In re OSG Securities Litigation
12 F. Supp. 3d 619
S.D.N.Y.2014Background
- Plaintiffs alerted the Court to a malpractice suit OSG filed against its outside counsel, Proskauer, in Delaware Bankruptcy Court; Proskauer moved to dismiss that malpractice suit.
- Plaintiffs seek leave to amend their securities/adversary complaint here to incorporate factual allegations disclosed in Proskauer’s dismissal motion, arguing those facts strengthen scienter allegations against former OSG officers Morten Arntzen and Myles Itkin.
- Defendants opposed use of unadjudicated allegations from another proceeding, citing district-court decisions that strike such references under Fed. R. Civ. P. 12(f).
- The Court reviewed Second Circuit precedent (notably Lipsky and Gilbert) and discovery/pleading standards governing use of allegations from other proceedings and pleading on information and belief.
- The Court granted plaintiffs leave to amend to add allegations drawn from the Proskauer motion, set a brief schedule for supplemental briefing on the pending motion to dismiss, and expressly declined to decide whether the amended allegations ultimately satisfy Rule 9(b) or the PSLRA.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| May plaintiffs amend to plead allegations from an ongoing, unadjudicated proceeding? | Yes — the Proskauer motion contains facts that may support scienter and are properly pleaded "on information and belief." | No — Second Circuit law and district courts prohibit citing unresolved suits; such references are immaterial and should be struck. | Granted — amendment allowed; allegations from the Proskauer filing may be pled and developed in discovery. |
| Are allegations from another suit inadmissible as a matter of law such that they must be stricken under Rule 12(f)? | They need not be admissible now; discovery may yield admissible evidence; pleadings may allege facts from other actions. | Some district courts apply a bright-line rule striking references to unresolved complaints. | Rejected bright-line rule; Lipsky is limited and does not bar citing unadjudicated allegations in ongoing actions. |
| Does Lipsky require exclusion of all references to unresolved proceedings? | Plaintiffs: Lipsky is narrow and tied to FRE 410 concerns; it does not create an absolute bar. | Defendants: Lipsky supports striking unadjudicated allegations. | Court: Lipsky is limited to consent-decree/nolo plea context; it does not establish an absolute rule. |
| May fraud allegations be pleaded "on information and belief" here? | Yes — matters peculiarly within defendants’ knowledge may be pleaded on information and belief if plaintiffs state supporting facts. | Implicitly: such pleadings must still meet Rule 11 and Rule 9(b) standards. | Allowed — plaintiffs may plead on information and belief and must provide facts supporting that belief; ultimate sufficiency remains for later resolution. |
Key Cases Cited
- Lipsky v. Commonwealth United Corp., 551 F.2d 887 (2d Cir. 1976) (limited holding excluding use of complaints that produced consent decrees or nolo pleas under evidentiary protections)
- United States v. Gilbert, 668 F.2d 94 (2d Cir. 1981) (clarifies that consent decrees and settlements implicate FRE 410 and discusses admissibility for purposes like knowledge)
- Wexner v. First Manhattan Co., 902 F.2d 169 (2d Cir. 1990) (permits allegations on information and belief where facts lie peculiarly within opposing party’s knowledge)
- Brady v. Wal-Mart Stores, Inc., 531 F.3d 127 (2d Cir. 2008) (consent decrees may be admitted to show defendant’s awareness of legal obligations)
- Campaniello Imports, Ltd. v. Saporiti Italia S.p.A., 117 F.3d 655 (2d Cir. 1997) (standards for pleading on information and belief and Rule 11 obligations)