)
On April 13, 2010, via telephone, Singh told Ms. Stewart that he no longer wished to cooperate with Plaintiffs' investigation because he was currently working on a project involving Boeing. (R. 264, Pls.' Sealed Resp. at 6.) Ms. Stewart claims that despite ceasing his cooperation, Singh did not deny the information he previously provided. ( Id. )
On May 26, 2010, Judge Conlon granted Defendants' motion to dismiss Plaintiffs' first amended complaint and dismissed the complaint without prejudice for failure to adequately plead scienter. City of Livonia I, 2010 WL 2169491, at *7. Judge Conlon found that the amended complaint failed to plead any particularized facts about the confidential sources and therefore held that Plaintiffs' generalized reliance on confidential source information was insufficient to establish Defendants' scienter. Id. at *5-*7.
On June 22, 2010, Robbins Geller filed Plaintiffs' second amended complaint, which added paragraphs 139-142, pleading details about one confidential source (who turned out to be Singh) and the basis for his knowledge. (R. 63, Second Am. Compl. ¶¶ 139-42.) Ms. Stewart's e-mail-memorandum supplied the basis for the new allegations in the second amended complaint. (R. 264, Pls.' Sealed Resp. at 5.) On August 10, 2010, Judge Conlon denied Defendants' motion to dismiss the second amended complaint, finding that the added details in the complaint satisfied the pleading requirements of the PSLRA. (R. 73, Min. Order.) Defendants filed a motion for certification of an interlocutory appeal, (R. 75, Defs.' Mot. Interlocutory Appeal), and a hearing on that motion was held on August 30, 2010, (R. 211, Tr. Aug. 30, 2010 Hr'g). At the hearing, Plaintiffs' counsel, Egler, defended the confidential source and the source's personal knowledge of the documents that pointed to Defendants' scienter. (R. 211 Tr. Aug. 30, 2010 Hr'g at 10:15-11:15, 13:06-22.) Judge Conlon "expressly relied on the new allegations in paragraphs 139-142 concerning the confidential source's insider position at Boeing and representations by plaintiffs' counsel that the confidential source had firsthand knowledge about the 787's test results in documents circulated to top executives" in denying Defendants' motion for certification of an interlocutory appeal. See City of Livonia II, 2011 WL 824604, at *2.
After the August 30, 2010 hearing, Plaintiffs disclosed Singh as their confidential source to Defendants. (R. 263, Defs.' Mem. at 10.) Defendants conducted a preliminary investigation and discovered that Singh had never been a Boeing employee and instead had been employed by an outside contractor to perform low-level engineering work on a different airplane months after the events at issue in this case. ( Id. at 10-11.) Singh had never worked on any wing project tied to the lawsuit, and he had no access to any test files or e-mails sent to Defendants. ( Id. at 11.) After discovering this information, on September 24, 2010, Defendants filed a renewed motion to dismiss the second amended complaint with prejudice, arguing that Plaintiffs' counsel had committed a fraud on the court. (R. 90, Defs.' Mot. Dismiss for Fraud.) At a hearing on October 14, 2010, Judge Conlon, relying on the investigator's notes to conclude that there was a good faith basis for the allegations in paragraphs 139-142, denied Defendants' renewed motion to dismiss. (R. 107, Min. Entry; R. 141, Tr. Oct. 14, 2010 H'rg.)
After the October 14, 2010 hearing, Defendants served Singh with a subpoena for documents. (R. 263, Defs.' Mem. at 12.) After meeting with defense counsel, Singh signed a sworn declaration on November 2, 2010, where he repudiated each of the allegations attributed to him in the second amended complaint. ( Id. at 13; R. 160, Ex. 2, Singh Decl. at 23.) Singh was deposed two weeks later, where he again denied Plaintiffs' allegations about his position at Boeing, his personal knowledge of the wing and test files, and his knowledge of any communications to the individual defendants regarding the tests. (R. 263, Defs.' Mem. at 13-14; R. 142, Singh Dep.) Singh met Plaintiffs' counsel for the first time at his deposition and saw the second amended complaint for the first time when defense counsel gave him a copy six months after the complaint was filed. (R. 263, Defs.' Mem. at 13.)
On December 12, 2010, Defendants moved for reconsideration of the court's orders denying their motions to dismiss. (R. 157, Defs! Mot. Reconsideration.) On March 7, 2011, Judge Conlon granted Defendants' motion and dismissed the second amended complaint with prejudice. (R. 200, Min. Entry.) In her Memorandum Opinion and Order, Judge Conlon stated that her two prior orders denying dismissal "relied on false information concerning Singh's position and his personal knowledge, " which was "manifest factual error." City of Livonia II, 2011 WL 824604, at *5. Judge Conlon noted that "[w]ithout verifying the facts, plaintiffs' counsel represented to the court that the confidential source was a former Boeing senior structural analyst and chief engineer who worked on the 787 team, " and that Plaintiffs' counsel "led the court to believe that the confidential source had direct access to and firsthand knowledge about the 787 test files and the distribution of the information to defendants." Id. at *3. At the time of her earlier rulings, Judge Conlon was unaware of these factual inaccuracies, was unaware "that plaintiffs' counsel never met with Singh before adding the confidential source allegations to the second amended complaint, " and was unaware that "counsel apparently never verified the hearsay reports of their investigators concerning Singh's position at Boeing or the basis of his purported personal knowledge." Id at *2. Judge Conlon stated that "[i]f these facts were disclosed while the dismissal motions were pending, the court would have not have concluded that the confidential source allegations were reliable, much less cogent and compelling." Id. at *4. Judge Conlon dismissed Plaintiffs' argument that "Singh told their investigators the truth, but he is lying now for ulterior motives, " concluding that it did not matter because it was clear "that the informational basis for paragraphs 139-42 is at best unreliable and at worst fraudulent, whether it is Singh or plaintiffs' investigators who are lying." Id.
Importantly, Judge Conlon noted that "this unseemly conflict between plaintiffs' confidential source and plaintiffs' investigators could have been avoided by reasonable inquiry on the part of plaintiffs' counsel before filing the second amended complaint and... making flawed representations directly to the court." Id. Judge Conlon emphasized that Plaintiffs' counsel did not meet Singh until his deposition six months after filing the second amended complaint, and that counsel did not appear to have "conducted a reasonable investigation concerning the credibility and reliability of a purported key witness attributed with making the serious allegations in paragraphs 139-142." Id. Judge Conlon noted that Plaintiffs' counsel "relied on investigators' unverified interview reports, even though one report noted Singh's information regarding Boeing's Structural Design reporting hierarchy was unreliable, " which "should have been a red flag." Id.
On April 4, 2011, Plaintiffs sought relief from the March 7, 2011 judgment. (R. 206, Mot. Relief.) Defendants opposed the motion and sought sanctions under the PSLRA based on Judge Conlon's findings that Plaintiffs' counsel made misrepresentations to the court and failed to reasonably investigate their confidential source allegations. (R. 263, Defs.' Mem. at 16.) The case was reassigned to this Court on August 24, 2011. (R. 228, Executive Comm. Order.) On March 16, 2012, the Court denied Plaintiffs' motion for relief, but declined to address Defendants' request for sanctions because they did not comply with the procedural requirements of Rule 11. (R. 232, Min. Entry; R. 233, Order at 5.) Plaintiffs subsequently appealed the dismissal of its second amended complaint and Defendants cross-appealed, seeking a mandatory sanctions determination under the PSLRA. (R. 234, Notice Appeal; R. 239 Notice Cross-Appeal; R. 263, Defs.' Mem at 17.)
On May 6, 2013, the Seventh Circuit affirmed the dismissal of the suit with prejudice. City of Livonia Employees' Ret. Sys. v. The Boeing Co. (" City of Livonia III "), 711 F.3d 754, 762 (7th Cir. 2013). The Seventh Circuit remanded the case for consideration, pursuant to the PSLRA, of whether to impose Rule 11 sanctions on Plaintiffs' counsel. Id. The Seventh Circuit noted that Judge Conlon's "harsh criticism" of Plaintiffs' counsel "indicated agreement" with Defendants' belief that Plaintiffs' counsel had violated Rule 11 and held that Judge Conlon should have determined whether to impose sanctions when she dismissed the second amended complaint with prejudice. Id at 761-62. Further, the Seventh Circuit criticized Plaintiffs' counsel for their "ostrich tactics" in failing to inquire about their confidential source "for fear that the inquiry might reveal stronger evidence of their scienter regarding the authenticity of the confidential source than the flimsy evidence of scienter they were able to marshal against Boeing." Id. at 762. The Seventh Circuit explained how Plaintiffs' counsel had made "confident assurances in their complaints about a confidential source-their only barrier to dismissal of their suit-even though none of the lawyers had spoken to the source and their investigator had acknowledged that she couldn't verify what (according to her) he had told her." Id. The court emphasized that the investigator's "qualms" should have been a "red flag" to Plaintiffs' counsel. Id. Finally, the Seventh Circuit pointed to other cases where Robbins Geller had "engaged in similar misconduct, " id. (citing Belmont Holdings Corp. v. SunTrust Banks, Inc., 896 F.Supp.2d 1210, 1231-32 (N.D.Ga. 2012); Campo v. Sears Holdings Corp., 371 Fed.App'x. 212, 216-17 (2d Cir. 2010); Applestein v. Medivation, Inc., 861 F.Supp.2d 1030, 1037-39 (N.D. Cal. 2012)), and noted that "[riecidivism is relevant in assessing sanctions, " id. (citing Reed v. Great Lakes Cos., 330 F.3d 931, 936 (7th Cir. 2003)). The Seventh Circuit remanded the issue to the district court, explaining that "the district court is in a better position than the court of appeals to calculate the dollar amount of the sanctions." Id.
The case was remanded to this Court, and Defendants filed a memorandum in support of the imposition of sanctions on September 27, 2013. (R. 263, Defs.' Mem.) Plaintiffs filed their sealed response on October 28, 2013, (R. 264, Pis.' Sealed Resp.), Defendants filed their reply on November 22, 2013, (R. 270, Defs.' Reply), and Plaintiffs filed their sur-reply on December 16, 2013, (R. 271, Pls.' Sur-reply). Additionally, Defendants filed a notice of supplemental authority on June 17, 2014, (R. 272, Suppl. Authority), and Plaintiffs responded on June 18, 2013, ...