Reading is Fundamental: Plaintiff’s Counsel Sanctioned for False Allegation in Complaint (NY)

Plaintiff filed a shareholder dispute, alleging, in part, that the defendants made false and misleading statements regarding the financial condition of the subject company, causing plaintiff to invest to her detriment.

One of the allegations cited to internal e-mail correspondence among the defendants that took place on March 7, 2007, as support for the claim that the defendants had previous knowledge about the financial troubles and then disclosed contrary information to the public.

While litigating a motion to dismiss, plaintiff’s counsel revealed that he learned about the internal e-mails at issue in an article published in Business Spectator magazine. However, counsel subsequently realized that the reference in the article to “March 7” e-mails addressed 2008 e-mails and not 2007, as alleged by plaintiff. This was critical, because this e-mail exchange actually occurred after the company’s public collapse. Counsel conceded the allegation was false, but that it was unintentional.

Rule 11 of the Federal Rules of Civil Procedure requires that factual contentions in pleadings have evidentiary support. In order to comply with the rule, an attorney must make reasonable inquiries into the facts. Here, the Court focused on the fact that this was a “material allegation central to the viability of the entire pleading” — and thus the failure of the attorney to conduct any further inquiry into that fact was “an act of gross negligence bordering on recklessness.”

The Court found this was the type of conduct Rule 11 was meant to address, and imposed sanctions, including the granting of all of the defendant’s legal fees, pending a showing that such an award does not represent an “unreasonable burden.”

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http://www.nylj.com/nylawyer/adgifs/decisions/051410cote.pdf