[CORRECTED] DECISION AND ORDER GRANTING DEFENDANT’S MOTION TO DISMISS THE COMPLAINT IN ITS ENTIRETY
INTRODUCTION
Dominic F. Amorosa was a private investor who purchased common stock of America Online, Inc. (“AOL”) prior to its merger with Time Warner, Inc. (“Time Warner”). As a pre-merger stockholder, Amorosa voted in favor of the merger, and on January 11, 2001, exchanged his shares at a one-to-one ratio for shares in the successor corporation, AOL Time Warner, Inc. (“AOLTW”).
More than a year and a half after the merger, the Washington Post published a two-part series of articles exposing widespread fraud at AOL and its successor corporation. Shortly thereafter, AOLTW, its executives and auditors found themselves facing hundreds of lawsuits arising
For the reasons set forth below, Ernst & Young’s motion to dismiss is granted in its entirety. Its motion for sanctions is neither granted nor denied; however, Ernst & Young is directed to produce a reasonable estimate of the attorneys’ fees it seeks in connection with its motion, and plaintiffs attorney is ordered to show cause why sanctions should not be imposed.
FACTS
Amorosa’s Stock Purchases
AOL and Time Warner announced their intent to merge on January 10, 2000. (Second Am. Compl. (“SAC”), Nov. 14, 2007, ¶¶ 12, 70.) Over the next three days, Amorosa purchased 16,000 shares of premerger AOL common stock at allegedly inflated prices ranging from $61.89 to $65.88 per share. (Id. ¶ 5.)
Then, on May 19, 2000, AOL and Time Warner took the next step toward consummating a merger between the two companies by jointly filing a Merger Registration Statement (“MRS”) with the Securities and Exchange Commission (“SEC”). (Id. ¶¶ 13-14, 86.) The MRS contained selected historical financial data and AOL’s previous SEC filings for shareholders to review in determining whether to support the merger, including inter alia:
(1) AOL’s 10-K for the fiscal year ended 06/30/99;
(2) AOL’s 10-Qs for the quarterly periods ended 09/30/99, 12/31/99 and 03/31/00;
(3) AOL’s 8-Ks dated 12/01/99, 12/21/99, 01/10/00, 01/19/00, 03/17/00, 04/03/00, and 04/18/00.
(Id. ¶¶ 15, 17, 21.) AOL’s 06/30/99 10-K (the “June 1999 Opinion” or “06/30/99 Opinion”) was the only audited financial statement incorporated into the MRS; the others were “reviewed and approved” but never “certified” by AOL’s auditor, Ernst & Young. (See id. ¶ 18.) Additionally, between the filing of the MRS and the consummation of the merger, Ernst & Young approved two additional audited financial statements on June 30, 2000 (the “June 2000” or “06/30/2000 Opinion”) and December 31, 2000 (the “December 2000 Opinion” or “12/31/2000 Opinion”). (See Ernst & Young Mem. of Law in Supp. of Mot. to Dismiss (“E & Y MTD”), Jan. 18, 2008, at 5 (citation omitted).) The fourth and final audited statement prepared by the auditor was released on December 31,-2001 (the “December 2001 Opinion” or “12/31/2001 Opinion”). (Id.)
Four months after AOL and Time Warner had first filed the MRS with the SEC, Amorosa purchased an additional 330 shares of pre-merger AOL common stock at $54.56. (SAC ¶ 5.) One week later, on June 23, 2000, AOL and Time Warner shareholders approved the merger (id. ¶ 12), and approximately seven months la
Ernst & Young’s Involvement in the AOLTW Merger
Ernst & Young was the independent auditor for AOL, Time Warner and AOLTW at all relevant times prior to the AOLTW merger. (Id. ¶ 6.) As the independent auditor, Ernst & Young “audited and issued audit reports on the companies’ year-end financial statements,” including audit opinions for the years 1999-2001. (E & Y MTD at 5 (citation omitted).)
Amorosa alleges that Ernst & Young’s wrongdoing stems from the auditor’s role in approving certain false and misleading financial statements that were incorporated by reference into the MRS. Specifically, Amorosa alleges that AOL’s June 1999 Opinion was audited and certified as “clean” by Ernst & Young, and AOL’s interim results were reviewed and approved by the auditor. (SAC ¶¶ 18, 21.) A “clean unqualified opinion” indicates that the auditor has reviewed a company’s financial statements in keeping with Generally Accepted Auditing Standards (“GAAS”) and that the financial statements themselves comport with Generally Accepted Accounting Principles (“GAAP”). (Id. ¶¶21.) However, Amorosa alleges that no financial statement prepared and reviewed by Ernst & Young should ever have been certified as “clean” because Ernst & Young knew that AOL was actually relying upon non-GAAP accounting methods to fraudulently book certain revenues and conceal losses. (Id. ¶ 37.) Specifically, Amorosa alleges that Ernst & Young ignored certain “red flags” between 1999 and 2001 (id. ¶¶ 32, 45) and that Ernst & Young’s “audit workpapers” demonstrate that it “knew” of fraud and helped to conceal it by advising the company to “keep the percentage of barter revenue under 10% of total advertising revenue.” (Id. ¶ 33.) Amorosa further alleges that Ernst & Young “failed to challenge” the company’s accounting for a series of transactions (id. ¶ 34), even though the auditor “reviewed at least twelve transactions where the impropriety of revenue recognition was readily apparent” (id. ¶ 36).
Reports of the Fraud at AOL
According to Amorosa, throughout 2001 and 2002, scattered news reports began to expose AOL’s improper accounting practices. Some — but not all — were directly related specifically to the company’s booking of online advertising revenue. (Id. ¶¶ 22, 359.) The examples cited by Amorosa can be divided into four categories and include the following:
Reports Regarding AOL/AOLTW’s Financial Health
• A January 12, 2001 Bloomberg article that stated: “some on Wall Street have grown skeptical that the new company [AOLTW] will be able to meet its own projected growth rates.” (Id. ¶ 359(a) (internal quotations omitted).)
• A February 1, 2001 Wall Street Journal article reporting concerns that AOLTW might not meet its “aggressive '01 financial targets following disappointing 4Q '00 results.” (Id. ¶ 359(b).)
• A July 18, 2001, J.P. Morgan analyst report questioning AOLTW’s ability to meet its “aggressive post-Merger financial targets.” (Id. ¶ 359(d) (internal quotations omitted).)
• On August 14, 2001, the Washington Post reported that AOLTW was “expected to announce a round of substantial layoffs at its online unit [AOL]soon.” That same day, “Morgan Stanley reduced its financial targets for the company.” (Id. ¶ 359(e) (internal quotations omitted).)
• A September 7, 2001 Lehman Brothers forecast for AOLTW that cut revenue projections in part due to “a softer environment and more tempered top line growth at AOL.” (Id. ¶ 359(f) (internal quotations omitted).)
• An October 8, 2001 Barron’s article addressing “AOLTW’s inability to accelerate its growth and meet its aggressive financial targets.” (Id. ¶ 359(g).)
• An October 17, 2001 Merrill Lynch downgrade of AOLTW stock “due to concerns about future advertising revenue and subscriber growth.” (Id. ¶ 359(h).)
• A December 6, 2001 Bloomberg report speculating that AOL CEO Gerald Levin’s resignation “may signal weakness.” (Id. ¶ 359(i).)
• A December 7, 2001 Merrill Lynch report stating that AOLTW “may be hampered by slowing subscriber and advertising growth at its America Online unit.” (Id. ¶ 359(j) (internal quotations omitted).)
• A December 10, 2001 analyst report revising downward estimates for the AOLTW segment, because “the AOL segment is at risk of continuing margin erosion, driven primarily by declining ad and commerce revenue.” (Id. ¶ 359(k) (internal quotations omitted).)
• A February 20, 2002 Lehman Brothers downgrade of AOLTW stock, which cited as “key concerns” “declining subscriber revenues and online advertising.” (Id. ¶ 359(1).)
• A June 4, 2002 Lehman Brothers downward revision of AOL advertising revenue forecasts. (Id. ¶ 359(o).)
Reports of SEC Investigations
• A May 21, 2002 USA Today article that Amorosa alleges reported on an SEC investigation of AOL’s accounting practices, including the SEC’s inquiry into the company’s “bartering” transactions. (Id. ¶ 359(n).)
• The July 25, 2002 “disclosure” of an SEC investigation regarding AOL’s accounting practices, which Amorosa did not attribute to any source. (Id. ¶ 359(r).)
Reports of General Accounting “Problems”
• A July 11, 2001 Fortune article entitled “Do AOL’s Ads Add Up-Critics Question the Numbers,” which referred to “controversial sales tactics” and “accounting games.” (Id. ¶ 359(c) (internal quotations omitted).)
• An April 11, 2002 Neiv York Post article reporting that AOL “may have accounting problems.” (Id. ¶ 359(m) (internal quotations omitted).)
• June 26, 2002 “rumors,” which Amorosa did not attribute to any source, regarding the potential that AOL would restate its financial results. (Id. ¶ 359(p).)
Reports of Specific Financial Misstatements
• July 18 and 19, 2002 Washington Post articles regarding AOL’s accounting manipulations, which identified “certain transactions from which AOL falsely recorded revenue.” (Id. ¶ 359(q).)
Significantly, although Amorosa does specify a percentage by which he alleges the AOL/AOLTW stock dropped on the date of each of the above articles, his recollection of these news reports is slapdash at
Financial Restatements
Within two weeks after the July 2002 Washington Post story, AOLTW had confirmed that it was the subject of both SEC and Department of Justice (“DOJ”) investigations regarding its accounting practices. (Id. ¶ 240.) By October, AOLTW had announced that it would issue financial restatements to correct for material errors in its earlier accounting. (Id. If 26.) AOLTW went on to file two additional restatements with the SEC in February 2005 and August 2006, to correct related misstatements and inconsistencies (id.), and “ultimately, AOL admitted that its 3rdQ 00 through 2ndQ 02 results had been misstated,” and restatements issued covering the period July I, 2000, to June 30, 2002 (id. ¶ 340).
Procedural History and Related Cases
The Class Action
Not surprisingly, the various newspaper articles and reports trumpeting allegations of fraud at AOL portended widespread litigation. Amorosa’s action is the last of these several hundred lawsuits that arose in the wake of the AOL Time Warner merger. See generally In re AOL Time Warner, Inc. Sec. and “ERISA” Litig.,
Thereafter, “a number of parties opted out of the class and filed individual actions throughout the country.” AOL II,
In addition to the similarities among the various complaints filed by the Lerach Plaintiffs (hereinafter the “Lerach Complaint”), the Lerach Complaint was essentially identical to the main class action complaint (see Second Am. Consol. Class Action Compl. of Lead PI. Minn. State Bd. of Inv.) (hereinafter “Class Action Complaint”), In re AOL Time Warner, Inc. Sec. & “ERISA” Litig., 02 Civ. 5575 (02 MDL 1500), Aug. 21, 2004, with many allegations re-appearing verbatim or with only superficial edits. (Compare, e.g., Lerach Complaint ¶ 258(a)(ii) with Class Action Complaint ¶ 126 (describing the Homestore transaction); Lerach Complaint ¶258©)©0 with Class Action Complaint ¶ 149 (describing the Veritas transaction); Lerach Complaint ¶ 258(f)© with Class Action Complaint ¶ 141 (describing the Sun Microsystems transaction); Lerach
Amorosa’s Complaint and the Litigation Stay
On May 29, 2003, Amorosa, who was not a part of the class action at that time, filed his lawsuit in federal court as a “related” case, which was then referred to Judge Kram. In explaining the relationship between his and the main class action, he described his “securities fraud allegations” as “identical to those made in the class action.” (Civil Cover Sheet filed by Dominic F. Amorosa, Form JS-44 at 3, Amorosa v. AOL Time Warner, Inc., Inc., No. 03 Civ. 3902 (S.D.N.Y. May 29, 2003) (emphasis added).)
Two years later, Amorosa amended his complaint for the first time to reflect the allegations in the Class Action Complaint. His first amended complaint explicitly “ineorporate[d] by reference ¶¶ 3 through 30, ¶¶ 33 through 47, and ¶¶ 54 through 670 of the Second Amended Consolidated Class Action Complaint” — the equivalent of 650 paragraphs (approximately 140 pages) of the Class Action Complaint, which he also attached as Exhibit 1 to his complaint. (Amorosa First Am. Compl. ¶ 1, Amorosa v. AOL Time Warner, Inc., No. 03 Civ. 3902 (S.D.N.Y. Apr. 8, 2005.))
In light of the clear parallels between the various complaints filed in connection with the class action, the parties stipulated to a stay of Amorosa’s federal action until the court could resolve a motion to amend the Class Action Complaint and motions to dismiss the complaint of Stichting Pensioenfonds ABP. See Order Granting Stay (“Order Granting Stay”) at 1-2, Amorosa v. AOL Time Warner Inc., No. 03 Civ. 3902 (S.D.N.Y. Aug. 5, 2005). Stichting Pensioenfonds was not part of the Lerach group, but may have been included in the stipulation as emblematic of the larger set of opt out actions that were pending at the time.
The stipulation extended Ernst & Young’s time to answer or move against the complaint to 30 days after resolution of certain motions. The agreement provided in relevant part that:
Whereas plaintiff Dominic F. Amorosa (“Plaintiff’) filed a First Amended Complaint (the “Complaint”) in the above-captioned action on April 7, 2005; and
Whereas the Complaint is substantially similar in many respects to the second amended consolidated class complaint filed in In re AOL Time Warner, Inc. Sec. & “ERISA” Litigation, 02 MDL Docket No. 1500(SWK), the related consolidated putative securities class action that is also currently pending before this Court (“the MRD Securities Litigation”); and
Whereas the Complaint is also substantially similar in many respects to the amended complaint filed in Stichting Pensioenfonds ABP v. AOL Time Warner Inc., 03 Civ. 4934(SWK), a related individual securities action that is also currently pending before this Court (the “Stichting Litigation”); and
Whereas Plaintiff and E & Y wish to avoid burdening the Court with duplicative briefing on the same or similar issues; and
Whereas counsel for Plaintiff and counsel for E & Y have therefore agreed to extend E & Y’s time in which to answer or move against the Complaint until thirty (30) days after the Court resolves the Motion to Amend [filed by the lead plaintiff in the MDL] and the Stichting Motions to Dismiss;
Now therefore it is hereby stipulated and agreed ... that E & Y’s time in which to answer or move against the Complaint is hereby extended to and including thirty (30) days after the Court resolved the Motion to Amend and the Stichting Motions to Dismiss.
Id. (internal quotations omitted).
Although defendant Ernst & Young originally argued that Amorosa had requested the litigation stay (see E & Y MTD at 1), the parties now appear to agree that the stay of his claim was initially proposed by AOLTW (see Ernst & Young Reply in Supp. of Mot. for Sanctions (“E & Y Rll Reply”), Mar. 3, 2008, at 3; Amorosa Mem. in Opp. to Mot. for Sanctions (“Amorosa Rll Opp.”), Feb. 22, 2008, at 1.)
Almost one year after the stay was entered, the class action received final settlement approval, on April 25, 2006. On June 1, 2006, one week later, the Stichting Pensioenfonds ABP case was voluntarily dismissed.
By the time the settlements occurred, the Lerach Plaintiffs had joined the party before Judge Kram. Although the Court can find no record of any formal written stipulation extending the stay to the Lerach Plaintiffs, Ernst & Young took no action against Amorosa until Judge Kram partially denied a motion to dismiss the Lerach Plaintiffs’ claims on June 20, 2007.
Resolution of the Motions to Dismiss the Lerach Plaintiffs’ Complaints
On June 20, 2007, Judge Kram granted in part the motions to dismiss the Lerach Complaint, allowing the Lerach Plaintiffs’ suit to proceed on narrow grounds. See AOL II,
In adjudicating these claims, Judge Kram held:
• First, plaintiffs’ state law claims were preempted by the Securities Litigation Uniform Standards Act (“SLUSA”), because the Lerach Plaintiffs had a formal, established relationship pursuant to which they were jointly litigating their claims; therefore, despite the fact that each Lerach Plaintiff filed a separate copy of the Lerach Complaint with different state law claims, the Lerach Plaintiffs could be considered a “covered class action” as that term is used in SLUSA. Id. at 671-72.
• Second, plaintiffs’ Section 11 claims were partially dismissed due to pleading defects — that is, they were dismissed to the extent that the Section 11 claims were based upon anything other than a June 1999 Ernst & Young audit opinion. Id. at 674-75.
• Third, plaintiffs’ Section 10(b) claim was dismissed to the extent that liability was premised on the June 1999 Ernst & Young audit opinion because the plaintiffs could not establish loss causation as required by the 1934 Act. Additionally, plaintiffs’ recovery was circumscribed. The court denied recovery insofar as plaintiffs sought compensation for losses sustained pri- or to publication of articles in the Washington Post on July 18 and 19, 2002, because as the court explained, these articles first exposed the fraud at AOL/AOLTW. Therefore, theplaintiffs could not have sustained losses arising from the fraud prior to July 18, the court opined, since the market was unaware of the fraud until then. Id. at 676-80.
• Fourth, plaintiffs’ Section 14(a) claim was dismissed for failure to adequately plead loss causation relating to the proxy statement. Id.
• Fifth, plaintiffs’ control person claims under Section 15 of the 1933 Act and Section 20(a) of the 1934 Act were dismissed for failure to plead that Ernst & Young had control over a primary violator, since the primary violators were employed at AOL and Ernst & Young exercised no control over AOL personnel. Id. at 674.
• Sixth, the court also rested its dismissal of pre-merger shareholders’ Section 10(b), 11, and 14(a) claims on the ground that plaintiffs had failed to “identify any alleged misstatements by [Ernst & Young] that would have been material to pre-merger AOL shareholders.” Id. at 672.
Amorosa’s Amended Complaint and the Motions Sub Judice
Amorosa amended his complaint (for a second time) in November 2007, shortly after Judge Kram issued her opinion in AOL II. The stated purpose of the amendment was to accommodate the new pleading standard governing loss causation announced by the Supreme Court in Dura Pharm., Inc. v. Broudo,
As filed, Amorosa’s second amended complaint included the following claims:
Claim 1: Violations of Section 11 of the 1933 Act;
Claim 2: Violations of Section 14(a) of the 1934 Act and Rule 14a-9;
Claim 3: Violations of Section 10(b) of the 1934 Act and Rule 10b — 5;
Claim L Aiding and abetting a breach of fiduciary duty;
Claim 5: Common law fraud;
Claim 6: Aiding and abetting common law fraud.
(SAC ¶¶ 363^409.)
Amorosa acknowledges that his second amended complaint (and for that matter, his first amended complaint as well) bears a substantial likeness to the Lerach Complaint, and disputes only the scope of the similarities. (See generally Amorosa Mem. of Law in Opp. to Mot. to Dismiss “Amorosa MTD Opp.”), Feb. 14, 2008; (Amorosa Mem. in Supp. of Mot. for Leave to Amend, Mar. 12, 2007, at 7.) As a practical matter, although Amorosa is represented by different counsel (Christopher J. Gray, P.C.) and otherwise has no formal relationship to the Lerach group, his second amended complaint is identical in all material respects to the complaint of the Lerach group. The two pleadings share literally hundreds of pages of identical content. (Compare, e.g., SAC ¶ 113 with Northwestern Mut. Life Found., Inc. First Am. Compl. (“Lerach Compl.”), May 4, 2006, ¶ 120; SAC ¶ 163 uAth Lerach Compl. ¶ 172; SAC ¶ 181 with Lerach Compl. ¶ 190; SAC ¶ 357 with Lerach Compl. ¶ 318.)
In light of Judge Kram’s decision partially dismissing the Lerach Complaint, Ernst & Young filed the sub judice motion to dismiss Amorosa’s second amended complaint since it was nearly identical to the Lerach Complaint, and moved for Rule 11 sanctions against Mr. Gray, Amorosa’s attorney. Ernst & Young contends that Amorosa is a vexatious litigant pursuing clearly frivolous claims as evidenced inter alia by the fact that his complaint was
DISCUSSION
I. Standard of Review
In deciding a motion to dismiss pursuant to Rule 12(b)(6), the Court must liberally construe all claims, accept all factual allegations in the complaint as true, and draw all reasonable inferences in favor of the plaintiff. See Cargo Partner AG v. Albatrans, Inc.,
To survive a motion to dismiss, “a complaint must contain sufficient factual matter ... to ‘state a claim to relief that is plausible on its face.’ ” Ashcroft v. Iqbal, — U.S. -,
Claims sounding in fraud must also meet Rule 9(b)’s heightened pleading standard. See Fed.R.Civ.P. 9(b). To comply with Rule 9(b), a complainant “must: (1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent.” Lerner v. Fleet Bank, N.A.,
Similarly, the Private Securities Litigation Reform Act of 1995, Pub.L. 104-67, 109 Stat. 737 (1995) (codified as amended in scattered sections of 15 U.S.C.) (“PSLRA”), requires a private plaintiff bringing claims under certain federal securities laws (including Sections 10(b) and 14(a)) to “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” 15 U.S.C. § 78u-4(b)(2). To establish a “strong inference” of scienter, as required by the PSLRA, the inference must be such that a “reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged.” Tellabs, Inc. v. Makor Issues & Rights, Ltd.,
II. Relevant Statements by the Auditor
As a threshold matter, an auditor’s liability under the securities laws is limited to its release of audited financial statements or other statements formally attributed to the auditor at the time of dissemination. See Lattanzio v. Deloitte & Touche, LLP,
Amorosa’s Complaint refers to only four audited financial statements: (1) the June 1999 Opinion; (2) the June 2000 Opinion; (3) the December 2000 Opinion; and (4) the December 2001 Opinion. (E & Y MTD at 5 (citation omitted).) Since only audited financial statements are formally attributable to an auditor at the time of their dissemination, these four opinions are the only documents that could possibly serve as the basis for Ernst & Young’s liability under the 1933 and 1934 Acts. See id. at 155.
III. Amorosa’s Securities Claims
Amorosa alleges that Ernst & Young violated Sections 14(a) and 10(b) of the 1934 Act as well as Section 11 of the 1933 Act He further alleges that the auditor is liable under state law ’for fraud and for aiding and abetting AOL/AOLTW’s fraud and breaches of fiduciary duty by its directors. Amorosa’s claims under Sections 14(a) and 10(b) of the 1934 Act are dismissed in their entirety because he has failed to plead loss causation adequately. Additionally, Amorosa’s Section 11 claim is dismissed in its entirety because he fails to state a claim, and in any event, Amorosa’s complaint makes clear that the auditor did not cause any losses suffered by the plain
A. Section 14(a) of the 1934 Act
Section 14(a) of the 1934 Act provides that “it shall be unlawful for any person by use of the mails ... or otherwise ... to solicit or permit the use of his name to solicit any proxy or consent or authorization in respect of any security (other than an exempted security) registered pursuant to section 781 of this title.” 15 U.S.C. § 78n(a). “The purpose of [Section] 14(a) is to prevent management or others from obtaining authorization for corporate action by means of deceptive or inadequate disclosure in proxy solicitations.” J.I. Case Co. v. Borak,
As Judge Kram explained in AOL I, of the four audited financial statements, only Ernst & Young’s June 1999 Opinion could form the basis of a Section 14(a) claim against the auditor.
1. Loss Causation and the June 1999 Opinion
In order to state a claim under Section 14(a), the plaintiff bears the burden of pleading and proving loss causation, Grace v. Rosenstock,
The Second Circuit’s loss causation jurisprudence comports with the Supreme Court’s articulation of the loss causation requirement in Dura Pharm., Inc. v. Broudo,
By contrast, loss causation allegations are insufficient where they do not “speak to the relationship between the fraud and the loss of the investment.” Id. at 174 (citing cases). For example, it is insufficient under the law of this Circuit to allege simply that a defendant’s misstatements or omissions “induced a disparity between the price plaintiff paid for [securities] and their true investment quality.” Emergent Capital,
Further, in cases where, as here, a plaintiff seeks to hold a financial advisor or auditor responsible for primary violations of the securities laws, the plaintiff must plead that the market reacted negatively to some disclosure correcting the falsity in the advisor or auditor’s statements (and not simply the underlying fraud). See Lentell,
Analyzing loss causation under the Second Circuit’s framework and as pleaded in the Lerach Complaint, Judge Kram in AOL II held that the June 1999 Opinion could not be the basis for imposing liability under Sections 10 or 14 because:
The plaintiffs do not allege that the 6/30/99 AOL Opinion was ever the subject of a corrective disclosure. In fact, the plaintiffs do not allege that the financial results certified by that Opinion were ever restated, or that the truth of that Opinion was called into question at any time during the AOLTW stock decline that caused their losses. Nor do the plaintiffs allege that the two allegedly fraudulent transactions entered into during that period were either corrected or brought to the market’s attention pri- or to the stock’s bottoming out at the end of July 2002. In short, the plaintiffs have not alleged that the market reacted negatively to the revelation of the 6/30/99 AOL Opinion’s alleged falsity. Furthermore, the plaintiffs cannot connect any of their losses to E & Y on a materialization of the risk theory, whether those losses purportedly arose out of the 6/30/99 AOL Opinion or out of any other allegedly false audit opinions. In each of the cases in which the Second Circuit has employed a materialization of the risk analysis, it has considered a particular risk that was allegedly concealed by the defendant’s actions and which then materialized to cause a market loss .... Without providing some indication of the nature of the risk alleged, bare allegations that an undisclosed risk materialized to cause a plaintiffs loss are insufficient. Here, the plaintiffs do not adequately identify what risk was concealed by the allegedly false audit opinions, nor does the Court’s sci’utiny of the Complaint reveal the materialization of any risk that would be sufficient to plead loss causation.
Amorosa now urges this Court to reject the reasoning of AOL II in light of certain revisions he has made to his complaint since the date of that decision. (Amorosa MTD Opp. at 14-18.) Specifically, he argues that, unlike the Lerach Plaintiffs, he “has pleaded what corrective disclosures occurred, where, and on what date, how much AOLTW stock dropped in price at the times of the corrective disclosures, and that each drop was statistically significant.” (Id. at 14 (citing SAC ¶ 359).) But any difference between
Amorosa’s second amended complaint and the Lerach Complaint is superficial and insufficient to render Amorosa’s allegations materially different from the Lerach Complaint. Amorosa cites two paragraphs from his complaint that he believes differentiate it from the Lerach Complaint, though neither rehabilitates his pleadings. First, Amorosa points to a May 21, 2002 article in USA Today, which he alleges highlighted rumors regarding AOL’s “sham” accounting. (See Amorosa MTD Opp. at 16 (citing SAC ¶ 359(n)).) Apart from Amorosa’s failure to connect the article to the June 1999 Opinion, Judge Kram already held that any “disclosures” in this article were an insufficient basis on which to hang loss causation. AOL II,
Second, Amorosa argues that he adequately pleaded loss causation because he alleged that “the 06/30/99 opinion was false and misleading in that it failed to reveal that the revenues reported therein included revenues from ‘barter’ transactions that should not have been permitted to be recognized as revenue under GAAP.” (Amorosa MTD Opp. at 16 (citing SAC ¶ 30).) However, Amorosa still does not allege that the June 1999 Opinion was ever the subject of any corrective disclosure. See AOL II,
As was the case with Merrill Lynch in Lentell, Amorosa has failed to allege, as required, that the market reacted negatively to some corrective disclosure regarding the falsity of statements made by Ernst & Young in its June 1999 Opinion. See Lentell,
B. Section 10(b)
Section 10(b) of the 1934 Act provides that no person or entity may, in connection with the purchase or sale of a security, “use or employ ... any manipulative or deceptive device or contrivance” in contravention of an SEC rule. 15 U.S.C. § 78j(b). Rule 10b-5 makes it unlawful, in connection with the purchase or sale of a security, “(a) to employ any device, scheme, or artifice to defraud, (b) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made ... not misleading, or (c) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.” 17 C.F.R. § 240.10b-5.
To establish liability under Section 10(b), the SEC must show that “in connection with the purchase or sale of a security the defendant, acting with scienter, made a material misrepresentation (or a material omission, if the defendant had a duty to speak) or used a fraudulent device.” SEC v. First Jersey Sec. Inc.,
1. Loss Causation and the June 2000 and December 2000 Ernst & Young Audit Opinions
In AOL II, Judge Kram held that any pre-merger misstatements or omissions were immaterial as a matter of law, because any “corrective disclosure” would only have redoubled AOL shareholders’ resolve to consummate the AOLTW merger. AOL II,
Amorosa had the burden of pleading and proving loss causation under Section 10(b). See, e.g., In re Flag Telecom Holdings Ltd. Sec. Litig.,
As for later Ernst & Young opinions, Amorosa fails to allege that either the June or December 2000 Opinions were the subject of a corrective disclosure before he brought suit in May 2003, or that their truth was called into question at any time during the stock decline that he argues caused his losses. (See SAC ¶ 35 (financials for 2000 not restated until 2005).) Thus, although Amorosa does allege that the June and December 2000 Opinions, like June 1999 Opinion, contained Ernst & Young’s unqualified certification that the financial statements were prepared in accordance with GAAP (see SAC ¶ 365-66), his failure to plead any facts which, if proven, would substantiate his assertion that Ernst & Young’s certifications were indeed the cause of his losses is fatal to his claim.
The only allegations relating to Ernst & Young fail to establish a sufficient nexus between misstatements by the auditor arising specifically out of the June or December 2000 Opinions and losses alleged by the plaintiff. For example, Amorosa alleges that auditor ignored “red flags” between 1999 and 2001. (Id. ¶¶ 32, 45). This allegation is purely conclusory and mentions neither the June nor December 2000 Opinions. Next, Amorosa alleges that Ernst & Young’s “audit workpapers” demonstrate that it “knew” of fraud at AOLTW but that it failed to “put a stop” to the practice and instead advised the company to “keep the percentage of barter revenue under 10% of total advertising revenue,” (Id. ¶ 33.) This allegation affords no basis for imputing liability to Ernst & Young, because AOLTW existed only after the merger. Therefore, Ernst & Young’s purported advice about AOLTW’s accounting necessarily postdates the June and December 2000 Opinions (filed only on behalf of AOL) as well as Amorosa’s share exchange (his last transaction involving AOL/AOLTW stock).
Amorosa’s statements that Ernst & Young “allowed AOLTW to account for its interest in its European joint venture, AOL Europe, using a non-GAAP method of accounting” and “ignore[d] the fraudulent financial reporting” suffer from the same defect. (Id. ¶ 35; see also id. ¶ 44.) Insofar as this allegation relates to AOLTW, it postdates the merger and is therefore insufficient to suggest that there was fraud at AOL in the months prior to the merger. To the extent that the disclosure relates to AOL, Amorosa alleges that “the Company [not Ernst & Young] subsequently admitted in its second restatement in 2005, it should have consolidated the results of AOL-Europe’s operations and recognized 100% of these losses.” (Id. ¶ 35 (emphasis omitted).) Additionally, the fact that the restatement issued in 2005 suggests that any previous misstatements by the auditor that were corrected therein did not cause Amorosa’s losses, since Amorosa brought suit in 2003, two years before the restatement issued.
Amorosa further alleges that that the auditor “failed to challenge” the company’s accounting for a series of transactions even though Ernst & Young “reviewed at least
Amorosa’s allegations do not include facts which, if proven, would establish that Ernst & Young could be held liable as a primary violator, because they do not refer to any misstatements by the auditor and fail to connect any fraud at AOL during the relevant time period to the auditor itself. As Lentell makes clear, Amorosa must identify specific statements implicating the auditor that causally relate in some way to the losses he alleges he suffered. See
2. The Purchaser-Seller Limitation Under Federal Laiv
Amorosa tries to bootstrap his way into a Section 10 claim by arguing that the Supreme Court abandoned the “purchaser-seller” standing requirement in private securities actions in Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit,
Unfortunately for Amorosa, his interpretation of Dabit misconstrues its core holding and contradicts the plain language of the opinion.
The purchaser-seller limitation on the private right of action under the securities laws (Rule 10b — 5) was first announced by the Second Circuit in Birnbaum v. Newport Steel Corp.,
In Blue Chip Stamps, the Supreme Court “chose to limit the private remedy” afforded by Section 10(b) to purchasers and sellers. Id. As the Court explained in Dabit, “the main policy consideration tipping the scales in favor of precedent was the widespread recognition that ‘litigation
By contrast, the Supreme Court in Dabit interpreted the statutory phrase, “in connection with the purchase or sale,” as used in the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”), Pub.L. No. 105-353, 112 Stat. 3227 (1998) (codified in part at 15 U.S.C. § 77v(a)). See Dabit,
Section 10 and Rule 10b-5, like SLUSA, all employ the phrase “in connection with” the purchase or sale of a covered security. However, the Supreme Court in Dabit stated clearly that it did not purport to “revisit the Blue Chip Stamps Court’s understanding of the equities involved in limiting the availability of private remedies under federal law.” Id. at 88 n. 13,
In this ease, the practical impact of Blue Chip Stamps would be to limit Amorosa’s cause of action to misstatements or omissions by Ernst & Young that he could have relied upon in connection with his purchase or sale of stock (i.e., that are alleged to have occurred prior to the purchase and/or sale dates). These would include the June 1999, June 2000 and December 2000 Opinions, since Amorosa alleges that he purchased shares on two occasions pri- or to the merger: January 10 and June 23, 2000, and he exchanged (“sold”) his shares for AOLTW common stock pursuant to the terms of the merger in January 2001. (SAC ¶ 5.) Since Amorosa has failed to adequately allege loss causation with respect to any of these opinions, see supra
C. Section 11
Amorosa, like the Lerach Plaintiffs, alleges that Ernst & Young is liable for misstatements contained in AOLTW’s Merger Registration Statement (“MRS”), which was filed with the SEC on February 11, 2000.
Section 11 of the 1933 Act provides that any signer, director of the issuer, preparing or certifying accountant, or underwriter may be liable if “any part of the registration statement, when such part became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading .... ” 15 U.S.C. § 77k(a). To state a claim under Section 11 of the 1933 Act, a plaintiff must show that a registration statement: “(1) contained an untrue statement of material fact; (2) omitted to state a material fact required to be stated therein; or (3) omitted to state a material fact necessary to make the statement therein not misleading.” Caiafa v. Sea Containers Ltd.,
Further, while “liability against the issuer of a security is virtually absolute, even for innocent misstatements,” accountant liability under Section 11 (as with Section 10(b)) is limited to “those matters which purport to have been prepared or certified by them.” Herman & MacLean v. Huddleston,
There are two reasons why Amorosa’s Section 11 claim must be dismissed. First, on the literal allegations of the complaint, it is time barred. While securities claims sounding in fraud must be brought the earlier of two years after discovery of the violation or five years after the violation itself, 28 U.S.C. § 1658(b), claims under section 11, which sound in negligence (rather than fraud), are subject to a shorter statute of limitations, In re Global Crossing Ltd. Sec. Litig.,
Amorosa alleges that the first corrective disclosure relating to AOL/AOLTW “fraud” occurred on January 12, 2001. If this allegation is true, then the fact that Amorosa waited almost two and a half years — until May 29, 2003' — to file suit
Alternatively, if the Court adopts Judge Kram’s holding that any so-called “corrective disclosures” that occurred prior to July 18, 2002, failed to “establish a nexus between any of [Ernst & Young’s] audit opinions and investment losses prior to July 18, 2002,” AOL II,
In light of the Second Circuit’s opinion in Staehr v. The Hartford Fin. Serv. Group, Inc.,
For example, Amorosa cites twelve articles published between January 2001 and June 2002, all of which discuss AOL’s revenue projections and financial health. (See SAC ¶ 359.) None of these articles mentions the auditor or its June 1999 Opinion. (See SAC ¶ 359(a) & (b),(d)-(o).)
Plaintiff also cites three sets of alleged “disclosures” that address general accounting “problems” at AOL. (Id. ¶¶ 359(c), (m), (p).) These were: a July 11, 2001 article in Fortune, (id. ¶ 359(c)); the resignation of Barry Schuler, CEO of AOLTW’s AOL unit, on April 10, 2002 (id. ¶ 359(m)); an April 11, 2002 New York Post article (id.); and “rumors” that “swirled” on June 25-27, 2002, regarding AOL’s prospective restatement of its advertising revenues (id. ¶ 359(p)). Specifically, Amorosa states that:
On June 25-27, 2002, rumors swirled that AOL was restating its advertising revenue. On June 26, 2002 concerns over the viability of cable stocks, rumors that AOLTW would pre-announce its second quarter results below expectations, and rumors that the Company might restate its financial results hit the market.
Id.
Judge Kram already ruled that the Fortune and New York Post stories cannot be deemed “corrective disclosures” because they did not include enough information to call Ernst & Young’s June 1999 Opinion into question. See AOL II,
Finally, Amorosa cites two reports that he says reveal SEC investigations of AOL. The first is a USA Today article on May 21, 2002, that allegedly “reported that the Securities [and] Exchange Commission (‘SEC’) was looking closely at ‘bartering’ transactions, and identified AOLTW as one company relying on this type of transaction.” (Id. ¶ 339(n).) But the USA Today article does not actually say anything about AOL’s accounting practices. See supra Part III.A.l.
The other “disclosure” is the conclusory statement that: “On July 25, 2002, it was disclosed that the SEC was investigating
Amorosa tries to evade the force of this logic by noting that AOLTW’s stock price dropped by a statistically significant amount after each of these articles appeared. (See generally SAC ¶ 359.) He further asserts — in wholly conclusory fashion (which this Court ignores on a motion to dismiss) — that the stock price occurred “due to news specific to AOLTW, and not explained by market or industry factors.” (Id.)
It may be — indeed, it probably is — true that declines in the stock price of AOLTW that followed hard on the appearance of these articles can be attributed to the appearance of the articles. But that does not save plaintiffs Section 11 allegations. The fact of a drop in the stock price after the appearance of a news story, without more, is insufficient to give rise to an inference that Ernst & Young’s negligence in certifying the June 1999 financial statements (as opposed to anything else) caused the stock price to drop — especially where, as here, there is no mention of Ernst & Young or the June 1999 audit opinion in any of the pre-July 18, 2002 articles mentioned in plaintiffs second amended complaint. Plaintiffs persistent failure to focus his “corrective disclosure” analysis pleading on purported misstatements by Ernst & Young — and, in the case of his Section 11 claim, on misstatements that were contained in one specific audit opinion, the June 1999 opinion — make it impossible to take that “analysis” seriously.
So the earliest “corrective disclosure” that could arguably be connected to the 1999 audit opinion is, as Judge Kram found, the Washington Post story that ran on July 18, 2002. And because that is the relevant corrective disclosure for Section 11 purposes, Amorosa’s Section 11 claim is doomed because he suffered no losses following July 18, 2002.
It is true that in a Section 11 case, a court presumes that harm occurred based upon the alleged misstatement, and the defendant must rebut the presumption of loss before it can prevail. Loss causation is not an element of the cause of action under Section 11, so the plaintiff need not plead it, as he had to with claims brought under Sections 10(b) or 14(a). See In re Giant Interactive Group, Inc. Sec. Litig.,
However, where it is clear, from the pleading and from facts that can be judicially noticed (i.e., the stock prices on the relevant dates), that the plaintiff incurred all his losses in AOLTW prior to the date of the corrective disclosure (July 18, 2002), a plaintiffs Section 11 claim can and should be dismissed at the pleading stage. See In re Merrill Lynch & Co., Inc. Research Reports Sec. Litig., 272
In this case, AOLTW’s stock price increased between July 18, 2002, and May 29, 2003. Therefore, it is clear from the face of the pleadings that plaintiff suffered no damages following the relevant corrective disclosure, and his Section 11 claim must be dismissed.
IV. Plaintiffs State Law Claims Are Preempted by SLUSA
Ernst & Young also argues that Amorosa’s state law claims for common law fraud, aiding and abetting common law fraud, and aiding and abetting breaches of fiduciary duty, should be dismissed because they are preempted by the SLUSA. (E & Y MTD at 12.) Ernst & Young argues in favor of preemption on the ground that Amorosa’s action arises from “the same operative facts” as the Lerach Complaint that Judge Kram previously adjudicated. (Id. at 13.) In fact, Amorosa’s complaint is identical in almost every way to the Lerach Complaint (and both are nearly identical to the main Class Action Complaint). And while Amorosa seeks damages for himself alone, if his case is aggregated with the cases brought by the Lerach Plaintiffs (or the main class action), all of the complaints considered collectively seek damages on behalf of more than 50 people. These facts are undisputed.
The parties disagree about whether Amorosa’s suit can be considered a “covered class action” because it “proceed [ed] as a single action” with certain other plaintiffs’ cases (including either the main class action or the lawsuits filed by the Lerach Plaintiffs). Ernst & Young argues that Amorosa’s lawsuit proceeded as “a single action” with certain other opt-out plaintiffs’ cases when Amorosa assented to a stay of litigation pending resolution of the motion to dismiss the class action complaint and that of one of those opt-outs. (Id. at 13-14) Ernst & Young notes that SLUSA must be interpreted broadly to effect the statute’s remedial purpose, and under a broad reading, the Amorosa’s lawsuit, the Lerach Plaintiffs’ case and the main class action were functionally a single action because Amorosa “obtained the benefit of [ ] coordination” through the litigation stay. (Id. at 13.)
Ernst & Young also alleges that Amorosa’s attorney, Christopher Gray, routinely engages in procedural shenanigans, pursuant to which he is able to circumvent the strictures of SLUSA by “requesting a stay of pleadings and discovery to allow for informal coordination without seeking formal joinder or consolidation.” (Id. at 14.) Specifically, the auditor points out that in Ventura v. AT & T Corp., No. 05 Civ. 5718,
A. Background of SLUSA
SLUSA is one of a handful of securities statutes passed in the late nineties that were “intended to promote uniformity in the securities markets.” Lander v. Hartford Life & Annuity Ins. Co.,
The PSLRA aimed to raise the pleading standards and instituting a mandatory stay of discovery “so that district courts could first determine the legal sufficiency of the claims in all securities class actions.” Lander,
SLUSA was enacted to close this loophole. The statute’s primary purpose was to make “federal court the exclusive venue for class actions alleging fraud in the sale of certain covered securities and by mandating that such class actions be governed exclusively by federal law.” Id. at 108 (citing 15 U.S.C. §§ 77p(b)-(c)). Accordingly, SLUSA’s preemptive scope reaches “any group of lawsuits filed in or pending in the same court and involving common questions of law or fact, in which — (I) damages are sought on behalf of more than 50 persons; and (II) the lawsuits are joined, consolidated, or otherwise proceed as a single action for any purpose.” 15 U.S.C. § 78bb(f)(5)(B)(ii).
B. The Finding of SLUSA Preemption in AOL II
In AOL II, the Lerach Plaintiffs had argued that their state law claims should
C. Relevant Precedent
Other courts in this District have not been shy to apply SLUSA to preempt state law claims when confronted with similar circumstances. For example, in In re WorldCom, Inc. Sec. Litig.,
Similarly, in Gordon Partners v. Blumenthal, No. 02 Civ. 7377,
In fact, it appears that only one court in this District has ever declined to apply SLUSA under circumstances akin to those presented here. See Ventura v. AT & T Corp., No. 05 Civ. 5718,
The two-page unpublished decision provides little detail about the basis of Judge Stanton’s conclusion regarding the procedural posture of the cases. As a result is of limited directional value for other courts in this District. Cf. Gordon,
Further, were the procedural posture of the case indistinguishable, Judge Stanton’s holding in Ventura would eviscerate SLUSA’s core provision, which defines a covered class action relevant part to include two or more “lawsuits [that] are joined, consolidated, or otherwise proceed as a single action for any purpose.” 15 U.S.C. § 78bb(f)(5)(B)(ii)(II) (emphasis added). To interpret this language as covering only lawsuits that are formally “joined or consolidated” would be to render the statute’s description of the latter category of covered actions — lawsuits that “otherwise proceed as a single action for any purpose”— entirely redundant. Such an interpretation would run counter to the canons of statutory construction, which require courts “to give effect, if possible, to every clause and word of a statute.” State St. Bank & Trust Co. v. Salovaara,
D. Amorosa’s State Law Claims
While Amorosa’s opt-out action was never formally coordinated or consolidated with that of the other opt-outs, as was the case in WorldCom I,
First, he filed a civil cover sheet identifying his case as “related” to the main class action, explaining that his “allegations on the securities fraud claim [were] identical to those made in the class action.” (Civil Cover Sheet filed by Dominic F. Amorosa, Form JS-44 at 3, Amorosa v. AOL Time Warner, Inc., No. 03 Civ. 3902 (S.D.N.Y. May 29, 2003) (emphasis added).) As a result, his case was assigned to Judge Kram who was handling all of the
Several additional facts alone compel a finding that Amorosa’s case falls under the ambit of SLUSA. He replaced his initial complaint with a first amended complaint that “incorporated by reference” more than 650 paragraphs (the equivalent of approximately 140 pages) from the “Second Amended Consolidated Class Action Complaint,” which was the main class action complaint in the case. (See Amorosa First Am. Compl. ¶ 1, Amorosa v. AOL Time Warner, Inc. (S.D.N.Y. Apr. 8, 2005) (listing paragraphs from the Main Class Action Complaint).) Then, he agreed to stay proceedings in his action pending resolution of a motion to amend the Class Action Complaint and motions to dismiss Stichting Pensioenfonds ABP’s opt-out complaint, on the ground that his complaint was — not surprisingly — “ substantially similar” to both the main class action complaint and the opt-out’s; Amorosa announced that he wished to avoid “burdening the Court with duplicative briefing on the same or similar issues.” See Order Granting Stay at 2.
Further, not only was Amorosa’s first amended complaint virtually identical to both the Lerach Complaint and the Class Action Complaint (most of which Amorosa’s complaint incorporated by reference), but he sought leave to amend his complaint only after he had obtained the benefit of briefing on motions to dismiss the Lerach Complaint. And he amended his complaint (for a second time) following disposition of the Lerach Plaintiffs’ claims. See AOL II,
Amorosa’s second amended complaint, which he filed after AOL II, contained literally hundreds of pages of allegations that can only be explained as having been copied and pasted from the Lerach Complaint that Judge Kram had just dismissed. Amorosa states that he amended his complaint to reflect the Supreme Court’s loss causation holding in Dura Pharm., Inc. v. Broudo,
Finally, although the litigation stay did not by its terms apply to the Lerach actions, which were sent to the Southern District of New York by the Judicial Panel on Multidistrict Litigation after Amorosa had entered into the stay, Ernst & Young took no action against Amorosa’s complaint for a year and a half after the class action settled. That is, when Ernst & Young moved to dismiss the Lerach Complaint in June 2006, it did not simultaneously move to dismiss Amorosa’s virtually identical complaint. Further, for ten months, there were no developments in the litigation as between Ernst & Young and Amorosa until March 2007, when Amorosa filed a motion for leave to amend his complaint for a second time.
SLUSA thus preempts Amorosa’s state law claims. This disposes of the remainder of Mr. Amorosa’s claims, and his complaint is dismissed in its entirety.
Y. Sanctions
A. Legal Standard
Defendant has moved pursuant to Federal Rule of Civil Procedure 11 for an award of sanctions against Amorosa’s attorney (Christopher J. Gray, P.C.), including its reasonable attorneys’ fees and costs incurred in bringing this action. Rule 11(b) of the Federal Rules of Civil Procedure provides that:
By presenting to the court a pleading, written motion, or other paper ... an attorney or unrepresented party certifies that to the best of the person’s knowledge, information, and belief, formed after an inquiry reasonable under the circumstances:
(1) it is not being presented for any improper purpose, such as to harass or to cause unnecessary delay or needlessly increase in the cost of litigation;
(2) the claims, defenses, and other legal contentions therein are warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversing of existing law or for establishing new law;
(3) the factual contentions have evidentiary support or, if specifically so identified, will likely have evidentiary support after a reasonable opportunity for further investigation or discovery; and
(4) the denials of factual contentions are warranted on the evidence or, if specifically so identified, are reasonably based on belief or a lack of information or belief.
In actions asserting federal securities violations, Rule 11 must be read in conjunction with the PSLRA’s sanction provisions, which state, in relevant part:
(c) Sanctions for abusive litigation
(1) Mandatory review by the court
In any private action arising under this chapter, upon final adjudication of the action, the court shall include in the record specific findings regarding compliance by each party and each attorney representing any party with each requirement of Rule 11(b) of the Federal Rules of Civil Procedure as to any complaint, responsive pleading, or dispositive motion.
(2) Mandatory sanctions
If the court makes a finding under paragraph (1) that a party or attorney violated any requirement of Rule 11(b) of the Federal Rules of Civil Procedure as to any complaint, responsive pleading, or dispositive motion, the court shall impose sanctions on such party or attorney in accordance with Rule 11 of the Federal Rules of Civil Procedure. Prior to making a finding that any party or attorney has violated Rule 11 of the Federal Rules of Civil Procedure, the court shall give such party or attorney notice and an opportunity to respond.
(A) In general
Subject to subparagraphs (B) and (C), for purposes of paragraph (2) [the mandatory sanctions provision], the court shall adopt a presumption that the appropriate sanction-—
(i) for failure of any responsive pleading or dispositive motion to comply with any requirement of Rule 11(b) of the Federal Rules of Civil Procedure is an award to the opposing party of the reasonable attorneys’ fees and other expenses incurred as a direct result of the violation; and
(ii) for substantial failure of any complaint to comply with any requirement of Rule 11(b) of the Federal Rules of Civil Procedure is an award to the opposing party of the reasonable attorneys’ fees and other expenses incurred in the action.
(B) Rebuttal evidence
The presumption described in sub-paragraph (A) may be rebutted only upon proof by the party or attorney against whom sanctions are to be imposed that — -
(i) the award of attorneys’ fees and other expenses will impose an unreasonable burden on that party or attorney and would be unjust, and the failure to make such an award would not impose a greater burden on the party in whose favor sanctions are to be imposed; or
(ii) the violation of Rule 11(b) of the Federal Rules of Civil Procedure was de minimis.
(C) Sanctions
If the party or attorney against whom sanctions are to be imposed meets its burden under subparagraph (B), the court shall award the sanctions that the court deems appropriate pursuant to Rule 11 of the Federal Rules of Civil Procedure.
15 U.S.C. § 78u-4(c).
Thus, the PSLRA requires district courts, at the conclusion of private actions arising under federal securities laws, to make Rule 11 findings as to each party and each attorney. See 15 U.S.C. § 78u-4(c)(l); see also Rombach v. Chang,
In Gurary v. Nu-Tech Bio-Med, Inc.,
Amorosa’s federal claims (which comprise half of his total claims) patently lack
However, this Court has not had the benefit of any briefing on sanctions under the PSLRA. In fact, this Court has had very little substantive briefing on sanctions at all; the briefs that purport to address Rule 11 appear to have been little more than a pretense for ad hominem attacks. As a result, this Court lacks sufficient information to determine, for example, whether an imposition of attorneys’ fees would be an unreasonable burden upon Mr. Gray, an issue this Court is required to make findings about under the PSLRA. See id.
Accordingly, the parties are ordered to provide a new round of briefing on sanctions on the following schedule: (1) Within 10 business days, Ernst & Young will provide an estimate of the reasonable attorneys’ fees it seeks; (2) Within 10 business days of receipt of Ernst & Young’s estimate, Mr. Gray will show cause (in 10 pages or less) why sanctions should not be imposed on him; his brief should address specifically, inter alia, whether the fees proposed by Ernst & Young would pose an unreasonable burden on him; (3) Within 5 business days of receipt of Mr. Gray’s brief, Ernst & Young shall respond (in 10 pages or less) or notify this Court that it does not intend to file a response.
All briefs submitted by the parties must be professional, engage in substantive legal analysis, and comply with the individual rules of this Court. If either brief fails to meet this standard, as the parties’ previous Rule 11 briefs did, this Court will not hesitate to strike that brief.
CONCLUSION
Defendant’s motion to dismiss (Docket No. 11) is granted in its entirely. Defendant Ernst & Young is instructed produce an estimate of the reasonable attorneys’ fees it seeks under Rule 11 within 10 business days of the date of this order. Plaintiffs attorney, Mr. Christopher Gray, is ordered to show cause (in 10 pages or less) why sanctions should not be imposed, and he should do so within 10 business days of receipt of the fee estimate. The Clerk of the Court should immediately remove the motion to dismiss (Docket No. 11) from the Court’s outstanding motion list.
This constitutes the decision and order of this Court.
Notes
. Judge Kram did not discuss lack of damage under Section 11 in AOL II,
The fact that Amorosa's lack of damage is dispositive also makes it unnecessary to analyze whether the radical change in the standard for pleading a viable claim for relief under Rule 8-a change ushered in by the Supreme Court’s opinions in Bell Atl. Corp. v. Twombly,
. SLUSA is codified in two separate sections of the federal securities laws, 15 U.S.C. § 77p (amending the Securities Act of 1933) and 15 U.S.C. § 78bb(f) (amending the Securities Exchange Act of 1934). Because SLUSA amended the 1933 and 1934 Acts in "substantially similar ways,” see Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit,