FI L ED

U.S. COURT OF APPEAL S

EL EVENTH CI RCUI T

J UNE 30, 2010

J OHN L EY

CL ERK [ P U B L I S H ]

I N T H E U N I T E D S T A T E S C O U R T O F A P P E A L S

F O R T H E E L E V E N T H C I R C U I T

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A p p e a l s f

r o m t h e U n i t e d S t a t e s D i s t r i c t C o u r t

f o r t h e S o u t h e r n D i s t r i c t o f F l o r i d a

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ ( J u n e 3 0

, 2 0 1 0 )

B e f o r e T J O F L A T a n d B L A C K

, C i r c u i t J u d g e s

, a n d E V A N S

, D i s t r i c t J u d g e

. *

B L A C K

, C i r c u i t J u d g e :

Honora ble Orinda

D. Evans, United States D istrict J udg e for the Northe rn District of *

Geor g ia, sitting by

desig nation.T h i s c a s e c o m e s t o u s a s a n a p p e a l f r o m t h e d i s m i s s a l o f a p p e l l a n t L

. A l a n

J a c o b y ’ s p u t a t i v e c l a s s a c t i o n l a w s u i t

. I n h i s S e c o n d A m e n d e d C o m p l a i n t

, J a c o b y

a l l e g e d R e l a t i o n S e r v e M e d i a

, I n c

. a n d e l e v e n o f i t s d i r e c t o r s a n d e m p l o y e e s 1 2

v i o l a t e d S e c t i o n s 1 0 ( b ) a n d 2 0 ( a ) o f t h e S e c u r i t i e s E x c h a n g e A c t o f 1 9 3 4 b y f a i l i n g

t o d i s c l o s e

, b e f

o r e t h e c o m p a n y w e n t p u b l i c

, t h a t $ 2

, 0 0 0

, 0 0 0 i n s t o c k h a d b e e n

p r i v a t e l y o f

f e r e d f o r s a l e b y u n r e g i s t e r e d b r o k e r s i n t e n d i f f e r e n t s t a t e s

. I n t h e

d i s t r i c t c o u r t

, J a c o b y j o i n e d c o

- p l a i n t i f f R i c h a r d T h o m p s o n

, w h o h a d p r e v i o u s l y

i n i t i a t e d t h i s a c t i o n

. T h o m p s o n r e p r e s e n t e d a s u b c l a s s s e e k i n g r e c o v e r y p r e m i s e d

o n s t a t e l a w c l a i m s i n t h e S e c o n d A m e n d e d C o m p l a i n t

. A f t e r t w i c e a l l o w i n g t h e

p l a i n t i f f s t o a m e n d t h e i r c o m p l a i n t

, t h e d i s t r i c t c o u r t d i s m i s s e d w i t h p r e j u d i c e

J a c o b y ’ s § 1 0 ( b ) a n d § 2 0 ( a ) c l a i m s p u r s u a n t t o F e d

. R

. C i v

. P

. 1 2 ( b ) ( 6 )

. T h e

d i s t r i c t c o u r t f

o u n d t h e a l l e g a t i o n s o f t h e S e c o n d A m e n d e d C o m p l a i n t f a i l e d t o

The princ ipal defe ndant in this case, Rela tionServe Media, I nc. (Rela tionServe), is an 1

internet mar

keting firm that maintains its principal place of business in For t L auder dale, F lorida.

RelationServe a

nd Chubasco Resourc es Corpora tion merg ed on June 13, 2005. Following the

merg er, Chubasc o Resource s Corporation cha ng ed its name to RelationServe . On J uly 26, 2006,

RelationServe c hang ed its name to SendTec , I nc. For purposes of this opinion, we re fer to

SendTec , I nc. as Rela tionServe.

These de fenda

nts, with the ex ception of one , are (or we re) office rs and/or dire ctors of 2

RelationServe ( Offic ers) . Be tween June 2005 and F ebrua ry 2006, Danielle K arp se rved a s

President, Scott Hirsch ser ved as Chief

Oper ating Offic er, a

nd Adam Wasserma

n serve d as

Chief Fina

ncial Of fice r (CF O). Er ic Obec k has ser ved as Pre sident since F ebrua ry 2006.

Mandee Adler se rved a s Chief Executive Offic er ( CEO) betwe en June 2005 and Novembe r

2005, followed by

Shawn McNa

mara as interim CEO and Vic e President until J une 2006. I n

Fe bruar y 2006, Paul Solt off be came CEO, and Dona ld Gould beca me CFO. Warr en Musser w as

appointed Chairman of

the B oard of

Direc tors in J une 2005 and se rved until Octobe r 2005, at

which point Michae l Bra

usser be came Chairman of the Boa rd and se rved until September 2006.

Scott Young w as the founde r and pr esident of Chubasc o and ser ved in that ca

pacity until J une

13, 2005.s a t i s f

y t h e h e i g h t e n e d p l e a d i n g r e q u i r e m e n t s o f t h e P r i v a t e S e c u r i t i e s L i t i g a t i o n

R e f o r m A c t ( P S L R A ) a n d R u l e 9 ( b ) o f t h e F e d e r a l R u l e s o f C i v i l P r o c e d u r e

. T h e 3

c o u r t t h e n d i s m i s s e d T h o m p s o n ’ s s t a t e l a w c l a i m s w i t h o u t p r e j u d i c e a f t e r

c o n c l u d i n g i t n o l o n g e r h a d s u p p l e m e n t a l j u r i s d i c t i o n o v e r t h o s e c l a i m s

. I n

s e p a r a t e o r d e r s

, o n t h r e e d i f f e r e n t o c c a s i o n s

, t h e d i s t r i c t c o u r t d e n i e d d e f e n d a n t

D a n i e l l e K a r p ’ s m o t i o n s f o r a t t o r n e y s ’ f

e e s a n d R u l e 1 1 s a n c t i o n s

.

J a c o b y a p p e a l s t h e d i s m i s s a l o f h i s f e d e r a l s e c u r i t i e s

- l a w p u t a t i v e c l a s s

a c t i o n

. A d d i t i o n a l l y

, K a r p c r o s s

- a p p e a l s t h e d e n i a l o f h e r r e q u e s t f o r R u l e 1 1

s a n c t i o n s a n d a t t o r n e y s ’ f e e s

. B e c a u s e w e c o n c l u d e t h e S e c o n d A m e n d e d 4

C o m p l a i n t f

a i l s t o s a t i s f

y t h e s t a n d a r d f

o r p l e a d i n g s c i e n t e r

, w e a f f i r m t h e d i s t r i c t

c o u r t ’ s d i s m i s s a l o f J a c o b y ’ s § 1 0 ( b ) a n d § 2 0 ( a ) c l a i m s

. W i t h r e g a r d t o s a n c t i o n s

,

w e r e m a n d t o t h e d i s t r i c t c o u r t t o m a k e f i n d i n g s i n a c c o r d a n c e w i t h t h e P S L R A

.

The PSL RA applies to private a ctions seeking relief on the basis of a lleg ed violations 3

of the Sec urities Act of 1933 a nd the Secur ities Ex chang e Ac t of 1934. See 15 U.S.C. § 77z-1(c)

(1933 Ac t) and 15 U.S.C. § 78u-4(c ) (1934 Ac t).

Kar p also cross- appea ls the dismis sal of Thompson’s state la w claims, conte nding she 4

is ag g rieve d beca

use Thompson re- filed the c laims in state court and she “is now fa cing the same

frivolous alleg ations.” Thompson’s state c ourt ac tion has subsequently been dismissed with

prejudice , so we de cline to consider this aspect of K arp’ s cross-a ppeal.

4I

. F A C T U A L A L L E G A T I O N S 5

O n M a y 2 4

, 2 0 0 5

, R e l a t i o n S e r v e e n t e r e d i n t o a n I n d e p e n d e n t C o n s u l t i n g

A g r e e m e n t w i t h S u m m i t F i n a n c i a l P a r t n e r s

, L L C ( S u m m i t )

. U n d e r t h e a g r e e m e n t

,

S u m m i t s o l d s h a r e s o f R e l a t i o n S e r v e t h r o u g h a p r i v a t e o f f e r i n g t o i n v e s t o r s i n

e x c h a n g e f

o r 1

, 0 5 0

, 0 0 0 s h a r e s o f s t o c k a n d a 7 % s e l l e r ’ s f e e

.

O n J u n e 1 4

, 2 0 0 5

, R e l a t i o n S e r v e f i l e d a F o r m 1 0

- Q S B q u a r t e r l y s t a t e m e n t

,

i t s f i r s t S e c u r i t i e s a n d E x c h a n g e C o m m i s s i o n ( S E C ) f i l i n g

, i n d i c a t i n g C h u b a s c o

R e s o u r c e s C o r p o r a t i o n ( C h u b a s c o ) h a d c o m p l e t e d a r e v e r s e a c q u i s i t i o n o f

R e l a t i o n S e r v e

. R e l a t i o n S e r v e M e d i a I n c

. Q u a r t e r l y R e p o r t

– S m a l l B u s i n e s s ( F o r m

1 0

- Q S B )

, a t 5 ( J u n e 1 4

, 2 0 0 5 )

. O n J u n e 1 6

, 2 0 0 5

, R e l a t i o n S e r v e f i l e d a F o r m 8

- K 6

a n d d i s c l o s e d

, f

o r t h e f i r s t t i m e

, t h e I n d e p e n d e n t C o n s u l t i n g A g r e e m e n t w i t h 7

S u m m i t

. R e l a t i o n S e r v e M e d i a I n c

. , C u r r e n t R e p o r t ( F o r m 8

- K )

, a t 2 9 ( J u n e 1 6

,

2 0 0 5 )

. O n J u n e 2 8

, 2 0 0 5

, t w e l v e d a y s a f t e r R e l a t i o n S e r v e d i s c l o s e d i t s 8

I n considering a motion to dism iss, we ac cept a ll well-pleade d fac ts as true, a nd we 5

make a ll reasona

ble infer ence s in favor of the plaintiff. Bryant v. Av ado Brands, Inc. , 187 F.3d

1271, 1273 n.1 (11th Cir 1999)). B eca use the Sec ond Amended Complaint alleg es violations of

secur ities laws, we may

also take judicia l notice of re levant SEC filings. Id. at 1278.

RelationServe ha d no duty to file secur ities filings prior to the me rg er w ith Chubasco. 6

A full copy

of the Ag ree ment betwee n RelationServe a nd Summi t was attac hed to the 7

SEC fili ng as an e x hibit; t his attachment include d lang uag e which e x plicitly noted Summit was

not acting as a br oker/de aler for Rela tionServe, but rathe r ser ving a s a promoter

of the c ompany

.

The Sec ond Amended Complaint omitted any ref ere nce to Rela tionServe’s June 16, 8

2005, Current Repor

t.

5r e l a t i o n s h i p w i t h S u m m i t

, R i c h a r d F

. T h o m p s o n

, a n I n d i a n a r e s i d e n t

, p u r c h a s e d

5 0

, 0 0 0 s h a r e s a t $ 2

. 0 0 p e r s h a r e

. T o n y A l t a v i l l a

, a S u m m i t e m p l o y e e

, h a d a d v i s e d

T h o m p s o n a b o u t t h e p r i v a t e o f f e r i n g a n d h e l p e d f

a c i l i t a t e T h o m p s o n ’ s p u r c h a s e o f

t h e s h a r e s

. O n J u n e 3 0

, 2 0 0 5

, R e l a t i o n S e r v e b e c a m e a p u b l i c l y

- t r a d e d c o m p a n y

a n d r e p o r t e d t o t h e S E C i t h a d r e c e i v e d $ 2

, 0 0 0

, 0 0 0 i n s u b s c r i p t i o n s t h r o u g h a

p r i v a t e o f

f e r i n g

. T h a t s a m e d a y

, R e l a t i o n S e r v e l i s t e d i t s n o n

- r e s t r i c t e d s h a r e s o n 9

t h e O v e r t h e C o u n t e r B u l l e t i n B o a r d

. O n J u l y 2 2

, J u l y 2 6

, a n d A u g u s t 1 2

, 2 0 0 5

, L

.

A l a n J a c o b y p u r c h a s e d a t o t a l o f 1 0

, 0 0 0 s h a r e s o f R e l a t i o n S e r v e o n t h e o p e n

m a r k e t

.

O n M a r c h 3

, 2 0 0 6

, T h o m p s o n f i l e d a l a w s u i t i n I n d i a n a s t a t e c o u r t a g a i n s t

R e l a t i o n S e r v e a n d s e v e r a l o f t h e d e f e n d a n t s n a m e d i n t h i s f

e d e r a l a c t i o n

.

U n r e l a t e d t o t h i s l i t i g a t i o n

, R e l a t i o n S e r v e f i l e d a r e g i s t r a t i o n s t a t e m e n t w i t h t h e

S E C o n M a r c h 2 0

, 2 0 0 6

. T h i s s t a t e m e n t d i d n o t m e n t i o n t h e T h o m p s o n l i t i g a t i o n

.

O n M a y 1

, 2 0 0 6

, R e l a t i o n S e r v e a m e n d e d t h e r e g i s t r a t i o n s t a t e m e n t t o p r o v i d e t h e

p u b l i c w i t h n o t i c e o f t h e l a w s u i t

, a n d i n d i c a t e d i t b e l i e v e d t h e s u i t l a c k e d m e r i t

. I n

The re port filed with the SEC disclosed RelationServe “ completed a private of

fer ing of 9

Units to ‘acc redited inve stors,’” Rela tionServe “r ece ived and a cce pted $2,000,000 of

subscriptions in the Offe ring ,” and “ [t ]he Units were issued in re liance on a n exemption from

reg istration provided under Reg ulation D of the Sec urities Act and a re r estricted se curities as

define d by

the Secur ities Act.” RelationServe Media, I nc., Curre nt Report (F orm 8-K) , at 2

(June 30, 2005).

6r e s p o n s e t o a n i n q u i r y f r o m t h e S E C r e q u e s t i n g m o r e d e t a i l s a b o u t t h e l a w s u i t

,

R e l a t i o n S e r v e u p d a t e d i t s f i l i n g s o n M a y 2 3

, 2 0 0 6

. 1 0

O n M a y 2 3

, 2 0 0 6

, R e l a t i o n S e r v e s t o c k w a s v a l u e d a t $ 1

. 3 5 p e r s h a r e

. T h r e e

w e e k s l a t e r

, o n J u n e 1 5

, 2 0 0 6

, t h e s t o c k w a s v a l u e d a t $ 0

. 6 3 p e r s h a r e

. J a c o b y

a t t r i b u t e s t h i s d e c l i n e i n v a l u e t o t h e p u b l i c d i s c l o s u r e o f T h o m p s o n ’ s l a w s u i t

.

I I

. P R O C E E D I N G S I N T H E D I S T R I C T C O U R T

O n A u g u s t 2 8

, 2 0 0 6

, T h o m p s o n i n i t i a t e d t h i s a c t i o n b y f i l i n g a c l a s s a c t i o n

i n t h e U n i t e d S t a t e s D i s t r i c t C o u r t f o r t h e S o u t h e r n D i s t r i c t o f F l o r i d a

.

R e l a t i o n S e r v e a n d t h e o t h e r d e f e n d a n t s m o v e d t o d i s m i s s t h e c o m p l a i n t ; t h e

d i s t r i c t c o u r t t h e n d e n i e d t h e s e m o t i o n s a n d o r d e r e d t h a t T h o m p s o n f i l e a n

a m e n d e d c o m p l a i n t

. O n N o v e m b e r 1 3

, 2 0 0 6

, T h o m p s o n f i l e d t h e F i r s t A m e n d e d

C o m p l a i n t

, w h i c h a d d e d J a c o b y a s a c o

- p l a i n t i f f

. T h e d e f

e n d a n t s a g a i n m o v e d t o

d i s m i s s

, a n d o n M a r c h 6

, 2 0 0 7

, t h e d i s t r i c t c o u r t d i s m i s s e d t h e a m e n d e d c o m p l a i n t

w i t h o u t p r e

j u d i c e

.

The May

23 amendment state d, in part, “[t] he Company intends to file a motion to 1 0

dismiss this action beca

use the shar es did not need to be reg istered unde r I ndiana L aw, a s they

wer e exempt from re g istration as a ‘f eder al cove red se curity .’” Rela tionServe Media, I nc.,

Amendment No. 2 to F orm SB-2 Reg istration Statement (For m SB-2/A), a t 64-65 (May 23,

2006). The a

mendment also noted “ Mr. Altavilla did not sell shares on the Company ’s

behalf [,] ” althoug h he “did r ece ive, in addition to other compensa tion, a finder’ s fee in the

amount of 7% of

total gr oss funding provided for introductions made by

him to investors not

alre ady having a pre exis ting r elationship with the Company .” Id.

7O n M a r c h 1 9

, 2 0 0 7

, T h o m p s o n a n d J a c o b y f i l e d t h e S e c o n d A m e n d e d

C o m p l a i n t

, r a i s i n g c l a i m s f o r t w o p u t a t i v e c l a s s e s : o n e

, l e d b y T h o m p s o n

, w h i c h

i n c l u d e d a l l p u r c h a s e r s o f s e c u r i t i e s t h r o u g h u n r e g i s t e r e d b r o k e r / d e a l e r s o f

R e l a t i o n S e r v e

, a n d a n o t h e r

, l e d b y J a c o b y

, w h i c h i n c l u d e d a l l p u r c h a s e r s w h o

b o u g h t R e l a t i o n S e r v e s t o c k o n t h e o p e n m a r k e t p r i o r t o M a y 2 3

, 2 0 0 6

. D e f e n d a n t s

t h e n m o v e d t o d i s m i s s t h e S e c o n d A m e n d e d C o m p l a i n t f o r f a i l u r e t o s t a t e a c l a i m

,

a n d t h i s t i m e t h e d i s t r i c t c o u r t g r a n t e d t h e m o t i o n w i t h p r e j u d i c e

, c o n c l u d i n g

J a c o b y h a d f

a i l e d t o s t a t e a c l a i m f

o r a v i o l a t i o n o f e i t h e r § 1 0 ( b ) o r § 2 0 ( a ) o f t h e

S e c u r i t i e s A c t

. T h e d i s t r i c t c o u r t a l s o d i s m i s s e d w i t h o u t p r e j u d i c e T h o m p s o n ’ s

s t a t e l a w c l a i m s f

o r l a c k o f s u b

j e c t m a t t e r j u r i s d i c t i o n

.

O n c e b e f o r e a n d t w i c e a f

t e r t h e d i s t r i c t c o u r t d i s m i s s e d t h e S e c o n d

A m e n d e d C o m p l a i n t

, d e f e n d a n t K a r p m o v e d f

o r R u l e 1 1 s a n c t i o n s a n d a t t o r n e y s ’

f e e s

, c o n t e n d i n g t h e c l a i m s a g a i n s t h e r w e r e f r i v o l o u s a n d d e m o n s t r a t e d a n u t t e r

l a c k o f l e g a l o r f

a c t u a l i n v e s t i g a t i o n

. T h e d i s t r i c t c o u r t d e n i e d t h e m o t i o n s i n t h r e e

s e p a r a t e o r d e r s

. T h i s a p p e a l a n d c r o s s

- a p p e a l e n s u e d

.

I I I

. D I S C U S S I O N

O u r d i s c u s s i o n i s d i v i d e d i n t o t h r e e p a r t s

. F i r s t

, w e a d d r e s s w h e t h e r t h e

S e c o n d A m e n d e d C o m p l a i n t s a t i s f i e s t h e s t a n d a r d f

o r p l e a d i n g s c i e n t e r

. S e c o n d

,

w e a d d r e s s w h e t h e r t h e S e c o n d A m e n d e d C o m p l a i n t s t a t e s a c l a i m o f s e c o n d a r y

8l i a b i l i t y u n d e r § 2 0 ( a )

. T h i r d

, w e a d d r e s s t h e d i s t r i c t c o u r t ’ s r e f u s a l t o i m p o s e

R u l e 1 1 s a n c t i o n s a n d a w a r d a t t o r n e y s ’ f e e s

.

A

. S c i e n t e r P l e a d i n g R e q u i r e m e n t s

W e r e v i e w t h e g r a n t o f a m o t i o n t o d i s m i s s f o r f a i l u r e t o s t a t e a c l a i m u n d e r

F e d

. R

. C i v

. P

. 1 2 ( b ) ( 6 ) d e n o v o

. F i n

. S e c

. A s s u r a n c e

, I n c

. v

. S t e p h e n s

, I n c

. , 5 0 0

F

. 3 d 1 2 7 6

, 1 2 8 2 ( 1 1 t h C i r

. 2 0 0 7 )

.

I n C o u n t I

, J a c o b y a s s e r t e d a v i o l a t i o n o f § 1 0 ( b ) o f t h e S e c u r i t i e s A c t a n d

S E C R u l e 1 0 b

- 5

. S e c t i o n 1 0 ( b ) o f t h e S e c u r i t i e s A c t m a k e s i t u n l a w f u l t o “ u s e o r

e m p l o y

, i n c o n n e c t i o n w i t h t h e

. . . s a l e o f a n y s e c u r i t y

. . . a n y m a n i p u l a t i v e o r

d e c e p t i v e d e v i c e o r c o n t r i v a n c e

. ” 1 5 U

. S

. C

. § 7 8 j ( b )

. P u r s u a n t t o § 1 0 ( b )

, t h e

S E C p r o m u l g a t e d R u l e 1 0 b

- 5

, w h i c h m a k e s i t u n l a w f u l

, a m o n g o t h e r t h i n g s

, “ t o

m a k e a n y u n t r u e s t a t e m e n t o f a m a t e r i a l f a c t o r t o o m i t t o s t a t e a m a t e r i a l f a c t

n e c e s s a r y i n o r d e r t o m a k e t h e s t a t e m e n t s m a d e

, i n t h e l i g h t o f t h e c i r c u m s t a n c e s

u n d e r w h i c h t h e y w e r e m a d e

, n o t m i s l e a d i n g

. ” 1 7 C

. F

. R

. § 2 4 0

. 1 0 b

- 5 ( b )

.

T o s t a t e a c l a i m f

o r a v i o l a t i o n o f § 1 0 ( b )

, a p l a i n t i f f m u s t a l l e g e : ( 1 ) t h e

e x i s t e n c e o f a m a t e r i a l m i s r e p r e s e n t a t i o n ( o r o m i s s i o n )

, ( 2 ) m a d e w i t h s c i e n t e r

( i

. e

. , “ a w r o n g f

u l s t a t e o f m i n d ” )

, ( 3 ) i n c o n n e c t i o n w i t h t h e p u r c h a s e o r s a l e o f a n y

s e c u r i t y

, ( 4 ) o n w h i c h t h e p l a i n t i f f r e l i e d

, a n d ( 5 ) w h i c h w a s c a u s a l l y c o n n e c t e d t o

( 6 ) t h e p l a i n t i f

f ’ s e c o n o m i c l o s s

. D u r a P h a r m

. I n c

. v

. B r o u d o

, 5 4 4 U

. S

. 3 3 6

, 3 4 1

-

94 2

, 1 2 5 S

. C t

. 1 6 2 7

, 1 6 3 1 ( 2 0 0 5 ) ; s e e a l s o B r y a n t v

. A v a d o B r a n d

s

, I n c

. , 1 8 7 F

. 3 d

1 2 7 1

, 1 2 8 1 ( 1 1 t h C i r

. 1 9 9 9 ) ( e l a b o r a t i n g o n t h e s c i e n t e r r e q u i r e m e n t )

. B e c a u s e 1 1

R u l e 1 0 b

- 5 s o u n d s i n f

r a u d

, t h e p l a i n t i f

f m u s t p l e a d t h e e l e m e n t s o f i t s v i o l a t i o n

w i t h p a r t i c u l a r i t y

. S e e M i z z a r o v

. H

o m e D e p o t

, I n c

. , 5 4 4 F

. 3 d 1 2 3 0

, 1 2 3 7 ( 1 1 t h

C i r

. 2 0 0 8 ) ( s t a t i n g R u l e 9 ( b ) r e q u i r e s s e c u r i t i e s f r a u d c o m p l a i n t s “ t o s t a t e w i t h

p a r t i c u l a r i t y t h e c i r c u m s t a n c e s c o n s t i t u t i n g f r a u d ” )

.

W h e n a § 1 0 ( b ) c l a i m i s b r o u g h t b y a p r i v a t e l i t i g a n t

, i t i s s u b j e c t t o t h e

P S L R A

, u n d e r w h i c h a p l a i n t i f f m u s t “ s t a t e w i t h p a r t i c u l a r i t y f a c t s g i v i n g r i s e t o a

s t r o n g i n f

e r e n c e t h a t t h e d e f

e n d a n t a c t e d w i t h t h e r e q u i r e d s t a t e o f m i n d

. ” 1 5

U

. S

. C

. § 7 8 u

- 4 ( b ) ( 2 )

. I n t h i s c o n t e x t

, a “ s t r o n g i n f e r e n c e ” o f s c i e n t e r i s o n e t h a t i s

“ m o r e t h a n m e r e l y p l a u s i b l e o r r e a s o n a b l e

— i t m u s t b e c o g e n t a n d a t l e a s t a s

c o m p e l l i n g a s a n y o p p o s i n g i n f e r e n c e o f n o n f

r a u d u l e n t i n t e n t

. ” T

e l l a b s

, I n c

. v

.

M a k o r I s s u e s & R i

g h t s

, L t d

. , 5 5 1 U

. S

. 3 0 8

, 3 1 4

, 1 2 7 S

. C t

. 2 4 9 9

, 2 5 0 4

- 0 5 ( 2 0 0 7 )

.

T h r e e g u i d e l i n e s g o v e r n o u r r e v i e w : c o u r t s m u s t ( 1 ) “ a c c e p t a l l f a c t u a l a l l e g a t i o n s

i n t h e c o m p l a i n t a s t r u e

, ” ( 2 ) “ c o n s i d e r t h e c o m p l a i n t i n i t s e n t i r e t y ” a n d d e t e r m i n e

“ w h e t h e r a l l o f t h e f

a c t s a l l e g e d

, t a k e n c o l l e c t i v e l y

, g i v e r i s e t o a s t r o n g i n f e r e n c e

o f s c i e n t e r

, ” a n d ( 3 ) “ t a k e i n t o a c c o u n t p l a u s i b l e o p p o s i n g i n f e r e n c e s

. ” T

e l l a b s

,

Be cause we hold the Sec ond Amended Complaint fails to satisfy the standar d for 1 1

pleading scienter , we do not re ach the questions of whethe r the Sec ond Amended Complaint

adequately

pleads the othe r ele ments of a § 10( b) cla im.

105 5 1 U

. S

. a t 3 2 2

- 2 3

, 1 2 7 S

. C t

. a t 2 5 0 9 ; s e e a l s o R o s e n b e r

g v

. G o u l d

, 5 5 4 F

. 3 d 9 6 2

,

9 6 5 ( 1 1 t h C i r

. 2 0 0 9 )

. M o r e o v e r

, “ s c i e n t e r m u s t b e f o u n d w i t h r e s p e c t t o e a c h

d e f e n d a n t a n d w i t h r e s p e c t t o e a c h a l l e g e d v i o l a t i o n o f t h e s t a t u t e

. ” P h i l l i p s v

.

S c i e n t i f i c

- A t l a n t a

, I

n c

. , 3 7 4 F

. 3 d 1 0 1 5

, 1 0 1 7

- 1 8 ( 1 1 t h C i r

. 2 0 0 4 )

.

A l t h o u g h t h e P S L R A i m p o s e s a h e i g h t e n e d s t a n d a r d f o r p l e a d i n g s c i e n t e r

, i t

d o e s n o t a l t e r t h e s u b s t a n t i v e i n t e n t r e q u i r e m e n t s n e c e s s a r y t o e s t a b l i s h a § 1 0 ( b )

a n d R u l e 1 0 b

- 5 v i o l a t i o n

. M i z z a r o

, 5 4 4 F

. 3 d a t 1 2 3 8

. I n t h i s C i r c u i t

, § 1 0 ( b ) a n d

R u l e 1 0 b

- 5 r e q u i r e a s h o w i n g o f e i t h e r a n “ i n t e n t t o d e c e i v e

, m a n i p u l a t e

, o r

d e f r a u d

, ” o r “ s e v e r e r e c k l e s s n e s s

. ” I d

. ( q u o t i n g B r

y a n t

, 1 8 7 F

. 3 d a t 1 2 8 2 )

. A n

a l l e g a t i o n o f “ s e v e r e r e c k l e s s n e s s ” m u s t s a t i s f y a d e m a n d i n g s t a n d a r d :

S e v e r e r e c k l e s s n e s s i s l i m i t e d t o t h o s e h i g h l y u n r e a s o n a b l e o m i s s i o n s

o r m i s r e p r e s e n t a t i o n s t h a t i n v o l v e n o t m e r e l y s i m p l e o r e v e n

i n e x c u s a b l e n e g l i g e n c e

, b u t a n e x t r e m e d e p a r t u r e f r o m t h e s t a n d a r d s

o f o r d i n a r y c a r e

, a n d t h a t p r e s e n t a d a n g e r o f m i s l e a d i n g b u y e r s o r

s e l l e r s w h i c h i s e i t h e r k n o w n t o t h e d e f e n d a n t o r s o o b v i o u s t h a t t h e

d e f e n d a n t m u s t h a v e b e e n a w a r e o f i t

.

B r y a n t

, 1 8 7 F

. 3 d a t 1 2 8 2 n

. 1 8

. A c c o r d i n g l y

, t o s u r v i v e a m o t i o n t o d i s m i s s

,

J a c o b y “ m u s t ( i n a d d i t i o n t o p l e a d i n g a l l o f t h e o t h e r e l e m e n t s o f a § 1 0 ( b ) c l a i m )

p l e a d ‘ w i t h p a r t i c u l a r i t y f a c t s g i v i n g r i s e t o a s t r o n g i n f e r e n c e ’ t h a t t h e d e f

e n d a n t s

e i t h e r i n t e n d e d t o d e f

r a u d i n v e s t o r s o r w e r e s e v e r e l y r e c k l e s s w h e n t h e y m a d e t h e

a l l e g e d l y m a t e r i a l l y f

a l s e o r i n c o m p l e t e s t a t e m e n t s

. ” M i z z a r o

, 5 4 4 F

. 3 d a t 1 2 3 8

.

11T h e S e c o n d A m e n d e d C o m p l a i n t a l l e g e s R e l a t i o n S e r v e d i d n o t d i s c l o s e a

b r o k e r w a s i n v o l v e d i n t h e s e c u r i t i e s s a l e t o h i d e t h e f a c t t h a t R e l a t i o n S e r v e s o l d

s e c u r i t i e s t h r o u g h u n r e g i s t e r e d b r o k e r s

. F u r t h e r

, t h e S e c o n d A m e n d e d C o m p l a i n t

a s s e r t s t h i s a c t o f h i d i n g R e l a t i o n S e r v e ’ s u s e o f a b r o k e r “ c o u l d n o t h a v e b e e n

p e r p e t r a t e d o v e r a s u b s t a n t i a l p e r i o d o f t i m e

. . . w i t h o u t t h e k n o w l e d g e a n d

c o m p l i c i t y o f t h e

. . . i n d i v i d u a l D e f e n d a n t s

. ” V i e w e d h o l i s t i c a l l y

, t h e S e c o n d

A m e n d e d C o m p l a i n t a l l e g e s t h e f o l l o w i n g f

a c t s a s s u p p o r t i n g a r e a s o n a b l e

i n f e r e n c e o f s c i e n t e r : ( 1 ) t e n o f t h e i n d i v i d u a l d e f e n d a n t s “ s i g n e d [ o r a u t h o r i z e d ]

o n e o r m o r e c e r t i f

i c a t i o n [ s ] p u r s u a n t t o t h e S a r b a n e s

- O x l e y A c t t h a t i m p e r m i s s i b l y

o m i t t e d m a t e r i a l f

a c t s ; ” ( 2 ) e a c h i n d i v i d u a l d e f e n d a n t h e l d a m a n a g e m e n t p o s i t i o n

a t R e l a t i o n S e r v e ; ( 3 ) e a c h i n d i v i d u a l d e f e n d a n t w a s “ i n v o l v e d i n t h e d r a f t i n g

,

p r o d u c i n g

, r e v i e w i n g

, a n d / o r d i s s e m i n a t i o n o f m i s l e a d i n g s t a t e m e n t s a n d [ w a s ]

a w a r e [ o f

]

— o r r e c k l e s s l y d i s r e g a r d e d

— t h e f a c t t h a t m i s l e a d i n g s t a t e m e n t s w e r e

b e i n g i s s u e d a n d a p p r o v e d o r r a t i f i e d t h e s e s t a t e m e n t s ; ” ( 4 ) e a c h i n d i v i d u a l

d e f e n d a n t

, “ b y v i r t u e o f [ h i s o r h e r ] r e c e i p t o f i n f o r m a t i o n

. . . , c o n t r o l o v e r o r

r e c e i p t o f R e l a t i o n S e r v e [ ’ s ] m a t e r i a l l y m i s l e a d i n g s t a t e m e n t s a n d / o r [ h i s o r h e r ]

a s s o c i a t i o n s w i t h R e l a t i o n S e r v e

. . . [ w a s a n ] a c t i v e a n d c u l p a b l e p a r t i c i p a n t [ ] ; ” ( 5 )

s e v e r a l i n d i v i d u a l d e f

e n d a n t s s i g n e d S E C f

o r m s “ t h a t f

a i l e d t o i n d i c a t e

12R e l a t i o n S e r v e h a d c o n t r a c t e d w i t h S u m m i t ; ” a n d ( 6 ) t h e r e w e r e “ a c c o u n t i n g

i r r e g u l a r i t i e s ” i n R e l a t i o n S e r v e ’ s f i n a n c i a l s t a t e m e n t s

.

T h e s e c o n c l u s o r y a l l e g a t i o n s a r e i n s u f f i c i e n t t o e s t a b l i s h a “ s t r o n g i n f e r e n c e

t h a t t h e d e f

e n d a n t s a c t e d w i t h t h e r e q u i r e d s t a t e o f m i n d

. ” S e e T e l l a b s

, 5 5 1 U

. S

.

a t 3 1 4

, 1 2 7 S

. C t

. a t 2 5 0 4

. T h e i n f e r e n c e t h a t t h e i n d i v i d u a l d e f e n d a n t s p u r p o s e l y

f a i l e d t o d i s c l o s e t h e u s e o f u n r e g i s t e r e d b r o k e r s t o m i s l e a d t h e p u b l i c r e g a r d i n g

t h e c o m p a n y ’ s w o r t h i s n o t a s c o m p e l l i n g a s t h e c o m p e t i n g i n f e r e n c e t h a t t h e

d e f e n d a n t s d i d n o t d i s c l o s e i t s u s e o f u n r e g i s t e r e d b r o k e r s b e c a u s e t h e b r o k e r s

w e r e e x e m p t f

r o m r e g i s t r a t i o n

. W i t h o u t a n a l l e g a t i o n t h a t a n y o f t h e n a m e d

d e f e n d a n t s k n e w t h e S u m m i t e m p l o y e e s ( 1 ) w e r e n o t r e g i s t e r e d b r o k e r s a n d ( 2 )

w e r e r e q u i r e d t o b e r e g i s t e r e d b r o k e r s

, w e c a n n o t c o n c l u d e t h e i n f e r e n c e o f

n e f a r i o u s w r o n g d o i n g i s “ a t l e a s t a s c o m p e l l i n g a s a n y o p p o s i n g i n f e r e n c e o f

n o n f r a u d u l e n t i n t e n t

. ” S e e i d

.

E v e n i f t h e S e c o n d A m e n d e d C o m p l a i n t a l l e g e d t h e s a l e s w e r e n o t e x e m p t

t r a n s a c t i o n s

, i t w o u l d s t i l l n o t b e a “ c o g e n t ” p o s s i b i l i t y t h a t t h e d e f e n d a n t s f a i l e d t o

d i s c l o s e t h e u s e o f u n r e g i s t e r e d b r o k e r s f o r t h e p u r p o s e o f m i s l e a d i n g t h e p u b l i c

.

T h e S e c o n d A m e n d e d C o m p l a i n t d o e s n o t a l l e g e f a c t s t e n d i n g t o s h o w t h a t a n y o f

t h e i n d i v i d u a l d e f

e n d a n t s w e r e e v e n a w a r e o f R e l a t i o n S e r v e ’ s r e l a t i o n s h i p w i t h

S u m m i t

. T h i s i s p a r t i c u l a r l y s o w i t h r e s p e c t t o d e f e n d a n t s S o l t o f

f

, O b e c k

, a n d

13G o u l d

— w h o

, a c c o r d i n g t o t h e S e c o n d A m e n d e d C o m p l a i n t

, w e r e n o t e m p l o y e d b y

R e l a t i o n S e r v e u n t i l a f

t e r t h e e v e n t s r e l i e d o n b y p l a i n t i f f s o c c u r r e d

— a n d w i t h

r e s p e c t t o d e f

e n d a n t Y o u n g

— w h o

, a c c o r d i n g t o t h e S e c o n d A m e n d e d C o m p l a i n t

,

w a s n o t e m p l o y e d b y R e l a t i o n S e r v e

.

S i m p l y p u t

, t h e a l l e g a t i o n s i n t h e S e c o n d A m e n d e d C o m p l a i n t a r e

i n s u f f i c i e n t t o c r e a t e a “ s t r o n g i n f e r e n c e ” o f s c i e n t e r

. A c c o r d i n g l y

, t h e d i s t r i c t

c o u r t d i d n o t e r r b y d i s m i s s i n g J a c o b y ’ s § 1 0 ( b ) a n d R u l e 1 0 b

- 5 c l a i m s a g a i n s t t h e

i n d i v i d u a l d e f

e n d a n t s u n d e r t h e h e i g h t e n e d p l e a d i n g s t a n d a r d s i m p o s e d b y t h e

P S L R A

.

A l t h o u g h t h e S e c o n d A m e n d e d C o m p l a i n t f a i l e d t o a d e q u a t e l y p l e a d

s c i e n t e r f o r a n y o f t h e i n d i v i d u a l d e f e n d a n t s

, t h e o r e t i c a l l y

, t h e S e c o n d A m e n d e d

C o m p l a i n t c o u l d c r e a t e a s t r o n g i n f e r e n c e t h a t t h e c o r p o r a t e d e f e n d a n t

,

R e l a t i o n S e r v e

, a c t e d w i t h t h e r e q u i s i t e s t a t e o f m i n d

. M i z z a r o

, 5 4 4 F

. 3 d a t 1 2 5 4

.

C o r p o r a t i o n s h a v e n o s t a t e o f m i n d o f t h e i r o w n ; r a t h e r

, t h e s c i e n t e r o f t h e i r a g e n t s

m u s t b e i m p u t e d t o t h e m

. I d

. H e r e

, t h e S e c o n d A m e n d e d C o m p l a i n t f a i l s t o

s u f f i c i e n t l y p l e a d s c i e n t e r a s t o a n y o f t h e i n d i v i d u a l s w h o s e r v e d a s c o r p o r a t e

d i r e c t o r s o r o f

f i c e r s o f R e l a t i o n S e r v e

, a n d t h e r e a r e n o o t h e r a l l e g a t i o n s t h a t g i v e

r i s e t o a n i n f

e r e n c e o f s c i e n t e r

. T h u s

, w e a f f i r m t h e d i s t r i c t c o u r t ’ s d i s m i s s a l o f

14C o u n t I f

o r f a i l u r e t o s t a t e a c a u s e o f a c t i o n u n d e r § 1 0 ( b ) a n d R u l e 1 0 b

- 5 o f t h e

S e c u r i t i e s E x c h a n g e A c t

.

B

. S e c o n d a r

y L i a b i l i t y U n d e r S e c t i o n 2 0 (

a )

I n C o u n t I I

, J a c o b y a s s e r t e d a v i o l a t i o n o f § 2 0 ( a ) o f t h e S e c u r i t i e s E x c h a n g e

A c t

. S e c t i o n 2 0 ( a ) p r o v i d e s :

E v e r y p e r s o n w h o

, d i r e c t l y o r i n d i r e c t l y

, c o n t r o l s a n y p e r s o n l i a b l e

u n d e r a n y p r o v i s i o n o f t h i s c h a p t e r o r o f a n y r u l e o r r e g u l a t i o n

t h e r e u n d e r s h a l l a l s o b e l i a b l e j o i n t l y a n d s e v e r a l l y w i t h a n d t o t h e

s a m e e x t e n t a s s u c h c o n t r o l l e d p e r s o n t o a n y p e r s o n t o w h o m s u c h

c o n t r o l l e d p e r s o n i s l i a b l e

, u n l e s s t h e c o n t r o l l i n g p e r s o n a c t e d i n g o o d

f a i t h a n d d i d n o t d i r e c t l y o r i n d i r e c t l y i n d u c e t h e a c t o r a c t s

c o n s t i t u t i n g t h e v i o l a t i o n o r c a u s e o f a c t i o n

.

1 5 U

. S

. C

. § 7 8 t ( a )

. S e c t i o n 2 0 ( a ) i s n o t a f r e e s t a n d i n g c l a i m b u t r a t h e r a m e a n s o f

i m p o s i n g l i a b i l i t y “ n o t o n l y o n t h e p e r s o n w h o a c t u a l l y c o m m i t s a s e c u r i t i e s l a w

v i o l a t i o n

, b u t a l s o o n a n e n t i t y o r i n d i v i d u a l t h a t c o n t r o l s t h e v i o l a t o r

. ” L a p e r r i e r e

v

. V e s t a I n s

. G r o u p

, I n c

. , 5 2 6 F

. 3 d 7 1 5

, 7 2 1 ( 1 1 t h C i r

. 2 0 0 8 )

.

B e c a u s e a p r i m a r y v i o l a t i o n o f t h e s e c u r i t i e s l a w i s a n e s s e n t i a l e l e m e n t o f a

§ 2 0 ( a ) d e r i v a t i v e c l a i m

, a p l a i n t i f f w h o p l e a d s a § 2 0 ( a ) c l a i m c a n w i t h s t a n d a

m o t i o n t o d i s m i s s o n l y i f t h e p r i m a r y v i o l a t i o n i s p l e a d e d w i t h l e g a l s u f f i c i e n c y

.

G a r f i e l d v

. N D C H e a l t h C o r p

. , 4 6 6 F

. 3 d 1 2 5 5

, 1 2 6 1 ( 1 1 t h C i r

. 2 0 0 6 )

. A s t h e

S e c o n d A m e n d e d C o m p l a i n t f a i l e d t o a l l e g e p r i m a r y l i a b i l i t y u n d e r § 1 0 ( b )

, t h e r e

c a n b e n o s e c o n d a r y l i a b i l i t y u n d e r § 2 0 ( a )

. T h u s

, w e a f f i r m t h e d i s t r i c t c o u r t ’ s

15d i s m i s s a l o f C o u n t I I f o r f a i l u r e t o s t a t e a c a u s e o f a c t i o n u n d e r § 2 0 ( a ) o f t h e

S e c u r i t i e s E x c h a n g e A c t

.

C

. R u l e 1 1 (

b ) S a n c t i o n s

W e r e v i e w t h e d e n i a l o f s a n c t i o n s u n d e r F e d e r a l R u l e o f C i v i l P r o c e d u r e 1 1

f o r a b u s e o f d i s c r e t i o n

. B a n k A t l a n t i c v

. B l

y t h e E a s t m a n P a i n e W

e b b e r

, I n c

. , 9 5 5

F

. 2 d 1 4 6 7

, 1 4 7 8 ( 1 1 t h C i r

. 1 9 9 2 )

. A d i s t r i c t c o u r t ’ s d e n i a l o f s a n c t i o n s u n d e r t h e

P S L R A i s r e v i e w e d u n d e r t h e s a m e s t a n d a r d

. S e e M o r r i s v

. W a c h o v i a S e c

. , I

n c

. ,

4 4 8 F

. 3 d 2 6 8

, 2 7 7 ( 4 t h C i r

. 2 0 0 6 ) ( n o t i n g r e v i e w o f “ a l l a s p e c t s ” o f a d i s t r i c t

c o u r t ’ s R u l e 1 1 d e t e r m i n a t i o n i s f o r a b u s e o f d i s c r e t i o n

, a n d “ [ n ] o t h i n g i n t h e

R e f o r m A c t ’ s s a n c t i o n s p r o v i s i o n c h a n g e s t h i s s t a n d a r d o f r e v i e w ” ) ; H a r t m a r x

C o r p v

. A b b o u d

, 3 2 6 F

. 3 d 8 6 2

, 8 6 6

- 6 7 ( 7 t h C i r

. 2 0 0 3 ) ( r e v i e w i n g t h e d i s t r i c t

c o u r t ’ s i m p o s i t i o n o f s a n c t i o n s u n d e r t h e P S L R A f o r a b u s e o f d i s c r e t i o n ) ; G u r a r y

v

. N u

- T e c h B i o

- M e d

, I n c

. , 3 0 3 F

. 3 d 2 1 2

, 2 1 9 ( 2 d C i r

. 2 0 0 2 ) ( s a m e )

.

C o n g r e s s p a s s e d t h e P S L R A i n 1 9 9 5

, “ m o t i v a t e d i n l a r g e p a r t b y a p e r c e i v e d

n e e d t o d e t e r s t r i k e s u i t s b y o p p o r t u n i s t i c p r i v a t e p l a i n t i f f s t h a t f i l e d s e c u r i t i e s

f r a u d c l a i m s o f d u b i o u s m e r i t i n o r d e r t o e x a c t l a r g e s e t t l e m e n t r e c o v e r i e s

. ”

L a p e r r i e r e

, 5 2 6 F

. 3 d a t 7 1 9 ( q u o t i n g N o v a k v

. K a s a k

s

, 2 1 6 F

. 3 d 3 0 0

, 3 0 6 ( 2 d C i r

.

2 0 0 0 ) )

. T h r o u g h t h e P S L R A

, C o n g r e s s h o p e d t o p u t a n e n d t o “ t h e a b u s e o f t h e

16d i s c o v e r y p r o c e s s t o i m p o s e c o s t s s o b u r d e n s o m e t h a t i t i s o f t e n e c o n o m i c a l f

o r t h e

v i c t i m i z e d p a r t y t o s e t t l e

. ” I d

.

I n a d d i t i o n t o r a i s i n g t h e s t a n d a r d f o r p l e a d i n g s c i e n t e r

, t h e P S L R A

“ m a n d a t e [ s ] i m p o s i t i o n o f s a n c t i o n s f o r f r i v o l o u s l i t i g a t i o n

. ” M e r r i l l L y n c h

,

P i e r c e

, F e n n e r & S m i t h

, I n c

. v

. D a b i t

, 5 4 7 U

. S

. 7 1

, 8 1

, 1 2 6 S

. C t

. 1 5 0 3

, 1 5 1 1

( 2 0 0 6 )

. T h e P S L R A p r o v i d e s :

I n a n y p r i v a t e a c t i o n a r i s i n g u n d e r t h i s c h a p t e r

, u p o n f i n a l

a d j u d i c a t i o n o f t h e a c t i o n

, t h e c o u r t s h a l l i n c l u d e i n t h e r e c o r d

s p e c i f i c f i n d i n g s r e g a r d i n g c o m p l i a n c e b y e a c h p a r t y a n d e a c h

a t t o r n e y r e p r e s e n t i n g a n y p a r t y w i t h e a c h r e q u i r e m e n t o f R u l e

1 1 ( b ) o f t h e F e d e r a l R u l e s o f C i v i l P r o c e d u r e a s t o a n y

c o m p l a i n t

, r e s p o n s i v e p l e a d i n g

, o r d i s p o s i t i v e m o t i o n

.

1 5 U

. S

. C

. § 7 8 u

- 4 ( c ) ( 1 ) ( e m p h a s i s a d d e d )

. I f t h e c o u r t f i n d s a p a r t y o r a t t o r n e y

v i o l a t e d a n y r e q u i r e m e n t o f R u l e 1 1 ( b )

, t h e c o u r t “ s h a l l ” i m p o s e s a n c t i o n s i n

a c c o r d a n c e w i t h R u l e 1 1

. 1 5 U

. S

. C

. § 7 8 u

- 4 ( c ) ( 3 )

. I f a c o m p l a i n t s u b s t a n t i a l l y

f a i l s t o c o m p l y w i t h R u l e 1 1 ( b )

, t h e p r e s u m p t i v e s a n c t i o n i s a t t o r n e y s ’ f e e s a n d

e x p e n s e s

. 1 5 U

. S

. C

. § 7 8 u

- 4 ( c ) ( 2 )

. A c c o r d i n g l y

, t h e P S L R A ’ s p r o v i s i o n s

e l i m i n a t e a d i s t r i c t c o u r t ’ s d i s c r e t i o n o n t w o f r o n t s : ( 1 ) i n c h o o s i n g w h e t h e r t o

c o n d u c t t h e R u l e 1 1 ( b ) i n q u i r y a n d ( 2 ) i n d e t e r m i n i n g w h e t h e r t o i m p o s e s a n c t i o n s

f o l l o w i n g a f

i n d i n g o f a R u l e 1 1 ( b ) v i o l a t i o n

. S e e M o r r i s

, 4 4 8 F

. 3 d a t 2 7 6

( “ B e c a u s e t h e s a n c t i o n s i n s t r u c t i o n c o m e s i n t e r m s o f t h e m a n d a t o r y ‘ s h a l l

, ’ w h i c h

n o r m a l l y c r e a t e s a n o b l i g a t i o n i m p e r v i o u s t o j u d i c i a l d i s c r e t i o n

, t h e d i s t r i c t c o u r t

17m u s t i m p o s e s a n c t i o n s f o r e a c h v i o l a t i o n f

o u n d

. ” ( i n t e r n a l c i t a t i o n a n d q u o t a t i o n

m a r k s o m i t t e d ) ) ; S i m o n D e B a r t o l o G r o u p

, L

. P

. v

. T

h e R i c h a r d E

. J

a c o b s G r o u

p

,

I n c

. , 1 8 6 F

. 3 d 1 5 7

, 1 6 7 ( 2 d C i r

. 1 9 9 9 ) ( n o t i n g t h e P S L R A c i r c u m s c r i b e s a d i s t r i c t

c o u r t ’ s d i s c r e t i o n “ i n c h o o s i n g w h e t h e r t o c o n d u c t t h e R u l e 1 1 i n q u i r y a t a l l a n d

w h e t h e r a n d h o w t o s a n c t i o n a p a r t y o n c e a v i o l a t i o n i s f o u n d ” )

.

A l t h o u g h t h e P S L R A a l t e r s t h e c o n s e q u e n c e s o f a R u l e 1 1 ( b ) v i o l a t i o n i n a

p r i v a t e s e c u r i t i e s f

r a u d a c t i o n

, t h e s u b s t a n t i v e a n a l y s i s u n d e r R u l e 1 1 r e m a i n s t h e

s a m e

. S e e 1 5 U

. S

. C

. § 7 8 u

- 4 ( c ) ; s e e a l s o C i t i b a n k G l o b a l M

k t s

. , I n c

. v

. S a n t a n a

, 1 2

5 7 3 F

. 3 d 1 7

, 3 2 ( 1 s t C i r

. 2 0 0 9 ) ( n o t i n g t h e P S L R A “ d o e s n o t a l t e r t h e s t a n d a r d s

u s e d t o j u d g e c o m p l i a n c e w i t h R u l e 1 1 ” ) ; M o r r i s

, 4 4 8 F

. 3 d a t 2 7 6 ( “ [ F ] o r p r i v a t e

s e c u r i t i e s f

r a u d s u i t s C o n g r e s s a l t e r e d t h e c o n s e q u e n c e s o f a R u l e 1 1 ( b ) v i o l a t i o n

b u t d i d n o t r e w r i t e t h e c o n v e n t i o n a l s t a n d a r d s f o r e v a l u a t i n g R u l e 1 1 ( b )

c o m p l i a n c e

. ” ) ; S i m o n D e B a r t o l o G r o u p

, L

. P

. , 1 8 6 F

. 3 d a t 1 6 7 ( “ T h e P S L R A d o e s

n o t i n a n y w a y p u r p o r t t o a l t e r t h e s u b s t a n t i v e s t a n d a r d s f o r f i n d i n g a v i o l a t i o n o f

R u l e 1 1

. . . . ” )

. M o r e o v e r

, n o t h i n g i n t h e P S L R A c h a n g e s o u r a b u s e o f d i s c r e t i o n

s t a n d a r d o f r e v i e w o f t h e d i s t r i c t c o u r t ’ s R u l e 1 1 ( b ) f i n d i n g s

. T h i s p o s i t i o n i s

Under Rule 11, sanctions are proper ly assessed w hen: (1) a

party files a plea ding tha

t 1 2

has no re asonable fac tual basis; (2) the pa rty files a plea ding ba sed on a le g al theory that has no

rea sonable c hance of succ ess and c annot be a dvance d as a r easona ble ar g ument to chang e

exis ting law ; or (3) the party files a plea ding in ba d faith for an improper

purpose. Massengale

v. Ray , 267 F.3d 1298, 1301 ( 11th Cir. 2001).

18s u p p o r t e d b y t h e r e a s o n i n g i n C o o t e r & G e l l v

. H a r t m a r x C o r p

. , 4 9 6 U

. S

. 3 8 4

, 1 1 0

S

. C t

. 2 4 4 7 ( 1 9 9 0 )

, i n w h i c h t h e S u p r e m e C o u r t h e l d a n a b u s e

- o f

- d i s c r e t i o n

s t a n d a r d a p p l i e s “ i n r e v i e w i n g a l l a s p e c t s o f a d i s t r i c t c o u r t ’ s R u l e 1 1

d e t e r m i n a t i o n

, ” i n c l u d i n g t h e l e g a l a s p e c t s

. I d

. a t 4 0 5

, 1 1 0 S

. C t

. a t 2 4 6 1

. T h e

C o o t e r & G e l l C o u r t n o t e d “ [ l ] e g a l i s s u e s a r e r a i s e d i n c o n s i d e r i n g w h e t h e r a

p l e a d i n g i s ‘ w a r r a n t e d b y e x i s t i n g l a w o r a g o o d f a i t h a r g u m e n t ’ f

o r c h a n g i n g t h e

l a w a n d w h e t h e r t h e a t t o r n e y ’ s c o n d u c t v i o l a t e d R u l e 1 1

. ” I d

. a t 3 9 9

, 1 1 0 S

. C t

. a t

2 4 5 7

. I t t h e n e x p l a i n e d e v e n p u r e l y l e g a l i s s u e s i n t h e R u l e 1 1 c o n t e x t r e q u i r e a

d i s t r i c t c o u r t “ t o c o n s i d e r i s s u e s r o o t e d i n f a c t u a l d e t e r m i n a t i o n s

. ” I d

. a t 4 0 1

, 1 1 0

S

. C t

. a t 2 4 5 9

. I n t h i s r e g a r d

, “ t h e d i s t r i c t c o u r t i s b e t t e r s i t u a t e d t h a n t h e c o u r t o f

a p p e a l s t o m a r s h a l t h e p e r t i n e n t f a c t s a n d a p p l y t h e f

a c t

- d e p e n d e n t l e g a l s t a n d a r d

m a n d a t e d b y R u l e 1 1

. ” I d

. a t 4 0 2

, 1 1 0 S

. C t

. a t 2 4 5 9

.

I n t h i s c a s e

, h o w e v e r

, t h e d i s t r i c t c o u r t ’ s c o n c l u s o r y R u l e 1 1 a n a l y s i s i s n o t

s u f f i c i e n t t o p e r m i t m e a n i n g f u l a p p e l l a t e r e v i e w

. A l t h o u g h t h e d i s t r i c t c o u r t

e x p l i c i t l y d e n i e d K a r p ’ s m o t i o n f o r s a n c t i o n s

, i t s o n e p a r a g r a p h o r d e r p r o v i d e s

1 3

n o e x p l a n a t i o n o f t h e b a s i s f o r i t s r u l i n g a n d d o e s n o t i n c l u d e t h e s p e c i f i c f i n d i n g s

The orde r stated: “Plaintiffs’ c laims are not f rivolous, or so devoid of e videntiary 1 3

support as to war

rant sanc tions. L ikewise, ther e is no evidenc e that Plaintiffs institut ed this

action for improper pur

poses, such a s to harass De fenda nts or needle ssly

incre ase the cost of

litigation.”

19t h e P S L R A r e q u i r e s

. S p e c i f i c a l l y

, t h e d i s t r i c t c o u r t ’ s o r d e r d o e s n o t d i s c u s s 1 4

“ c o m p l i a n c e b y e a c h p a r t y a n d e a c h a t t o r n e y r e p r e s e n t i n g a n y p a r t y w i t h e a c h

r e q u i r e m e n t o f R u l e 1 1 ( b ) o f t h e F e d e r a l R u l e s o f C i v i l P r o c e d u r e a s t o a n y

c o m p l a i n t

, r e s p o n s i v e p l e a d i n g

, o r d i s p o s i t i v e m o t i o n

. ” 1 5 U

. S

. C

. § 7 8 u

- 4 ( c ) ( 1 )

.

I n f a c t

, n o w h e r e i n t h e J u n e 1 2

, 2 0 0 7

, o r d e r d i d t h e d i s t r i c t c o u r t e v e n m e n t i o n t h e

P S L R A o r a n y o f i t s r e q u i r e m e n t s

. A s a r e s u l t

, w e r e m a n d t h e c a s e t o t h e d i s t r i c t

c o u r t t o p e r m i t i t t o m a k e t h e P S L R A

- m a n d a t e d f i n d i n g s i n t h e f

i r s t i n s t a n c e

. 1 5

On J uly 16, 2007, Kar

p filed a se cond motion for attorne y s’ fe es and c osts and moved 1 4

the cour t to reconsider

its J une 12, 2007, sanc tions order, c ontending the PSL RA require d the

court to conduc t a more e x acting inquiry into counsel’s complianc e with Rule 11(b). The court

denied he r motion without ex plication on J uly 27, 2007. On August 3, 2007, Karp moved the

court to cla

rify its ruling to indicate w hether it had denied he r motion for re consideration on the

merits. The c ourt, on Novembe r 20, 2007, ente red a n order adher ing to its ruling s that plaintiffs’

counsel ha d not violated Rule 11(b). The se motions and order s are not before us beca use the

district court lost jurisdiction over the matter of sanctions upon the filing of the notice s of

appea l. Gree n Leaf Nursery v. E.I. D uPont de Nemours & Co. , 341 F.3d 1292, 1309 ( 11th Cir.

2003) (“ The filing of a notice of appe al is an eve nt of jurisdictional signific ance —it confer s

jurisdiction on the court of a ppeals a nd divests the district court of its control over those aspec ts

of the c ase involved in the a ppeal.” ) (quoting Griggs v. Provident Consumer D isc. Co. , 459 U.S.

56, 58, 103 S. Ct . 400, 402 (1982)) . Reg ardle ss, the district court’s Nove mber 20, 2007, orde r

added nothing of substance to the J une 12, 2007, sanc tions order, a nd is likewise inadequa te to

allow meaning ful appe llate re view.

Remand is consistent with the Supreme Court’s a dmonition i n Sprint/Unit ed Mgm t. 1 5

Co. v. Mende lsohn , 552 U.S. 379, 128 S. C t. 1140 (2008), that the c ircuit court should have

rema nded to allow the district cour t to make its “deter

minations in t he first instance , expli citly

and on the r ecor d.” Id ., 128 S. Ct . at 1146. I n Mende lsohn , the district court e ssentially

provided no e x planation of the ba sis for its evidentiary ruling , but the circ uit court presume d the

district court applied the incorre ct standar d and proc eede d to eng ag e in its own analy sis. Id. at

1144. The Supreme Court noted the broa d discretion af forde d to a district court’s e videntiary

ruling s and conc luded the cir cuit court should have rema nded to the district cour

t, instead of

eng ag ing in its own inquiry

. Id. at 1144-46. Althoug h Mende lsohn dealt with an e videntiary

ruling , the re asoning is applicable he re. B oth evidentiary ruling s and Rule 11(b) f

indings a re

revie wed unde r the de fer ential abuse of discre tion standard. See id .; Morris , 448 F.3d a t 277.

20T h i s a p p r o a c h i s c o n s i s t e n t w i t h t h e p r o c e d u r e w e u s e w h e n a d i s t r i c t c o u r t f a i l s t o

m a k e t h e P S L R A s a n c t i o n s f i n d i n g s a l t o g e t h e r

. S e e E h l e r t v

. S i n g e r

, 2 4 5 F

. 3 d

1 3 1 3

, 1 3 2 0

- 2 1 ( 1 1 t h C i r

. 2 0 0 1 ) ( r e m a n d i n g f o r c o m p l i a n c e w i t h t h e P S L R A w h e r e

t h e d i s t r i c t c o u r t m a d e n o R u l e 1 1 f i n d i n g s )

. 1 6

I t m a y b e t e m p t i n g t o e n g a g e i n s a n c t i o n s d e t e r m i n a t i o n s o u r s e l v e s

, g i v e n

t h e a p p a r e n t f

r i v o l i t y o f t h e p l a i n t i f

f s ’ c l a i m s

. I n f

a c t

, t h e e x t e n s i v e r e c o r d o n

a p p e a l m a y a c t u a l l y m a k e s u c h d e t e r m i n a t i o n s p o s s i b l e

. B u t

, e v e n a s s u m i n g w e

h a v e t h e a b i l i t y t o c o n d u c t a t h o r o u g h R u l e 1 1 a n a l y s i s

, d o i n g s o i n t h i s c a s e w o u l d

b e i l l

- a d v i s e d

. R e m a n d i s t h e b e t t e r r o u t e

.

F i r s t

, a s i s a l m o s t a l w a y s t h e c a s e

, t h e d i s t r i c t c o u r t i s “ b e t t e r s i t u a t e d ” t h a n

t h i s C o u r t “ t o m a r s h a l t h e p e r t i n e n t f a c t s a n d a p p l y t h e f

a c t

- d e p e n d e n t l e g a l

s t a n d a r d m a n d a t e d b y R u l e 1 1

. ” S e e C o o t e r & G e l l

, 4 9 6 U

. S

. a t 4 0 2

, 1 1 0 S

. C t

. a t

2 4 5 9

. G i v e n t h e d i s t r i c t c o u r t ’ s f a m i l i a r i t y w i t h t h e c a s e a n d t h e p a r t i e s

, t h e

d i s t r i c t c o u r t i s i n a b e t t e r p o s i t i o n “ t o m a k e t h e s e d e t e r m i n a t i o n s i n t h e f i r s t

i n s t a n c e

, e x p l i c i t l y a n d o n t h e r e c o r d

. ” S e e S p r i n t / U n i t e d M g m t

. C o

. v

.

M e n d e l s o h n

, 5 5 2 U

. S

. 3 7 9

, 3 8 7

, 1 2 8 S

. C t

. 1 1 4 0

, 1 1 4 6 ( 2 0 0 8 )

. M o r e o v e r

, o u r

This approa ch is also consistent with the proc edure followed by the Second Circuit. 1 6

See R ombach v . Chang , 355 F.3d 164, 178 ( 2d Cir. 2004) (re manding for c ompliance with the

PSL RA when the district c ourt failed to make the re quired Rule 11 finding s); Gurary v.

W inehouse , 190 F.3d 37, 47 ( 2d Cir. 1999) (re manding for f indings re g arding

Rule 11(b)

compliance pursuant to the PSL RA after the district court implicitly denied a motion for

sanctions).

21a n a l y s i s o f t h e s a n c t i o n s i s s u e w o u l d l i k e l y f u r t h e r d e v e l o p t h e r e c o r d b y

, f o r

e x a m p l e

, e x p o u n d i n g u p o n t h e r e l e v a n t S E C f i l i n g s o r d r a w i n g i n f

e r e n c e s f r o m

u n d i s p u t e d f

a c t s

. C o n s e q u e n t l y

, i f w e e l e c t t o m a k e s u c h s a n c t i o n s f i n d i n g s a t t h e

a p p e l l a t e l e v e l

, t h e p a r t i e s w o u l d n e c e s s a r i l y b e l e s s i n v o l v e d i n t h e p r o c e s s a n d

w o u l d b e u n a b l e t o o b

j e c t i f a n d w h e n a p p r o p r i a t e

.

F u r t h e r

, o u r d e c i s i o n t o r e m a n d r e c o g n i z e s t h a t w h e n t h e d i s t r i c t c o u r t

e n g a g e d i n i t s s a n c t i o n s a n a l y s i s i n 2 0 0 7 o u r C i r c u i t h a d n o t y e t e x p l i c i t l y

a d d r e s s e d t h e l e v e l o f s p e c i f i c i t y r e q u i r e d b y t h e P S L R A

. T o b e s u r e

, t h e P S L R A

,

b y i t s o w n t e r m s

, c l e a r l y r e q u i r e s f i n d i n g s a s t o e a c h c l a i m

, e a c h p a r t y

, a n d e a c h

a t t o r n e y

, s u c h t h a t t h e d i s t r i c t c o u r t ’ s p e r f u n c t o r y a n a l y s i s w a s i n s u f f i c i e n t e v e n

w i t h o u t c l e a r p r e c e d e n t f r o m t h i s C o u r t

. I t i s n o t u n t i l t h i s c a s e

, h o w e v e r

, t h a t w e

e m p h a s i z e j u s t h o w e x t e n s i v e t h e d i s t r i c t c o u r t ’ s s a n c t i o n s f i n d i n g s m u s t b e i n t h e

P S L R A c o n t e x t

. T h u s

, i n l i g h t o f o u r r e i t e r a t i o n a n d a c c e n t u a t i o n o f t h e P S L R A ’ s

r e q u i r e m e n t s

, i t i s a p p r o p r i a t e t o p e r m i t t h e d i s t r i c t c o u r t t o e n g a g e i n a P S L R A

c o m p l i a n t s a n c t i o n s a n a l y s i s p r i o r t o a p p e l l a t e r e v i e w

.

A d d i t i o n a l l y

, w e r e c o g n i z e t h e p r a c t i c a l r e a l i t y t h a t t h i s a p p e a l a r i s e s f r o m

c o m p l e x f

a c t u a l c i r c u m s t a n c e s t h a t h a v e n o t b e e n o r g a n i z e d i n s u c h a m a n n e r t o

f a c i l i t a t e e f

f i c i e n t s a n c t i o n s r e v i e w

. A s a r e s u l t

, p r i o r t o e n g a g i n g i n a R u l e 1 1 ( b )

a n a l y s i s

, w e w o u l d f

i r s t h a v e t o u n r a v e l t h e d e n s e r e c o r d a n d e x a m i n e i t i n a w a y

22t h a t n o o t h e r i s s u e i n t h i s c a s e r e q u i r e s u s t o d o

. T h i s t a s k w o u l d r e q u i r e u s t o

o b t a i n a l e v e l o f f

a m i l i a r i t y w i t h t h e p a r t i e s a n d t h e e v i d e n c e t h a t t h e d i s t r i c t c o u r t

a l r e a d y h a s ; a s a r e s u l t

, w e w o u l d e n d u p r e p l i c a t i n g m u c h o f t h e w o r k t h a t t h e

d i s t r i c t c o u r t h a s a l r e a d y c o m p l e t e d

. T h i s i s n o t a w i s e u s e o f j u d i c i a l r e s o u r c e s

.

T h e b e t t e r s o l u t i o n

, f

r o m a p r a c t i c a l s t a n d p o i n t

, i s f o r u s t o c a r e f

u l l y a n d p r o m p t l y

d e c i d e t h e i s s u e s o n a p p e a l

, a n d t h e n t o r e m a n d t o t h e d i s t r i c t c o u r t t o a d d r e s s a n y

o u t s t a n d i n g f

a c t

- f i n d i n g t a s k s

. E x p e d i t i o u s n e s s i s e v e r y b i t a s i m p o r t a n t t o a w e l l

f u n c t i o n i n g j u d i c i a r y a s i s t h o r o u g h n e s s

.

F i n a l l y

, e v e n i f w e w e r e t o e n g a g e i n a f u l l P S L R A s a n c t i o n s a n a l y s i s

, i t

w o u l d s t i l l b e n e c e s s a r y t o r e m a n d t o t h e d i s t r i c t c o u r t t o d e t e r m i n e a n u m b e r o f

o u t s t a n d i n g i s s u e s

. F o r i n s t a n c e

, w e w o u l d b e u n a b l e t o d e t e r m i n e w h e t h e r e i t h e r

T h o m p s o n o r J a c o b y h i m s e l f ( a s d i s t i n c t f r o m t h e i r l a w y e r s ) v i o l a t e d R u l e 1 1 ( t h e

r e c o r d i s s i l e n t o n t h i s p o i n t )

, w h e t h e r t h e l a w y e r s v i o l a t e d R u l e 1 1 ( b ) ( 1 ) b y f i l i n g

t h e c o m p l a i n t s f

o r i m p r o p e r p u r p o s e s ( a s u b j e c t i v e a n a l y s i s t h a t w i l l l i k e l y r e q u i r e

t e s t i m o n y )

, o r w h e t h e r t h e p l a i n t i f f s c a n r e b u t t h e P S L R A ’ s p r e s u m p t i v e a w a r d o f

a t t o r n e y s ’ f

e e s

. T h e s e i s s u e s r e q u i r e t h e k i n d o f r e c o r d d e v e l o p m e n t i n w h i c h

a p p e l l a t e c o u r t s c a n n o t e n g a g e

. A s a r e s u l t

, e v e n i f w e d i d e x p e n d t h e e n o r m o u s

j u d i c i a l r e s o u r c e s n e c e s s a r y t o p a r s e t h r o u g h t h e r e c o r d i n t h e f i r s t i n s t a n c e

, t h e

d i s t r i c t c o u r t w o u l d s t i l l h a v e t o r e e x a m i n e a n d f u r t h e r d e v e l o p t h e r e c o r d t o

23a d d r e s s t h e s e o u t s t a n d i n g i s s u e s

. S u c h a p r o c e s s w o u l d i n t r o d u c e e v e n m o r e

i n e v i t a b l e d u p l i c a t i o n o f e f f o r t a n d w o u l d r e s u l t i n f u r t h e r d e p l e t i o n o f l i m i t e d

j u d i c i a l r e s o u r c e s

.

A c c o r d i n g l y

, e v e n i f w e c o u l d i n s o m e c a s e s e n g a g e i n a P S L R A s a n c t i o n s

a n a l y s i s o u r s e l v e s

, w e d e c l i n e t o d o s o i n t h i s c a s e

. C a r e f u l e x a m i n a t i o n o f t h e

r e l e v a n t c o n s i d e r a t i o n s c o u n s e l s a g a i n s t s u c h a u s e o f j u d i c i a l r e s o u r c e s

.

I V

. C O N C L U S I O N

W i t h r e s p e c t t o J a c o b y ’ s a p p e a l

, w e A F F I R M t h e d i s t r i c t c o u r t ’ s d i s m i s s a l

o f C o u n t s I a n d I I o f t h e S e c o n d A m e n d e d C o m p l a i n t p u r s u a n t t o R u l e 1 2 ( b ) ( 6 ) o f

t h e F e d e r a l R u l e s o f C i v i l P r o c e d u r e

. W i t h r e s p e c t t o K a r p ’ s c r o s s

- a p p e a l

, t h e

d i s t r i c t c o u r t ’ s o r d e r e n t e r e d J u n e 1 2

, 2 0 0 7

, i s V A C A T E D a n d R E M A N D E D f o r

f u r t h e r p r o c e e d i n g s c o n s i s t e n t w i t h t h i s o p i n i o n

.

24T J O F L A T

, C i r c u i t J u d g e

, c o n c u r r i n g i n t h e a p p e a l

, N o

. 0 7

- 1 3 2 2 5

, a n d d i s s e n t i n g

i n t h e c r o s s

- a p p e a l

, N o

. 0 7

- 1 3 4 7 7 :

I n t h e a p p e a l

, I c o n c u r i n t h e c o u r t ’ s j u d g m e n t a f f i r m i n g t h e d i s t r i c t c o u r t ’ s

d i s m i s s a l o f t h e s e c o n d a m e n d e d c o m p l a i n t

. I d i s s e n t f r o m t h e c o u r t ’ s d e c i s i o n i n

t h e c r o s s

- a p p e a l

, v a c a t i n g i n f u l l t h e d i s t r i c t c o u r t ’ s d e c i s i o n d e n y i n g P r i v a t e

S e c u r i t i e s L i t i g a t i o n R e f o r m A c t ( “ P L R S A ” ) s a n c t i o n s

, a n d r e m a n d i n g t h e

s a n c t i o n s i s s u e s t o t h e d i s t r i c t c o u r t f o r r e c o n s i d e r a t i o n a b i n i t i o

. I w o u l d r e v e r s e

t h e s a n c t i o n s d e c i s i o n a n d r e m a n d t h e c a s e w i t h t h e i n s t r u c t i o n t h a t t h e d i s t r i c t

c o u r t s a n c t i o n p l a i n t i f

f s ’ c o u n s e l f

o r p r o s e c u t i n g t h e f

e d e r a l s e c u r i t i e s l a w c l a i m s

i n t h e t h r e e c o m p l a i n t s t h e y p r e s e n t e d t o t h e d i s t r i c t c o u r t

— t h e i n i t i a l

, f i r s t

, a n d

s e c o n d a m e n d e d c o m p l a i n t s

— b e c a u s e

, i n p r e s e n t i n g t h o s e c l a i m s

, c o u n s e l v i o l a t e d

F e d e r a l R u l e o f C i v i l P r o c e d u r e 1 1 ( b ) ( 2 ) a s a m a t t e r o f l a w

. T h e y a l s o v i o l a t e d

R u l e 1 1 ( b ) ( 3 ) w i t h r e s p e c t t o s o m e o f t h e s e c l a i m s b e c a u s e t h e c l a i m s l a c k e d a n

e v i d e n t i a r y f

o u n d a t i o n

. I n r e m a n d i n g t h e m a t t e r o f s a n c t i o n s t o t h e d i s t r i c t c o u r t

, I

w o u l d i n s t r u c t t h e c o u r t t o h e a r f r o m c o u n s e l f

o r t h e p a r t i e s o n t h e q u e s t i o n s o f ( 1 )

w h e t h e r t h e r e m a i n i n g c l a i m s l a c k e d t h e e v i d e n t i a r y s u p p o r t r e q u i r e d b y R u l e

1 1 ( b ) ( 3 )

, a n d ( 2 ) w h e t h e r p l a i n t i f f s ’ c o u n s e l b r o u g h t a n y o f t h e c l a i m s f o r a n

i m p r o p e r p u r p o s e i n v i o l a t i o n o f R u l e 1 1 ( b ) ( 1 )

.

25T h e c o u r t i s f a c e d w i t h t w o o p t i o n s i n d i s p o s i n g o f t h e c r o s s

- a p p e a l

. O n e i s

t o v a c a t e t h e s a n c t i o n s d e c i s i o n a n d r e m a n d t h e c a s e f o r f u r t h e r p r o c e e d i n g s o n t h e

s a n c t i o n s i s s u e s

. T h e c o u r t h a s c h o s e n t h i s o p t i o n

. T h e c o u r t b e l i e v e s t h a t i t i s

i n c a p a b l e o f m e a n i n g f

u l l y r e v i e w i n g t h e d i s t r i c t c o u r t ’ s d e n i a l o f R u l e 1 1 s a n c t i o n s

b e c a u s e t h e d e n i a l i s f

r a m e d i n c o n c l u s o r y l a n g u a g e

, w i t h o u t f i n d i n g s o f f

a c t o r

c o n c l u s i o n s o f l a w

. T h e o t h e r o p t i o n i s t o d e c i d e w h e t h e r p l a i n t i f f s ’ a t t o r n e y s

f a i l e d t o c o m p l y w i t h R u l e 1 1 ( b ) ’ s r e q u i r e m e n t s

, a n d

, i f s o

, w h e t h e r s a n c t i o n s a r e

i n o r d e r

. I c h o o s e t h i s o p t i o n b e c a u s e

, i n t h e P S L R A c o n t e x t

, C o n g r e s s e x p l i c i t l y

r e q u i r e s a d i s t r i c t c o u r t t o i m p o s e s a n c t i o n s w h e n e v e r R u l e 1 1 i s v i o l a t e d

. W h e n

,

a s h e r e

, t h e r e c o r d s o c l e a r l y i n d i c a t e s a R u l e 1 1 v i o l a t i o n

, i t i s b o t h w i t h i n o u r

c a p a c i t y a n d i n t h e b r o a d e r i n t e r e s t o f j u s t i c e t h a t w e d i r e c t t h e d i s t r i c t c o u r t t o

i m p o s e s a n c t i o n s t h a t i t w i l l h a v e t o i m p o s e o n r e m a n d

.

A n o b j e c t i v e e x a m i n a t i o n o f p l a i n t i f f s ’ t h r e e c o m p l a i n t s r e v e a l s t h a t

p l a i n t i f f s ’ f e d e r a l s e c u r i t i e s l a w c l a i m s a r e f r i v o l o u s

, a n d

, u n d e r t h e s e f a c t s

, a

d i s t r i c t c o u r t w o u l d n e c e s s a r i l y a b u s e i t s d i s c r e t i o n t o c o n c l u d e o t h e r w i s e

.

M o r e o v e r

, p l a i n t i f

f s s u e d s o m e i n d i v i d u a l d e f e n d a n t s w h o h a d n o i n v o l v e m e n t

w h a t s o e v e r i n t h e m a n a g e m e n t o f R e l a t i o n s e r v e M e d i a

, I n c

. , o r i t s p r e d e c e s s o r

,

R e l a t i o n s e r v e

, I n c

. T h e c o u r t ’ s d i s p o s i t i o n w i l l r e q u i r e t h o s e u n i n v o l v e d

d e f e n d a n t s t o p a r t i c i p a t e i n t h e f u r t h e r p r o c e e d i n g s o n r e m a n d

. T h e d i s p o s i t i o n I

26p r o p o s e w o u l d l i m i t t h e i r i n v o l v e m e n t t o t h e s i m p l e t a s k o f p r e s e n t i n g t h e c o u r t

w i t h a l i s t o f t h e i r e x p e n s e s

, i n c l u d i n g t h e a t t o r n e y s ’ f e e s t h e y i n c u r r e d

.

T h e c o u r t ’ s d i s p o s i t i o n i s a l s o l i k e l y t o r e s u l t i n a s e c o n d a p p e a l

, w h i c h

w o u l d p u t t h i s c o u r t i n t h e s a m e p o s i t i o n i t n o w o c c u p i e s

. T h e d i s p o s i t i o n I w o u l d

r e a c h w o u l d a v o i d a s e c o n d a p p e a l a n d t h u s w o u l d r e d u c e t h e t i m e

, e f f o r t

, a n d

e x p e n s e s t h e d i s t r i c t c o u r t

, t h e p a r t i e s

, a n d t h i s c o u r t w i l l h a v e t o e n d u r e a s a r e s u l t

o f t o d a y ’ s d e c i s i o n

. T o m a k e t h i s c l e a r

, I m u s t t a k e t h e r e a d e r t h r o u g h t h i s c a s e a s

i t e v o l v e d

— f

r o m t h e f i l i n g o f t h e i n i t i a l c o m p l a i n t t h r o u g h t h e f i l i n g a n d

p r o s e c u t i o n o f t h e s e c o n d a m e n d e d c o m p l a i n t

. I s h a l l d o s o i n a c c o r d a n c e w i t h t h e

f o l l o w i n g o u t l i n e

.

I

. T h e F a c t s

A

. R e l a t i o n s e r v e M e d i a

, I n c

. ’ s a n d R e l a t i o n s e r v e

, I n c

. ’ s C o r p o r a t e H i s t o r i e s

a n d t h e A l l e g e d F r a u d

B

. R i c h a r d F

. T h o m p s o n S u e s R e l a t i o n s e r v e

, M e d i a I n c

. i n I n d i a n a S t a t e

C o u r t

I I

. T h e F e d e r a l P r o c e d u r a l H i s t o r y

A

. T h e I n i t i a l C o m p l a i n t

1

. T h o m p s o n F i l e s t h e I n i t i a l C o m p l a i n t

2

. T h e D e f

e n d a n t s W a r n T h o m p s o n ’ s A t t o r n e y s t h a t t h e S u i t i s

F r i v o l o u s

3

. T h e D e f

e n d a n t s M o v e t o D i s m i s s

, R e q u e s t t h e C o u r t t o R e t a i n

J u r i s d i c t i o n t o I m p o s e S a n c t i o n s

274

. T h o m p s o n ’ s A t t o r n e y s M o v e t h e C o u r t f o r L e a v e t o A m e n d a n d f o r

L i m i t e d D i s c o v e r y t o A d d I n d i v i d u a l D e f e n d a n t s

5

. T h e C o u r t G r a n t s t h e A t t o r n e y s L e a v e t o A m e n d a n d L i m i t e d

D i s c o v e r y a n d W a r n s t h e A t t o r n e y s A b o u t R u l e 1 1

B

. T h e F i r s t A m e n d e d C o m p l a i n t

1

. T h o m p s o n & J a c o b y F i l e t h e F i r s t A m e n d e d C o m p l a i n t

, E a c h

P u r p o r t i n g t o R e p r e s e n t A l l C l a s s M e m b e r s o n A l l C l a i m s

2

. T h e D e f

e n d a n t s M o v e t o D i s m i s s

, R e q u e s t t h e C o u r t t o R e t a i n

J u r i s d i c t i o n t o I m p o s e S a n c t i o n s

3

. T h e C o u r t D i s m i s s e s t h e F i r s t A m e n d e d C o m p l a i n t

C

. T h e S e c o n d A m e n d e d C o m p l a i n t

1

. T h o m p s o n & J a c o b y F i l e t h e S e c o n d A m e n d e d C o m p l a i n t w i t h

J a c o b y L e a d i n g a n O p e n

- M a r k e t P u r c h a s e r S u b c l a s s B r i n g i n g F e d e r a l

S e c u r i t i e s C l a i m s a n d w i t h T h o m p s o n L e a d i n g a P r i v a t e O f f e r i n g

P u r c h a s e r S u b c l a s s B r i n g i n g S t a t e L a w C l a i m s

2

. T h e D e f

e n d a n t s M o v e t o D i s m i s s

, a n d D e f e n d a n t K a r p M o v e s f

o r

S a n c t i o n s

3

. T h e C o u r t D i s m i s s e s t h e C o m p l a i n t w i t h P r e j u d i c e b u t D e n i e s

S a n c t i o n s

4

. J a c o b y ’ s A p p e a l

, K a r p ’ s C r o s s

- A p p e a l

, a n d t h i s C o u r t ’ s D e c i s i o n

I I I

. T h i s C o u r t E r r s b y S u m m a r i l y R e m a n d i n g K a r p ’ s C r o s s

- A p p e a l f o r S a n c t i o n s

U n d e r t h e P S L R A

A

. T h e P S L R A R u l e 1 1 A n a l y t i c a l F r a m e w o r k & R e q u i r e m e n t s

B

. A C o u r t o f A p p e a l s S h o u l d N o t R e m a n d f o r R u l e 1 1 F i n d i n g s W h e n i t

C a n D e t e r m i n e C o n c l u s i v e l y t h a t t h e D i s t r i c t C o u r t A b u s e d i t s D i s c r e t i o n i n

D e n y i n g S a n c t i o n s

28I V

. W i t h R e s p e c t t o P l a i n t i f f s ’ F e d e r a l S e c u r i t i e s L a w C l a i m s

, t h e D i s t r i c t C o u r t

A b u s e d i t s D i s c r e t i o n i n D e n y i n g S a n c t i o n s

A

. R u l e 1 1 ( b ) ( 2 ) C o m p l i a n c e

1

. T h e S e c t i o n 1 1 C l a i m s

a

. T h e I n i t i a l C o m p l a i n t ’ s S e c t i o n 1 1 C l a i m

b

. T h e F i r s t A m e n d e d C o m p l a i n t ’ s S e c t i o n 1 1 C l a i m

2

. T h e S e c t i o n 1 2 C l a i m s

3

. T h e S e c t i o n 1 0 ( b )

, R u l e 1 0 b

- 5 C l a i m s

a

. T h o m p s o n ’ s R u l e 1 0 b

- 5 C l a i m s

b

. J a c o b y ’ s R u l e 1 0 b

- 5 C l a i m s

i

. J a c o b y F a i l e d t o I d e n t i f y a n A c t i o n a b l e O m i s s i o n

i i

. J a c o b y M a d e O n l y F r i v o l o u s S c i e n t e r A l l e g a t i o n s

i i i

. J a c o b y A d v a n c e d a F r i v o l o u s L o s s C a u s a t i o n

A r g u m e n t

4

. T h e S e c t i o n 2 0 ( a ) C l a i m s

B

. R u l e 1 1 ( b ) ( 3 ) C o m p l i a n c e

C

. R u l e 1 1 ( b ) ( 1 ) C o m p l i a n c e

D

. T h e P l a i n t i f

f s ’ A t t o r n e y s ’ R u l e 1 1 V i o l a t i o n s T r i g g e r t h e P S L R A ’ s

P r e s u m p t i v e S a n c t i o n o f A t t o r n e y ’ s F e e s a n d O t h e r E x p e n s e s

E

. S u m m a r y

V

. T h e C o u r t E r r s b y I g n o r i n g K a r p ’ s C r o s s

- A p p e a l f o r R u l e 1 1 S a n c t i o n s o n t h e

S t a t e L a w C l a i m s A d v a n c e d i n t h e S e c o n d A m e n d e d C o m p l a i n t

V I

. C o n c l u s i o n

I

. T h e F a c t s

A

. R e l a t i o n s e r v e M e d i a

, I n c

. ’ s a n d R e l a t i o n s e r v e

, I n c

. ’ s C o r p o r a t e H i s t o r i e s a n d

t h e A l l e g e d F r a u d

T h e p r i n c i p a l d e f

e n d a n t i n t h i s c a s e

, R e l a t i o n s e r v e M e d i a

, I n c

. , i s a n I n t e r n e t

m a r k e t i n g f

i r m t h a t m a i n t a i n s i t s p r i n c i p a l p l a c e o f b u s i n e s s i n F o r t L a u d e r d a l e

,

29F l o r i d a

. T h e o t h e r d e f e n d a n t s

, w i t h t h r e e e x c e p t i o n s

, a r e ( o r w e r e ) o f f i c e r s a n d / o r 1

d i r e c t o r s o f t h e c o m p a n y ( “ O f f i c e r s ” )

. R e l a t i o n s e r v e M e d i a

, I n c

. w a s f o r m e d

w h e n p r i v a t e l y h e l d R e l a t i o n s e r v e

, I n c

. m e r g e d w i t h a w h o l l y o w n e d s u b s i d i a r y o f

p u b l i c l y h e l d C h u b a s c o R e s o u r c e s C o r p

. F o r t h e s a k e o f c l a r i t y

, I r e f e r t o t h e

p r e d e c e s s o r c o r p o r a t i o n a s “ R e l a t i o n s e r v e ” a n d t h e m e r g e d e n t i t i e s a s

“ R e l a t i o n s e r v e M e d i a ” o r s i m p l y “ M e d i a

. ” 2

R e l a t i o n s e r v e w a s i n c o r p o r a t e d i n D e l a w a r e o n M a r c h 2 9

, 2 0 0 5

. S h o r t l y

t h e r e a f t e r

, o n A p r i l 2 0

, 2 0 0 5

, R e l a t i o n s e r v e c o m m e n c e d a p r i v a t e o f f e r i n g o f

c o m m o n s t o c k t o “ a c c r e d i t e d i n v e s t o r s ” ( t h e “ A p r i l p r i v a t e o f f e r i n g ” )

. 3

The a ppeal is fr om a district court orde r dismissing the fe dera l securities law claims of 1

the sec ond amende d complaint for f ailure to c omply

with the heig htened plea ding r equire ments

of the PSL RA and Rule 9(b); a ccor dingly , the complaint’s we ll-pleade d fac ts must be acce pted

as true a nd all rea sonable infe renc es must be dra wn from those f

acts in fa vor of the pla intiff. I n

the main, the fa cts set out in part I are taken f

rom the three complaints filed in this case. The y

wer e known to plaintiffs’ attorney s prior to their filing of the initial complaint. The complaints

ref er to, a nd quote in part, filing s the corpor ate de fenda nt and some of the individual def endants

made with the Sec urities and Exchang e Commissi on (“SEC”). Re g ardle ss of whethe r pled, we

“may take judicial notice . . . of re levant public docume nts require d to be filed with the SEC, and

actua lly filed.” B ry ant v. Avado B rands, I nc., 187 F .3d 1271, 1278 (11th Cir. 1999). This can

be done “ for the pur

pose of de termining what stateme nts the documents contain a nd not to prove

the truth of the doc uments’ contents.” I d. “[C] onsidering the SEC documents in this m anner

. . . is permitted by

Fe d. R. Evid. 201, is consist ent with the over all aims of the [PS L RA], and is not

inconsistent with Rul e 12(b) (6), c ommon notions of fa irness, or the la w of this Circuit.” I d.

Relationserve Media, I nc. cha ng ed its name to SendTec , I nc. on Jul y 26, 2006. 2

Neve rtheless, I

ref er to the c ompany

as Relationserve Media or simply Media.

The ter m “ac cre dited investors” is a ter m of art, a s defined by

the SEC. See 17 C.F.R. 3

§ 230.501(a) . The ter

m delineates those pe rmitted to invest in certain ty pes of hig h risk

investments. The term g ener ally includes we althy

individuals and org anizations, such as

corpor ations, endowments, or r etireme nt plans. Acc ording to the SEC, an individual qualifies as

an “a ccr edited investor” if his or her “ individual net worth . . . at the time of . . . pur chase

exceeds $1,000,000,” id. § 230.501(a)( 5), or if he or she ha s “an individual income in e x cess of

30T h r o u g h o u t A p r i l a n d M a y 2 0 0 5

, R e l a t i o n s e r v e r e c e i v e d a n d a c c e p t e d $ 1

, 1 2 5

, 0 0 0

o f s u b s c r i p t i o n s i n e x c h a n g e f o r R e l a t i o n s e r v e s h a r e s

. T h e s h a r e s w e r e i s s u e d i n

r e l i a n c e o n a R e g u l a t i o n D e x e m p t i o n f r o m r e g i s t r a t i o n u n d e r t h e S e c u r i t i e s A c t o f

1 9 3 3 ( t h e “ 1 9 3 3 A c t ” )

, a n d w e r e “ r e s t r i c t e d s h a r e s ” a s d e f i n e d b y t h e A c t

. S e e 1 7 4

C

. F

. R

. § § 2 3 0

. 5 0 1 e t s e q

. 5

W h i l e t h e A p r i l p r i v a t e o f f e r i n g w a s g o i n g o n

, o n M a y 1 6

, 2 0 0 5

,

R e l a t i o n s e r v e a c q u i r e d t w o I n t e r n e t m a r k e t i n g c o m p a n i e s

, O m n i P o i n t M a r k e t i n g

L L C a n d F r i e n d s a n d L L C

. I n e x c h a n g e f o r t h e o w n e r s h i p i n t e r e s t i n t h o s e

c o m p a n i e s

, R e l a t i o n s e r v e p a i d $ 5 0 0

, 0 0 0 c a s h

, 8

, 0 0 0

, 0 0 0 s h a r e s o f i t s c o m m o n

s t o c k

, a n d a t w o

- y e a r p r o m i s s o r y n o t e f o r $ 7 0 0

, 0 0 0

. R e l a t i o n s e r v e a l s o i s s u e d

4

, 0 0 1

, 0 0 0 s h a r e s t o i t s f o u n d e r s a s c o m p e n s a t i o n f o r b r i d g e l o a n a d v a n c e s a n d

$200,000 in eac h of the two most rec ent y ear s . . . and has a rea sonable e x pecta tion of rea ching

the same inc ome level in the c urre nt y ear ,” id. § 230.501(a )(6)

.

The 1933 Ac t is codified at 15 U.S.C. §§ 77a et seq. 4

Reg ulation D allows issuers to sell secur ities without reg istering them with the SEC if a 5

series of both ge nera l and spec ific conditions is followed. Gene rally , the conditions that must be

met are : (1) all sale s within a cer tain time period must be “integ rate d” (tha t is, treated a s one

offe ring ); (2) infor

mation about the sec urities must be disclosed to investors; (3) ther e must be

no “g ener al solicitation” of purc haser s of the sec urities; and (4) the secur ities must contain

restric tions on their resale . See 17 C.F.R. § 230.502.

I n this case, Rela tionserve soug ht a re g istration exempti on on the basis of SECpromulg ated Rule 506. I d. § 230.506. Rule 506 imposes two specific c onditions t hat must be

met. First, “the issuer [must ] reasonably believe[] that there ar e no more than 35 purc haser s of

secur ities from the issuer.” I d. § 230.506(b)( 2)(i). Sec ond, the issuer must rea sonably believe

that “[e]ach purc haser

who is not an ac cre dited investor either alone or with his purchase r

repr esenta tive(s) ha s such knowledg e and e x perie nce in f inancial a nd business matters that he is

capa ble of e valuating the merits and r isks of the prospec tive investment.” I d. §

230.506(b)( 2)(ii).

31n e g o t i a t i n g t h e a c q u i s i t i o n s

. R e l a t i o n s e r v e ’ s c h i e f o p e r a t i n g o f f i c e r a t t h e t i m e

,

S c o t t H i r s c h

, w a s a l s o t h e i n d i r e c t m a j o r i t y o w n e r a n d p r e s i d e n t o f O m n i P o i n t

.

R e l a t i o n s e r v e ’ s t h e n p r e s i d e n t

, D a n i e l l e K a r p

, i s S c o t t H i r s h ’ s s i s t e r

.

A f t e r c o m p l e t i n g t h e A p r i l p r i v a t e o f f e r i n g a n d t h e a c q u i s i t i o n o f O m n i 6

P o i n t a n d F r i e n d s a n d

, o n M a y 2 4

, 2 0 0 5

, R e l a t i o n s e r v e e n t e r e d a n I n d e p e n d e n t

C o n s u l t i n g A g r e e m e n t ( t h e “ c o n s u l t i n g a g r e e m e n t ” ) w i t h S u m m i t F i n a n c i a l

P a r t n e r s

, L L C ( “ S u m m i t ” )

. U n d e r t h e c o n s u l t i n g a g r e e m e n t

, S u m m i t a n d i t s

p r e s i d e n t

, T o n y A l t a v i l l a

, a g r e e d t o “ [ i ] n t r o d u c e [ R e l a t i o n s e r v e ] t o t h e f i n a n c i a l

c o m m u n i t y ” a n d “ [ p ] e r f o r m t h e f u n c t i o n s g e n e r a l l y a s s i g n e d t o s t o c k h o l d e r

r e l a t i o n s a n d p u b l i c r e l a t i o n s d e p a r t m e n t s i n m a j o r c o r p o r a t i o n s

. ” R e l a t i o n s e r v e

M e d i a I n c

. , C u r r e n t R e p o r t ( F o r m 8

- K )

, E x

. 2

. 6

, a t 1

– 2 ( J u n e 1 6

, 2 0 0 5 )

. S u m m i t 7

a l s o a g r e e d t o a c t a s a “ f i n d e r ” o f f

i n a n c i n g s o u r c e s o r a c q u i s i t i o n c a n d i d a t e s f o r

I infer tha t Relationserve c ompleted the Apr il private off ering no later tha

n May 19, 6

2005. I ssuers selling secur ities pursuant to Reg ulation D must noti fy the SEC of the sales.

Relationserve g ave the requisite notice by filing F orm D on May

23, 2005. Relationserve , I nc.,

Notice of Sale of Sec urities Pursuant to Reg ulation D (F orm D), a t 1 (May 23, 2005).

Relationserve disclosed its rece ipt of $1.125 mill ion from twenty -two ac cre dited investors. I d. at

4. L ater filings indica te that Relationserve did not rece ive any more subscr iptions from this

offe ring . See Relationser ve Media , I nc., Curre nt Report (F orm 8-K) , at 29 (June 16, 2005) (“O n

April 20, 2005 Relationserve commence d a priva te offe ring . . . . Relationserve rec eived a nd

acc epted $1,125,000 of

subscriptions.”). The share s may not have be en issued, howe ver, until

J une. See Re lationserve Me dia, I nc., Reg istration Statement under the Sec urities Act of 1933

(F orm SB-2) , at 26 (Mar . 20, 2006) (“ I n May and June 2005, we sold 1,625,000 share s of and

g rante d 812,500 war

rants to purc hase 812,500 sha res of common stock at an e x erc ise price of

$2.00 per sha

re f or net proc eeds of

$1,495,026.”).

As indicated infr a, the c onsulting ag ree ment was publicly disclosed, in its entirety , in 7

this curre nt report a s Ex hibit 2.6.

32R e l a t i o n s e r v e

. I n e x c h a n g e

, R e l a t i o n s e r v e p a i d S u m m i t 1

, 0 5 0

, 0 0 0 s h a r e s o f i t s

c o m m o n s t o c k a n d p r o m i s e d t o p a y a c a s h f i n d e r ’ s f e e

. I d

. a t 3

, 5

. T h e c o n s u l t i n g

a g r e e m e n t n o t e d t h a t “ I T I S S P E C I F I C A L L Y U N D E R S T O O D T H A T [ S u m m i t ]

I S N O T A N D D O E S N O T H O L D I T S E L F O U T B E [ s i c ] A B R O K E R / D E A L E R

,

B U T I S M E R E L Y A ‘ F I N D E R ’ I N R E F E R E N C E T O [ M e d i a ] P R O C U R I N G

F I N A N C I N G S O U R C E S A N D A C Q U I S I T I O N / M E R G E R C A N D I D A T E S

. ” I d

.

a t 6

.

F r o m i n c e p t i o n

, R e l a t i o n s e r v e ’ s s t r a t e g y w a s t o b e c o m e a p u b l i c l y t r a d e d

c o m p a n y b y m e a n s o f a “ r e v e r s e m e r g e r

. ” A c c o r d i n g l y

, t h e A p r i l O f f e r i n g ’ s

p r i v a t e p l a c e m e n t m e m o r a n d u m e x p l a i n e d t h e c o m p a n y ’ s i n t e n t t o f i n d

[ a ] p u b l i c l y

- t r a d e d c o m p a n y

. . . w h i c h w i l l a c q u i r e

, b y m e r g e r o f

R e l a t i o n s e r v e

. . . a l l o f t h e i s s u e d a n d o u t s t a n d i n g c a p i t a l s t o c k o f

R e l a t i o n s e r v e ( a n d a n y a c q u i r e d b u s i n e s s e s a t t h e t i m e o f m e r g e r )

.

T h e r e a f t e r

, t h e p r e s e n t s t o c k h o l d e r s o f R e l a t i o n s e r v e a n d p u r c h a s e r s

i n t h e o f f e r i n g w i l l

, b y v i r t u e o f t h e m e r g e r

, b e c o m e t h e c o n t r o l l i n g

s t o c k h o l d e r s o f t h e p u b l i c l y

- t r a d e d c o m p a n y

.

R e l a t i o n s e r v e

, I n c

. , P r i v a t e P u r c h a s e O f f e r i n g D o c u m e n t

, a t 1 ( A p r

. 2 0

, 2 0 0 5 )

.

C o n s i s t e n t w i t h t h i s r e p r e s e n t a t i o n

, R e l a t i o n s e r v e e x p l o r e d a n d u l t i m a t e l y e n t e r e d

a m e r g e r a g r e e m e n t w i t h C h u b a s c o

.

P r i o r t o t h e m e r g e r

, C h u b a s c o

, a N e v a d a c o r p o r a t i o n w i t h i t s p r i n c i p a l p l a c e

o f b u s i n e s s i n C a n a d a

, w a s a n e x p l o r a t i o n

- s t a g e m i n i n g c o m p a n y y e t t o c o m m e n c e

o p e r a t i o n s

. I n t o t a l

, C h u b a s c o h a d 5 1 s h a r e h o l d e r s a n d a b o u t $ 1 0 0

, 0 0 0 i n a s s e t s

.

33T h e l a r g e s t s h a r e h o l d e r

, S c o t t Y o u n g

, o w n e d 6

. 8 m i l l i o n s h a r e s a n d a l s o s e r v e d a s

C h u b a s c o ’ s p r e s i d e n t

, c h i e f f i n a n c i a l o f

f i c e r

, a n d s o l e d i r e c t o r

. T h e r e m a i n i n g

f i f t y s h a r e h o l d e r s p u r c h a s e d C h u b a s c o s h a r e s i n a t l e a s t o n e o f t w o e x e m p t

R e g u l a t i o n S o f

f e r i n g s

. C o l l e c t i v e l y

, t h e f i f t y s h a r e h o l d e r s o w n e d 3

, 2 1 6

, 5 0 0 8

s h a r e s

. C h u b a s c o b e c a m e a p u b l i c r e p o r t i n g c o m p a n y b y f i l i n g a r e g i s t r a t i o n

s t a t e m e n t f

o r t h e s e 3

, 2 1 6

, 5 0 0 s h a r e s o n O c t o b e r 8

, 2 0 0 4

. O n c e e f f e c t i v e

, t h e

r e g i s t r a t i o n s t a t e m e n t w o u l d a l l o w t h e f i f t y h o l d e r s t o t r a d e t h a t s t o c k p u b l i c l y

.

C h u b a s c o R e s

. C o r p

. , R e g i s t r a t i o n S t a t e m e n t U n d e r t h e S e c u r i t i e s A c t o f 1 9 3 3

( S B

- 2 ) ( O c t

. 8

, 2 0 0 4 )

. A f t e r a s e r i e s o f a m e n d m e n t s

, t h e R e g i s t r a t i o n S t a t e m e n t

b e c a m e e f

f e c t i v e o n F e b r u a r y 2 4

, 2 0 0 5

. C h u b a s c o R e s

. C o r p

. , Q u a r t e r l y R e p o r t

( F o r m 1 0

- Q S B )

, a t 1 0 ( M a r

. 1 7

, 2 0 0 5 )

.

S o m e t i m e b e t w e e n M a r c h a n d J u n e 2 0 0 5

, R e l a t i o n s e r v e ’ s m a n a g e m e n t

a p p r o a c h e d C h u b a s c o a n d s u g g e s t e d a r e v e r s e a c q u i s i t i o n o f R e l a t i o n s e r v e

. A f t e r

d e t e r m i n i n g t h a t t h e r e v e r s e a c q u i s i t i o n w o u l d b e “ l e s s s p e c u l a t i v e a n d c o n t a i n [ ]

g r e a t e r b e n e f

i t s

, ” C h u b a s c o t e r m i n a t e d i t s m i n i n g e x p l o r a t i o n a c t i v i t i e s a n d

n e g o t i a t e d a p l a n o f m e r g e r a n d r e o r g a n i z a t i o n w i t h R e l a t i o n s e r v e

. C h u b a s c o R e s

.

C o r p

. , Q u a r t e r l y R e p o r t ( F o r m 1 0

- Q S B )

, a t 5 ( J u n e 1 4

, 2 0 0 5 )

.

Reg ulation S sets out rules gove rning exempt sales of secur ities beca use the 8

transac tions occur outside the U nited States. See 17 C.F.R. § 230.901 et seq.

34T h e t e r m s o f t h e m e r g e r i n c l u d e d t h e f o l l o w i n g

. C h u b a s c o w o u l d f o r m a

w h o l l y

- o w n e d s u b s i d i a r y

, R e l a n d A c q u i s i t i o n

. R e l a n d w o u l d t h e n m e r g e i n t o

R e l a t i o n s e r v e

, w i t h R e l a t i o n s e r v e s u r v i v i n g

. U p o n c o n s u m m a t i o n o f t h e m e r g e r

,

e a c h s h a r e o f R e l a n d w o u l d a u t o m a t i c a l l y c o n v e r t i n t o t h e r i g h t t o r e c e i v e o n e

s h a r e o f R e l a t i o n s e r v e ; t h u s C h u b a s c o w o u l d o w n a l l o f t h e i s s u e d a n d o u t s t a n d i n g

s h a r e s o f R e l a t i o n s e r v e

. R e l a t i o n s e r v e M e d i a I n c

. , C u r r e n t R e p o r t ( F o r m 8

- K )

, E x

.

2

. 1 ( P l a n o f M e r g e r ) ¶ 1

. 5 ( a ) ( J u n e 1 6

, 2 0 0 5 )

. I n e x c h a n g e

, R e l a t i o n s e r v e ’ s s t o c k

w o u l d a u t o m a t i c a l l y c o n v e r t i n t o t h e r i g h t t o r e c e i v e C h u b a s c o s t o c k o n a 1 : 1

b a s i s

. I d

. A d d i t i o n a l l y

, S c o t t Y o u n g a g r e e d t o c a n c e l h i s 6

. 8 m i l l i o n s h a r e s o f

C h u b a s c o a n d r e s i g n f

r o m h i s p o s i t i o n a s i t s s o l e d i r e c t o r

, p r e s i d e n t

, a n d c h i e f

f i n a n c i a l o f

f i c e r

. D a n i e l l e K a r p

, R e l a t i o n s e r v e ’ s p r e s i d e n t

, w o u l d b e c o m e t h e n e w

p r e s i d e n t a n d s o l e d i r e c t o r o f C h u b a s c o

. F i n a l l y

, C h u b a s c o w o u l d c h a n g e i t s n a m e

t o R e l a t i o n s e r v e M e d i a

, I n c

. I d

. ¶ 6

. 4

.

T h e m e r g e r t o o k p l a c e o n J u n e 1 3

, 2 0 0 5

. A s a r e s u l t o f t h e m e r g e r

,

R e l a t i o n s e r v e M e d i a

, I n c

. , f / k / a C h u b a s c o R e s o u r c e s C o r p

. , h e l d R e l a t i o n s e r v e a s a

w h o l l y o w n e d s u b s i d i a r y

. A s p l a n n e d

, S c o t t Y o u n g r e s i g n e d f r o m a l l p o s i t i o n s

w i t h M e d i a a n d D a n i e l l e K a r p b e c a m e i t s s o l e d i r e c t o r a n d p r e s i d e n t

. M e d i a n o w

h a d t w o g r o u p s o f s h a r e h o l d e r s

. T h e f i r s t g r o u p c o n s i s t e d o f t h e f o r m e r C h u b a s c o

s h a r e h o l d e r s w h o h e l d 3

, 2 1 6

, 5 0 0 s h a r e s ; t h e s e s h a r e s c o u l d b e t r a d e d a n d

35c o n s t i t u t e d M e d i a ’ s “ p u b l i c f l o a t

. ” I d

. ¶ 2

. 0 1

. T h e s e c o n d g r o u p c o n s i s t e d o f

f o r m e r R e l a t i o n s e r v e s h a r e h o l d e r s w h o o w n e d 1 3

, 3 2 6

, 0 0 0 s h a r e s o f R e l a t i o n s e r v e

s t o c k

, n o w c o n v e r t i b l e i n t o M e d i a s t o c k

. I d

. B e c a u s e t h e s e c o n d g r o u p a c q u i r e d

t h e s h a r e s i n u n r e g i s t e r e d o f f e r i n g s a n d n o s u b s e q u e n t r e g i s t r a t i o n s t a t e m e n t h a d

b e e n f i l e d

, t h e s h a r e s c o n t i n u e d t o b e r e s t r i c t e d a n d c o u l d n o t b e t r a d e d

. T h e

m e r g e r d i d n o t

, o f c o u r s e

, a l t e r t h e d u t y o f M e d i a f / k / a C h u b a s c o t o m a k e r o u t i n e

f i l i n g s w i t h t h e S E C

.

A c c o r d i n g l y

, j u s t t h r e e d a y s a f t e r t h e m e r g e r

, o n J u n e 1 6

, 2 0 0 5

, t h e n e w l y

f o r m e d M e d i a f

i l e d a n S E C c u r r e n t r e p o r t ( F o r m 8

- K )

. A m o n g o t h e r d i s c l o s u r e s

,

t h i s r e p o r t e x p l a i n e d t h e m e r g e r a n d t h e r e s u l t a n t c h a n g e i n b u s i n e s s

— f r o m m i n i n g

e x p l o r a t i o n t o I n t e r n e t m a r k e t i n g

. T h i s r e p o r t a l s o d i s c l o s e d

, f o r t h e f i r s t t i m e

, t h a t

M e d i a ’ s p r e d e c e s s o r

, R e l a t i o n s e r v e

, h a d “ e n t e r e d i n t o a n I n d e p e n d e n t C o n s u l t i n g

A g r e e m e n t w i t h S u m m i t F i n a n c i a l P a r t n e r s

, L L C

. ” I d

. a t 2 9

. A f u l l c o p y o f t h e 9

c o n s u l t i n g a g r e e m e n t w a s a t t a c h e d t o t h e S E C f i l i n g a s a n e x h i b i t ; t h i s a t t a c h m e n t

There would have be en no pre vious occa sion for Relationserve to disclose the 9

rela tionship wit h Summi t since as a private c ompany , Relationserve had no duty to file secur ities

disclosures re g arding its material def initive ag ree ments. The full text of the report’ s disclosure

is as follows:

On May 24, 2005, the Company

enter ed into an I ndepende nt Consult ing

Ag ree ment with Summ it Financia l Partners, L L C. Under the te rms of the

Ag ree ment, Summi t Financ ial Partners, L L C. is to provide investor relations and

simil ar se rvice s in ex chang e for issuance of

1,050,000 share s of Common S tock.

A copy of the Ag ree ment is annexed here to as Exhi bit 2.6.

Relationserve Media I nc., Curre nt Report (F orm 8-K) , at 29 (June 16, 2005).

36i n c l u d e d

, o f c o u r s e

, S u m m i t ’ s e x p r e s s r e p r e s e n t a t i o n t h a t i t w o u l d n o t b e a c t i n g a s

a b r o k e r / d e a l e r

, b u t r a t h e r w o u l d s e r v e m e r e l y a s a f i n d e r

. A s a c o n s e q u e n c e o f t h e

m e r g e r

, S u m m i t p e r f

o r m e d t h e s a m e s e r v i c e s f o r M e d i a a s i t h a d f

o r R e l a t i o n s e r v e

.

S h o r t l y a f

t e r t h e m e r g e r

, M e d i a c o m m e n c e d a R e g u l a t i o n D

, R u l e 5 0 6

p r i v a t e o f

f e r i n g p u r s u a n t t o a p r i v a t e p l a c e m e n t m e m o r a n d u m d a t e d J u n e 2 2

, 2 0 0 5

( t h e “ J u n e p r i v a t e o f

f e r i n g ” )

. I t w a s i n t h i s o f f e r i n g t h a t p l a i n t i f

f R i c h a r d F

. 1 0

T h o m p s o n

, a n I n d i a n a r e s i d e n t

, p u r c h a s e d 5 0

, 0 0 0 M e d i a s h a r e s a t t w o d o l l a r s p e r

s h a r e a n d t h r e e

- y e a r w a r r a n t s w i t h a n e x e r c i s e p r i c e o f $ 3

. 5 0

, f o r a t o t a l i n v e s t m e n t

o f $ 1 0 0

, 0 0 0

.

T h o m p s o n b o u g h t t h e s h a r e s o n J u n e 2 8

, 2 0 0 5

, t w e l v e d a y s a f t e r M e d i a h a d

d i s c l o s e d t h e c o n s u l t i n g a g r e e m e n t w i t h S u m m i t

. G a r y A l t a v i l l a

, S u m m i t ’ s

p r e s i d e n t

, a d v i s e d T h o m p s o n a b o u t t h e p r i v a t e o f f e r i n g a n d h e l p e d f

a c i l i t a t e

T h o m p s o n ’ s p u r c h a s e

. A t t h e t i m e o f h i s p u r c h a s e

, T h o m p s o n s i g n e d a

s u b s c r i p t i o n a g r e e m e n t w h e r e i n h e a t t e s t e d t o h i s k n o w l e d g e o f t h e c o n s u l t i n g

a g r e e m e n t a n d t h a t S u m m i t w a s n o t l i c e n s e d a n d d i d n o t h o l d i t s e l f o u t a s a

b r o k e r / d e a l e r

. I n d e e d

, i n t h e s u b s c r i p t i o n a g r e e m e n t t h a t h e s i g n e d

, T h o m p s o n

a c k n o w l e d g e [ d ] t h a t

. . . [ h e ] h a s r e a d a n d e v a l u a t e d

, o r h a s e m p l o y e d

t h e s e r v i c e s o f a n i n v e s t m e n t a d v i s o r

, a t t o r n e y o r a c c o u n t a n t t o r e a d

a n d e v a l u a t e

, a l l o f t h e d o c u m e n t s f u r n i s h e d o r m a d e a v a i l a b l e b y t h e

C o m p a n y t o [ T h o m p s o n ]

. . . i n c l u d i n g

. . . t h e C o m p a n y ’ s C u r r e n t

See supra

note 5 for a

n explanation of Reg ulation D and Rule 506. 1 0

37R e p o r t o n F o r m 8

- K f i l e d w i t h t h e S e c u r i t i e s a n d E x c h a n g e

C o m m i s s i o n ( “ S E C ” ) o n J u n e 1 6

, 2 0 0 5 ( “ C u r r e n t R e p o r t ” ) a n d

s u b s e q u e n t S E C f

i l i n g s a n d r e p o r t s

. . . .

R e l a t i o n s e r v e M e d i a

, I n c

. , C u r r e n t R e p o r t ( F o r m 8

- K )

, E x

. 4

. 1 ( S u b s c r i p t i o n

A g r e e m e n t )

, a t 1

– 2 ( J u n e 3 0

, 2 0 0 5 )

. A s i n d i c a t e d a b o v e

, t h i s J u n e 1 6

, 2 0 0 5 1 1

C u r r e n t R e p o r t i n c l u d e d t h e a g r e e m e n t b e t w e e n M e d i a a n d S u m m i t i n i t s e n t i r e t y

.

O n J u n e 3 0

, 2 0 0 5

, M e d i a c o m p l e t e d t h e J u n e p r i v a t e o f f e r i n g

. I n a r e p o r t

f i l e d w i t h t h e S E C

, i t d i s c l o s e d :

O n J u n e 3 0

, 2 0 0 5 w e c o m p l e t e d a p r i v a t e o f f e r i n g o f U n i t s t o

“ a c c r e d i t e d i n v e s t o r s ” a s t h a t t e r m i s d e f i n e d i n R e g u l a t i o n D o f t h e

S e c u r i t i e s A c t

, w i t h e a c h U n i t c o n s i s t i n g o f 5 0

, 0 0 0 s h a r e s o f o u r

c o m m o n s t o c k

, $ 0

. 0 0 0 1 p a r v a l u e p e r s h a r e ( “ C o m m o n S t o c k ” )

, a n d a

t h r e e

- y e a r w a r r a n t t o p u r c h a s e 2 5

, 0 0 0 s h a r e s o f C o m m o n S t o c k a t

$ 3

. 5 0 p e r s h a r e ( t h e “ O f f e r i n g ” )

. W e r e c e i v e d a n d a c c e p t e d

$ 2

, 0 0 0

, 0 0 0 o f s u b s c r i p t i o n s i n t h e O f f e r i n g

. T h e U n i t s w e r e i s s u e d i n

r e l i a n c e o n a n e x e m p t i o n f r o m r e g i s t r a t i o n p r o v i d e d u n d e r R e g u l a t i o n

D o f t h e S e c u r i t i e s A c t a n d a r e r e s t r i c t e d s e c u r i t i e s a s d e f i n e d b y t h e

S e c u r i t i e s A c t

.

R e l a t i o n s e r v e M e d i a

, I n c

. , C u r r e n t R e p o r t ( F o r m 8

- K )

, a t 2 ( J u n e 3 0

, 2 0 0 5 )

.

A t t a c h e d t o t h i s f

i l i n g w a s a c o p y o f t h e “ P r i v a t e O f f e r i n g S u b s c r i p t i o n

A g r e e m e n t ” t h e p u r c h a s e r s s i g n e d ( t h e “ s u b s c r i p t i o n a g r e e m e n t ” )

. A s i n

R e l a t i o n s e r v e ’ s A p r i l o f f e r i n g

, a l l o f t h e s h a r e s s o l d i n M e d i a ’ s J u n e p r i v a t e

I n addition to attesting that he had re ad Media ’s SEC filings, Thompson also 1 1

“re cog nize[ d] t hat Company rese rves the r ight to pay

a commission or finder s fee of up to 5% of

the g ross proce eds of the O ffe ring .” Relationser ve Media , I nc., Curre nt Report (F orm 8-K) , Ex

. 4.1 (Subscription Ag ree ment), at 3 (June 30, 2005).

38o f

f e r i n g w e r e r e s t r i c t e d a n d t h e r e f o r e c o u l d n o t b e r e s o l d u n t i l r e g i s t e r e d u n d e r t h e

1 9 3 3 A c t

. 1 2

I n a d d i t i o n t o t h i s c u r r e n t r e p o r t

, o n J u l y 1 4

, 2 0 0 5

, M e d i a f i l e d a F o r m D

w i t h t h e S E C t o g i v e f

u r t h e r n o t i c e o f a n d b a s i c d e t a i l s a b o u t t h e J u n e p r i v a t e

o f f e r i n g

. R e l a t i o n s e r v e M e d i a

, I n c

. , N o t i c e o f S a l e o f S e c u r i t i e s P u r s u a n t t o

R e g u l a t i o n D ( F o r m D )

, a t 1 ( J u l y 1 4

, 2 0 0 5 )

. A t t h e t i m e

, F o r m D r e q u i r e d t h e

i s s u e r t o d i s c l o s e i n f

o r m a t i o n a b o u t “ e a c h p e r s o n w h o h a s b e e n o r w i l l b e p a i d o r

g i v e n

, d i r e c t l y o r i n d i r e c t l y

, a n y c o m m i s s i o n o r s i m i l a r r e m u n e r a t i o n f o r

s o l i c i t a t i o n o f p u r c h a s e r s i n c o n n e c t i o n w i t h t h e s a l e s o f s e c u r i t i e s i n t h e o f f e r i n g

. ”

I d

. a t 3

. M e d i a d i d n o t d i s c l o s e S u m m i t ’ s i n v o l v e m e n t i n t h e J u n e p r i v a t e o f f e r i n g

.

M e d i a a l s o f

i l e d a n o t i c e o f t h e s a l e o f u n r e g i s t e r e d s e c u r i t i e s w i t h t h e

I n d i a n a S e c r e t a r y o f S t a t e i n c o m p l i a n c e w i t h I n d i a n a ’ s s e c u r i t i e s a c t

. S e e I n d

.

C o d e § § 2 3

- 2

- 1

- 1 e t s e q

. ( 2 0 0 5 ) ( r e p e a l e d 2 0 0 8 )

. T h i s n o t i c e

, r e c e i v e d a n d f i l e d

b y t h e S e c r e t a r y o f S t a t e ’ s o f f i c e o n J u l y 1 4

, 2 0 0 5

, d i s c l o s e d t h a t M e d i a ’ s J u n e

Absent an e x emption, the 1933 Act g ener ally prohibits the sale of unr eg istered 1 2

secur ities. I n the subscription ag ree ment, Media promised to re g ister the shar es within forty -five

day s of the closing of the fina l sale in the June private off ering . Relationserve Media, I nc.,

Current Repor

t (For m 8-K), Ex. 4.1 (Subscription Agr eeme nt), at I I I & E x . C. (Reg istration

Rights Ag ree ment) (June 30, 2005). Media de faulted on this obliga tion, but in October 2005,

Media’s boa

rd “r atified wa ivers obtained f rom a majority

of the purc haser s in the J une [] 2005

offe ring and ente red into newConsent and Waiver Ag ree ments containing amende d reg istration

obliga tions of the Company .” Relationser ve Media , I nc., Reg istration Statement Under the

Securities Ac t of 1933 (F orm SB-2) , at F- 25 (Mar . 20, 2006). Ultimately , as discussed be low,

Media did not file a r eg istration statement for the share s until March 20, 2006, which did not

become eff

ective until J uly

14, 2006.

39p r i v a t e o f

f e r i n g h a d a t t r a c t e d t w e n t y

- t w o a c c r e d i t e d i n v e s t o r s t o p u r c h a s e a n

a g g r e g a t e t o t a l o f $ 2 m i l l i o n o f M e d i a ’ s c o m m o n s t o c k

. I n p a r t i c u l a r

, M e d i a

a t t e s t e d t o i t s s a l e o f $ 3 4 0

, 0 0 0 o f M e d i a s h a r e s t o f i v e a c c r e d i t e d i n v e s t o r s i n

I n d i a n a

. 1 3

W h i l e t h e J u n e p r i v a t e o f f e r i n g w a s g o i n g o n

, M e d i a e x p a n d e d i t s

m a n a g e m e n t t e a m

. R e c a l l t h a t i m m e d i a t e l y a f t e r t h e m e r g e r

, D a n i e l l e K a r p w a s

M e d i a ’ s s o l e p r e s i d e n t

, c h i e f e x e c u t i v e o f f i c e r

, a n d d i r e c t o r ; M e d i a ’ s s u b s i d i a r y

,

R e l a t i o n s e r v e

, c o n t i n u e d t o b e s e r v e d b y S c o t t H i r s c h a s i t s c h i e f o p e r a t i n g o f f i c e r

.

O n J u n e 2 1

, M e d i a h i r e d M a n d e e H e l l e r A d l e r t o s e r v e a s i t s c h i e f e x e c u t i v e

o f f i c e r a n d a s a d i r e c t o r ; a n d o n J u n e 2 2

, M e d i a h i r e d W a r r e n “ P e t e ” M u s s e r t o

s e r v e a s a d i r e c t o r

.

A s d i s c u s s e d a b o v e

, a f

t e r t h e m e r g e r

, t h e 3

, 2 1 6

, 5 0 0 s h a r e s t h a t h a d b e e n

r e g i s t e r e d b y C h u b a s c o c o u l d b e t r a d e d i n t h e o p e n m a r k e t

. M e d i a ’ s s h a r e s b e g a n

t o t r a d e o n t h e O v e r t h e C o u n t e r B u l l e t i n B o a r d ( t h e “ O T C B B ” ) i n l a t e J u n e 2 0 0 5

.

I t w a s f r o m t h i s p o o l o f s t o c k t h a t p l a i n t i f f L

. A l a n J a c o b y p u r c h a s e d a t o t a l o f

1 0

, 0 0 0 s h a r e s o f M e d i a s t o c k i n t h r e e s e p a r a t e t r a n s a c t i o n s

. T h e s e p u r c h a s e s

o c c u r r e d o n J u l y 2 2

, J u l y 2 6

, a n d A u g u s t 1 2

, 2 0 0 5

, a n d J a c o b y c l a i m e d t o h a v e

The I ndiana Sec urities Act exempted issuers fr om reg istering with the state in ce rtain 1 3

circ umstances. See I .C. § 23-2-1-2( b)(10) (2005) ( repe aled 2008) . As discussed in par t I V,

infra, Me dia satisfied the r equire ments for a n exemption.

40p a i d a n a v e r a g e o f s i x d o l l a r s p e r s h a r e

. B y M a r c h 2 0 0 6

, a l m o s t n i n e m o n t h s 1 4

l a t e r

, M e d i a ’ s s h a r e s h a d l o s t 7 5 % o f t h e i r v a l u e i n t h e o p e n m a r k e t

.

C u r i o u s l y

, t h e p l a i n t i f

f s a l l e g e d t h a t M e d i a ’ s s h a r e s t r a d e d o n t h e N A S D A Q

s t o c k e x c h a n g e

. T h e r e i s n o e v i d e n c e i n M e d i a ’ s S E C f i l i n g s

, h o w e v e r

, t h a t

M e d i a ’ s s t o c k t r a d e d a n y w h e r e e x c e p t t h e O T C B B

. M e d i a d i d a p p l y f o r a

N A S D A Q l i s t i n g o n o r a b o u t J u l y 1 8

, 2 0 0 5

, b u t t h e r e i s n o e v i d e n c e t h a t t h e

a p p l i c a t i o n s u c c e e d e d

. T o t h e c o n t r a r y

, M e d i a ’ s A n n u a l R e p o r t f i l e d o n M a r c h 2 0

,

2 0 0 6 d i s c l o s e d : “ O u r C o m m o n S t o c k h a s b e e n q u o t e d o n t h e O T C B u l l e t i n B o a r d

s i n c e J u n e 3 0

, 2 0 0 5 u n d e r t h e s y m b o l R S V M

. O B

. P r i o r t o t h a t d a t e

, t h e r e w a s n o

a c t i v e m a r k e t f

o r o u r C o m m o n S t o c k

. ” R e l a t i o n s e r v e M e d i a

, I n c

. , A n n u a l R e p o r t

( F o r m 1 0

- K S B )

, a t 7 ( M a r

. 2 0

, 2 0 0 6 )

. 1 5

Whil e the r ecor d does not indicate Jacoby ’s purc hase pr ice, I judicially note that, 1 4

acc ording to the OTCBB website, the c losing pric es of Me dia’s shar es on those date s were as follows: $5.50 per shar e on Jul y 22; $5.13 per shar e on Jul y 26; and $8.75 on Aug ust 12. Note

that this is not nece ssarily the price that J acoby

paid for Me dia’s shar es, but rathe r is the closing

price quoted by

OTCBB for the pa

rticular da

y s.

The OTCB B c an be a cce ssed throug h a NASDAQ workstation. The O TCBB website 1 5

war ns, howeve r,

The OTCB B is a quota

tion medium for subscribing members, not an issuer listi ng

service , and should not be conf used with The NA SDAQ Stock Marke t. . . . The

OTCBB is unlike The NASDAQ Stock Ma rket in that it: does not impose list ing

standards; doe s not provide automated tr ade e x ecutions; does not maintain

rela tionships wit h quoted issuers; and doe s not have the sa me obliga tions for

Marke t Makers.

OTC Bulletin B oard, Compar ison of NASDAQ a nd OTCBB

, http:// www.otcbb.c om/aboutOTCBB /comparison.stm (last visited Apr. 6, 2010).

41A r o u n d t h e s a m e t i m e t h a t J a c o b y p u r c h a s e d h i s s t a k e i n M e d i a

, M e d i a ’ s

S E C f i l i n g s i n d i c a t e t h a t i t e n t e r e d i n t o t w o k e y t r a n s a c t i o n s

. F i r s t

, o n A u g u s t 9

,

2 0 0 5

, M e d i a e n t e r e d a n a s s e t p u r c h a s e a g r e e m e n t t o b u y t h e b u s i n e s s a n d

s u b s t a n t i a l l y a l l o f t h e a s s e t s o f t h e g l o b e

. c o m ’ s w h o l l y o w n e d s u b s i d i a r y

,

S e n d T e c

, f

o r $ 3 7

. 5 m i l l i o n

. R e l a t i o n s e r v e M e d i a

, I n c

. , C u r r e n t R e p o r t ( F o r m 8

- K )

( A u g

. 1 2

, 2 0 0 5 )

. T h e a c q u i s i t i o n w a s s u b j e c t t o c e r t a i n t e r m s a n d c o n d i t i o n s a n d

d i d n o t c l o s e u n t i l O c t o b e r 3 1

, 2 0 0 5

. S e c o n d

, o n A u g u s t 2 9

, 2 0 0 5

, M e d i a m e r g e d

w i t h i t s w h o l l y

- o w n e d s u b s i d i a r y

, R e l a t i o n s e r v e

, w i t h M e d i a s u r v i v i n g

.

R e l a t i o n s e r v e M e d i a

, I n c

. , C u r r e n t R e p o r t ( F o r m 8

- K )

, a t 2 ( S e p t

. 2

, 2 0 0 5 )

.

F o r t h e p u r p o s e s o f t h i s c a s e

, t w o f a c t s a r e c r u c i a l a b o u t t h e S e n d T e c a s s e t

a c q u i s i t i o n

. F i r s t

, a s p a r t o f t h e t e r m s a n d c o n d i t i o n s m e n t i o n e d

, M e d i a a g r e e d t o

t e r m i n a t e i t s c o n t r a c t w i t h S u m m i t

. R e l a t i o n s e r v e M e d i a

, I n c

. , C u r r e n t R e p o r t

( F o r m 8

- K )

, E x

. 1 0

. 1 a t 1 0 ( N o v

. 4

, 2 0 0 5 )

. S e c o n d

, M e d i a a g r e e d t h a t i t w o u l d

r e p l a c e c e r t a i n m e m b e r s o f i t s c u r r e n t m a n a g e m e n t w i t h S e n d T e c

- a p p r o v e d

m a n a g e r s

. R e l a t i o n s e r v e M e d i a

, I n c

. , C u r r e n t R e p o r t ( F o r m 8

- K ) ( A u g

. 1 2

, 2 0 0 5 )

.

A c c o r d i n g l y

, o n O c t o b e r 6

, 2 0 0 5

, M e d i a t e r m i n a t e d i t s a g r e e m e n t w i t h

S u m m i t

. T h e e x o d u s o f M e d i a ’ s s e n i o r m a n a g e m e n t t e a m b e g a n i n l a t e O c t o b e r

1 6

2 0 0 5 : d i r e c t o r M u s s e r r e s i g n e d o n O c t o b e r 3 1 ; c h i e f e x e c u t i v e o f f i c e r a n d d i r e c t o r

Media’s SEC filings indica te this. 1 6

42A d l e r r e s i g n e d o n N o v e m b e r 1 1

. W i t h o n e e x c e p t i o n

, t h e e x o d u s w a s c o m p l e t e b y

t h e f i r s t w e e k o f F e b r u a r y 2 0 0 6 w i t h t h e d e p a r t u r e o f p r e s i d e n t a n d d i r e c t o r K a r p

a n d c h i e f o p e r a t i n g o f

f i c e r H i r s c h o n F e b r u a r y 3 a n d F e b r u a r y 2

, r e s p e c t i v e l y

. T h e

l o n e e x c e p t i o n w a s c h i e f f i n a n c i a l o f

f i c e r A d a m W a s s e r m a n w h o w a s h i r e d o n a

p a r t

- t i m e b a s i s a s c h i e f f i n a n c i a l o f

f i c e r o n A u g u s t 9

, 2 0 0 5

, a n d u l t i m a t e l y s e r v e d

M e d i a i n s o m e c a p a c i t y u n t i l J u n e 1 5

, 2 0 0 6

. M e d i a ’ s o r i g i n a l m a n a g e m e n t t e a m 1 7

w a s r e p l a c e d b y S e n d t e k

- a p p r o v e d r e p l a c e m e n t s : M i c h a e l B r a u s e r j o i n e d a s

d i r e c t o r a n d c h a i r m a n o f t h e b o a r d o n O c t o b e r 3 1

, 2 0 0 5 ; S h a w n M c N a m a r a j o i n e d

a s i n t e r i m c h i e f e x e c u t i v e o f f i c e r

, s e n i o r v i c e p r e s i d e n t

, a n d a s s i s t a n t s e c r e t a r y o n

N o v e m b e r 3 0

, 2 0 0 5 ; a n d P a u l S o l t o f f

, a s c h i e f e x e c u t i v e o f

f i c e r a n d d i r e c t o r

, E r i c k

O b e c k

, a s p r e s i d e n t

, a n d D o n a l d G o u l d

, a s c h i e f f i n a n c i a l o f

f i c e r

, a l l j o i n e d o n

F e b r u a r y 3

, 2 0 0 6

. F o r a c o m p l e t e l i s t i n g o f t h e t e r m s o f M e d i a ’ s o f f i c e r s ’ s e r v i c e

,

s e e t h e T a b l e a t t a c h e d t o t h i s o p i n i o n a t 1 4 2

.

B

. R i c h a r d F

. T h o m p s o n S u e s R e l a t i o n s e r v e

, M e d i a I n c

. i n I n d i a n a S t a t e C o u r t

The plaintiffs a lleg ed that Wasserma n ended his tenur e on F ebrua ry 3, 2006. (Second 1 7

Am. Compl. ¶ 17.) The plaintiffs a lso alleg ed, howe ver, tha t Wasserman sig ned a SarbanesOxl ey cer tification as the pr incipal financ ial office r on Mar ch 20, 2006. (F irst Am. Compl . ¶

90.) The pla intiffs likely

made the f

ormer a lleg ation beca

use Dona ld Gould beca me chief

financ ial office r on F ebrua ry 3, 2006. Neve rtheless, it appe ars that Wasser man continued to

work for Media in some ca

pacity until J une 15, 2005. See Re lationserve Me dia, I nc., Curre nt

Report (F orm 8-K) (June 21, 2006) (noting tha t Wasserman re signe d from all positions on J une

15).

43O n M a r c h 3

, 2 0 0 6

, i n t h e C i r c u i t C o u r t o f H a m i l t o n C o u n t y I n d i a n a

,

T h o m p s o n s u e d S u m m i t

, A l t a v i l l a

, M e d i a

, a n d s e v e r a l o t h e r e n t i t i e s w h o u s e d

S u m m i t ’ s s e r v i c e s

, s e e k i n g r e s c i s s i o n o f h i s s h a r e s

. T h o m p s o n w a s r e p r e s e n t e d b y

C o h e n & M a l a d

, L L P

, a n I n d i a n a l a w f i r m

. T h o m p s o n d i r e c t e d t h r e e o f h i s

f o u r t e e n c o u n t s a g a i n s t M e d i a : C o u n t 4 c l a i m e d t h a t M e d i a s o l d u n r e g i s t e r e d

, n o n

e x e m p t s e c u r i t i e s i n I n d i a n a ; C o u n t 7 a l l e g e d t h a t M e d i a h a d v i o l a t e d t h e I n d i a n a

S e c u r i t i e s A c t ’ s a n t i

- f

r a u d p r o v i s i o n s b y f

a i l i n g t o d i s c l o s e t h e s h a r e s ’ r e s t r i c t e d

s t a t u s ; a n d C o u n t 1 3 c l a i m e d M e d i a d e c e i v e d T h o m p s o n b y f a i l i n g t o d i s c l o s e t h e

s h a r e s ’ r e s t r i c t e d s t a t u s

. T h e o t h e r c o u n t s o f t h e c o m p l a i n t w e r e b r o u g h t a g a i n s t

S u m m i t

, A l t a v i l l a

, a n d o t h e r n a m e d d e f e n d a n t s

. 1 8

U n r e l a t e d t o t h i s l i t i g a t i o n

, o n M a r c h 2 0

, 2 0 0 6

, M e d i a f i l e d a r e g i s t r a t i o n

s t a t e m e n t a n d i t s a n n u a l r e p o r t

. M e d i a f i l e d t h e r e g i s t r a t i o n s t a t e m e n t t o r e g i s t e r

t h e s h a r e s i t s o l d i n i t s p r i v a t e o f f e r i n g s

— a p p r o x i m a t e l y 8 5 m i l l i o n s h a r e s o f

c o m m o n s t o c k

— t o a l l o w t h e p r i v a t e o f f e r i n g s t o c k h o l d e r s t o s e l l t h e i r s h a r e s

. I n

t h e a n n u a l r e p o r t

, i n t e r a l i a

, M e d i a d i s c l o s e d t h a t

, “ [ i ] n A u g u s t 2 0 0 5

, t h e C o m p a n y

p a i d a $ 2 8

, 5 0 0 s u c c e s s f e e t o S u m m i t f

o r s e r v i c e s r e n d e r e d i n c o n n e c t i o n w i t h a

p r i v a t e p l a c e m e n t o f i t s c o m m o n s t o c k

. ” R e l a t i o n s e r v e M e d i a

, I n c

. , A n n u a l R e p o r t

Wit h respe ct to Media, Thompson cla imed that Altavilla had re prese nted that, while 1 8

Media’s sha

res ha d restric tions on resale, the se re strictions would be rele ased w ithin 30 day s of

Thompson’s purcha se.

44( F o r m 1 0

- K S B )

, a t F

- 2 6 ( M a r

. 2 0

, 2 0 0 6 )

. N e i t h e r t h e r e g i s t r a t i o n s t a t e m e n t n o r

t h e a n n u a l r e p o r t d i s c l o s e d t h e T h o m p s o n l i t i g a t i o n

.

O n M a y 1

, 2 0 0 6

, M e d i a a m e n d e d t h i s r e g i s t r a t i o n s t a t e m e n t t o g i v e t h e

p u b l i c n o t i c e o f T h o m p s o n ’ s l a w s u i t

. R e l a t i o n s e r v e M e d i a

, I n c

. , A m e n d m e n t N o

.

1 t o F o r m S B

- 2 R e g i s t r a t i o n S t a t e m e n t ( F o r m S B

- 2 / A )

, a t 5 3 ( M a y 1

, 2 0 0 6 )

.

M e d i a a l s o r e l a t e d t h a t T h o m p s o n s o u g h t r e s c i s s i o n b e c a u s e t h e s h a r e s w e r e n o t

r e g i s t e r e d a s r e q u i r e d u n d e r I n d i a n a L a w a n d b e c a u s e M e d i a f a i l e d t o d i s c l o s e a

c o m m i s s i o n t o A l t a v i l l a

. M e d i a a l s o a s s e r t e d i t s b e l i e f t h a t t h e s u i t l a c k e d m e r i t

b u t n o t e d t h a t i t c o u l d n o t p r e d i c t t h e r a n g e o f a n y l o s s

. T h i s d i s c l o s u r e p r o m p t e d

t h e S E C t o s e n d a l e t t e r t o M e d i a r e q u e s t i n g m o r e i n f o r m a t i o n a b o u t t h e T h o m p s o n

l i t i g a t i o n

.

R e s p o n d i n g t o t h e S E C ’ s l e t t e r

, o n M a y 2 3

, 2 0 0 6

, M e d i a a u g m e n t e d t h e

a m e n d m e n t i t h a d m a d e t o i t s r e g i s t r a t i o n s t a t e m e n t

. A n s w e r i n g t h e S E C ’ s

q u e s t i o n s

, M e d i a a d d e d t h a t : ( 1 ) T h o m p s o n s o u g h t r e s c i s s i o n o f 5 0

, 0 0 0 s h a r e s o f

s t o c k

, ( 2 ) M e d i a d i d n o t r e g i s t e r t h e s h a r e s i n I n d i a n a b e c a u s e t h e y q u a l i f i e d f o r a n

e x e m p t i o n

, a n d ( 3 ) A l t a v i l l a d i d n o t s e l l s h a r e s o n t h e c o m p a n y ’ s b e h a l f b u t d i d

r e c e i v e a s e v e n p e r c e n t f i n d e r ’ s f e e f o r i n t r o d u c i n g i n v e s t o r s t o M e d i a

. M e d i a

r e i t e r a t e d i t s b e l i e f t h a t t h e a c t i o n l a c k e d m e r i t

. R e l a t i o n s e r v e M e d i a

, I n c

. ,

A m e n d m e n t N o

. 2 t o F o r m S B

- 2 R e g i s t r a t i o n S t a t e m e n t ( F o r m S B

- 2 / A )

, a t 6 4

– 6 5

45( M a y 2 3

, 2 0 0 6 )

. T h e l a s t a m e n d m e n t t o t h i s r e g i s t r a t i o n s t a t e m e n t t o o k p l a c e o n

J u l y 1 3

, 2 0 0 6

, a n d t h e S E C d e c l a r e d i t e f f e c t i v e o n J u l y 1 4

, 2 0 0 6

.

O n M a y 9

, 2 0 0 6

, R e l a t i o n s e r v e M e d i a m o v e d t h e H a m i l t o n C o u n t y C i r c u i t

C o u r t t o d i s m i s s i t f

r o m T h o m p s o n ’ s l a w s u i t

. I t a r g u e d t h a t t h e f o r u m s e l e c t i o n

c l a u s e i n t h e s u b s c r i p t i o n a g r e e m e n t r e q u i r e d t h a t a l l l i t i g a t i o n b e c o n d u c t e d i n

B r o w a r d C o u n t y

, F l o r i d a

. T h o m p s o n r e s p o n d e d t o t h i s m o t i o n b y f i l i n g a n

a f f i d a v i t i n w h i c h h e a v e r r e d t h a t h e h a d n o d i r e c t c o m m u n i c a t i o n w i t h M e d i a a n d

i n f a c t d i d n o t r e a d t h e p r i v a t e o f f e r i n g m e m o r a n d u m o r a n y o t h e r m a t e r i a l s

c o n c e r n i n g M e d i a ; r a t h e r

, h i s s o n

, G r e g T h o m p s o n

, r e a d t h e m a t e r i a l s

. T h e c o u r t

a g r e e d w i t h M e d i a ’ s p o s i t i o n a n d

, o n J u l y 1 9

, 2 0 0 6

, d i s m i s s e d M e d i a f r o m t h e

c a s e

.

J u s t b e f

o r e t h e I n d i a n a c i r c u i t c o u r t d i s m i s s e d t h e c a s e

, o n J u l y 1 7

, 2 0 0 6

,

T h o m p s o n s o l d 1 0

, 0 0 0 s h a r e s a t $ 0

. 4 0 a s h a r e

, a n d a n o t h e r 1 0

, 0 0 0 s h a r e s a t $ 0

. 3 5

a s h a r e

. T h e s e s a l e s o b v i o u s l y l i m i t e d h i s a b i l i t y t o s e e k a f u l l r e s c i s s i o n o f h i s

5 0

, 0 0 0

- s h a r e i n i t i a l p u r c h a s e

. T h o m p s o n ’ s i n v e s t m e n t s t r a t e g y t o o k a t u r n l a t e r i n

t h e d a y

, t h o u g h

, a s h e b o u g h t a n o t h e r 1 0

, 0 0 0 s h a r e s o f M e d i a a t $ 0

. 4 2 a s h a r e o n

J u l y 1 7

, o n l y t o s e l l 1 0

, 0 0 0 s h a r e s t h e n e x t d a y a t $ 0

. 3 9 a s h a r e

. O n e m o n t h l a t e r

,

o n A u g u s t 1 6

, 2 0 0 6

, T h o m p s o n d u m p e d t h e r e s t o f h i s s h a r e s i n t h r e e s a l e s a t

$ 0

. 3 7

, $ 0

. 3 6

, a n d $ 0

. 3 5 a s h a r e

.

46I I

. T h e F e d e r a l P r o c e d u r a l H i s t o r y

A

. T h e I n i t i a l C o m p l a i n t

1

. T h o m p s o n F i l e s t h e I n i t i a l C o m p l a i n t

O n A u g u s t 2 8

, 2 0 0 6

, T h o m p s o n b r o u g h t t h e p r e s e n t l a w s u i t a g a i n s t M e d i a

,

t h r e e o f i t s f

o r m e r o f f i c e r s a n d o n e o f i t s f

o r m e r d i r e c t o r s i n t h e U n i t e d S t a t e s

D i s t r i c t C o u r t f

o r t h e S o u t h e r n D i s t r i c t o f F l o r i d a

. T h e f o r m e r o f f i c e r s w e r e

D a n i e l l e K a r p

, M a n d e e H e l l e r A d l e r

, a n d O h a d J e h a s s i ; t h e f o r m e r d i r e c t o r w a s

W a r r e n M u s s e r

. T h o m p s o n w a s a g a i n r e p r e s e n t e d b y C o h e n & M a l a d

, L L P

, a n d 1 9

n o w a l s o b y a F l o r i d a l a w f i r m

, F r i e d m a n

, R o s e n w a s s e r & G o l d b a u m

, P

. A

. E i g h t

d a y s a f t e r f i l i n g t h e c o m p l a i n t

, o n S e p t e m b e r 5

, C o h e n & M a l a d i s s u e d a p r e s s

r e l e a s e p u b l i c i z i n g t h e l a w s u i t a n d i n v i t i n g M e d i a s h a r e h o l d e r s t o c o n t a c t t h e

f i r m

. 2 0

T h o m p s o n s u e d o n b e h a l f o f a c l a s s c o n s i s t i n g o f “ [ a ] l l p e r s o n s [ i n c l u d i n g

h i m s e l f ] w h o p u r c h a s e d R e l a t i o n s e r v e [ M e d i a ] s h a r e s d u r i n g t h e p e r i o d b e g i n n i n g

M a y 2 4

, 2 0 0 5 a n d e n d i n g o n t h e d a t e o f t h e c o m m e n c e m e n t o f t h i s l i t i g a t i o n

, ” o n

Kar p serve d as Media’ s president fr om J une 13, 2005 to Fe bruar y 3, 2006. Adler w as 1 9

Media’s c hief e x ecutive of fice r fr om J une 21, 2005 to Novembe r 11, 2005. Jehassi was the

former chief opera ting of

fice r of Me dia, beg inning his tenure in J uly 2005 and ending it on an

unspecifie d date. Musser serve d on Media’s boa

rd of dire ctors fr om J une 21, 2005 to Octobe r

31, 2005.

The PSL RA require d this noti ce: “ Not later tha n 20 day s after

the date on w

hich the 2 0

complaint is filed, the plaintiff or pla intiffs shall cause to be published, in a widely circ ulated

national business-orie nted publication or wire service , a notice a dvising membe rs of the

purported pla intiff class . . . .” 15 U .S.C. § 78u-4(a)( 3)(A) (i).

47A u g u s t 2 8

, 2 0 0 6

. W h i l e n o t e x p l i c i t

, t h e c o m p l a i n t ’ s p r o p o s e d c l a s s c o n s i s t e d o f 2 1

t w o s u b c l a s s e s : ( 1 ) t h o s e w h o b o u g h t s h a r e s i n t h e p r i v a t e o f f e r i n g s ; a n d ( 2 ) t h o s e

w h o b o u g h t s h a r e s i n t h e p u b l i c m a r k e t

. T h e c o m p l a i n t c o n t a i n e d n i n e c o u n t s

.

C o u n t s I t h r o u g h I I I a l l e g e d v i o l a t i o n s o f f e d e r a l s e c u r i t i e s l a w a n d

, f o r r e m e d i e s

,

p r a y e d f o r r e s c i s s i o n o r d a m a g e s

. C o u n t s I V t h r o u g h I X a l l e g e d v i o l a t i o n s o f

F l o r i d a a n d I n d i a n a s t a t u t e s

. 2 2

As noted above , Thompson purcha sed 50,000 Media sha res in Media ’s J une priva te 2 1

offe ring . He a lso bought 10,000 shar es on Jul y 17, 2006, in the open mar ket. Thompson

appar ently

believed tha t the J uly

17 purcha se ena

bled him to “fairly

and ade quately

” re prese nt

and “pr otect the inter ests of” those of the class who pur chase d Media shar es in the open ma rket.

See F ed. R. Civ. P. 23(a)(4).

The c omplaint was a ty

pical “shotg

un” plea ding, in that e ach c ount incorpora ted by 2 2

ref ere nce a ll prece ding pa

rag raphs a

nd counts of the c omplaint notwiths tanding that many of the

fac ts alleg ed we re not mate rial to the cla im, or cause of ac tion, appear ing in a count’s hea ding.

This circuit conde mns shotgun plea dings. See , e.g ., Pelletier v. Z weife l, 921 F.2d 1465, 1518

(11th Cir. 1991) (“ Any one schoole d in the law who r ead the se [shotgun plea ding] complaints . . .

[] would know that many of the fa cts alleg ed could not possibly be mater ial to all of the counts.

Consequently , [t he opposing party ] and the district court [have] to si ft throug h the fa cts

prese nted and de cide f

or themselves w hich [are] material to the pa rticular c ause of

action

asser ted, a diff icult and laborious task indee d.”); see also Davis v. Coca -Cola B ottling Co., 516

F.3d 955, 984 ( 11th Cir. 2008) (re fusing to awar d attorney s’ fe es in a Title VI I case beca use the

use of shotg un pleading s “complica ted [appellate re view] to no end”); M.T.V. v. De Kalb County

Sch. Dist., 446 F.3d 1153, 1156 n.1 (11th Cir. 2006) (noting that shotgun ple ading s are “fr owned

upon in this circuit”); B y

rne v. N ezhat, 261 F.3d 1075, 1131 ( 11th Cir. 2001) (“Shotg un

pleading s, if tolerate d, harm the c ourt by impeding its ability

to administer justice.”); B eckw ith

v. City of Da y tona B eac h Shores, Fla ., 58 F.3d 1554, 1567 ( 11th Cir. 1995) (“The bar w ould be

better se rved by

heeding this advice: ‘I n law it is a g ood policy never to plead wha t y ou need not,

lest y ou oblige y ourself to prove what y ou cannot.’ ”) ( quoting Abr aham L incoln, L etter to Ushe r

F. L inder, F eb. 20, 1848, in The Q uotable L awy er 241 ( D. Shrag er & E. Fr ost eds., 1986)). The

first 50 para g raphs of

the complaint containe d alleg ations of fa ct that appe are d to relate to a

particula r count of the complaint but not to other counts. Utiliz ing this method of plea ding,

Count I incorpora

ted the first 50 pa

rag raphs of

the complaint, many

of which ha d nothing to do

with the Count I claim(s). Counts I I throug h I X succ essively incorporated the alleg ations of all

prec eding para g raphs a

nd counts, such that ea ch succ eeding count was loa ded down with

alleg ations having no bear ing on the claim(s) the count purporte d to assert.

48C o u n t I

, “ F i l i n g o f F a l s e R e g i s t r a t i o n S t a t e m e n t

, ” a l l e g e d a v i o l a t i o n o f

“ S e c t i o n 1 1 o f t h e S e c u r i t i e s A c t o f 1 9 3 3

, 1 5 U

. S

. C

. § 7 7 l ( a )

. ” S e c t i o n 1 1 i s

a c t u a l l y c o d i f

i e d a t 1 5 U

. S

. C

. § 7 7 k

, n o t § 7 7 l ( a )

. S e c t i o n 7 7 k p r o v i d e s r e l i e f f o r

p e r s o n s w h o p u r c h a s e s e c u r i t i e s i n r e l i a n c e o n a f a l s e o r m i s l e a d i n g r e g i s t r a t i o n

s t a t e m e n t

. S e c t i o n 7 7 l ( a )

, w h i c h i s a c o d i f i c a t i o n o f § 1 2 o f t h e 1 9 3 3 A c t

, 2 3

p r o v i d e s r e l i e f f

o r p u r c h a s e r s o f s e c u r i t i e s w h o r e l y o n a f a l s e o r m i s l e a d i n g

The text of 15 U.S.C. § 77k, C ivil li abilities on acc ount of false reg istration statement, 2 3

states, in pertinent pa

rt:

(a) Persons possessing cause of ac tion; persons liable

I n case any

part of the reg istration statement, when suc h part be came eff ective,

contained a

n untrue stateme nt of a mate rial fa ct or omitted to state a mate rial fa ct

require d to be stated ther ein or ne cessa ry to make the state ments therein not

misleading , any

person a cquiring such sec urity (unless it is proved that at the time

of such a cquisition he knew of suc h untruth or omission) may , either a t law or in

equity . . . sue—

(1) e very person who sig ned the r eg istration statement;

(2) e very person who w as a dire ctor of ( or per son perf orming simil ar

functions) or pa

rtner in the issuer

at the time of the f

iling of the part of the

reg istration statement with respe ct to which his liability is asserted;

. . . .

(f) J oint and sever al liability ; liabilit y of outside direc tor

(1) [A]ll or any

one or more of the pe rsons specif ied in subsection (a ) shall be

jointly and seve rally

liable, and e very

person who be comes liable to make any

pay ment under this sec tion may rec over c ontribution as in cases of contra ct from

any person who, if

sued sepa

rate ly , would have be en liable to make the same

pay ment, unless the per son who has bec ome liable wa s, and the other was not,

g uilty of fr audulent misrepr esenta tion.

(empha sis added).

49s t a t e m e n t i n a p r o s p e c t u s o r o r a l c o m m u n i c a t i o n

. T o s o l v e t h i s i n a c c u r a t e 2 4

c i t a t i o n p r o b l e m

, I r e a d C o u n t I t o s e e k r e l i e f u n d e r b o t h s e c t i o n s 1 1 a n d 1 2 o f t h e

1 9 3 3 A c t

. T h i s s q u a r e s w i t h C o u n t I ’ s a l l e g a t i o n t h a t

[ M e d i a ’ s ] f

i l i n g s w i t h t h e S e c u r i t i e s E x c h a n g e C o m m i s s i o n

, i n c l u d i n g

t h e r e g i s t r a t i o n s t a t e m e n t s

, p r o s p e c t u s

, a n d a m e n d m e n t s t h e r e t o

o m i t t e d t o s t a t e m a t e r i a l f a c t s n e c e s s a r y i n o r d e r t o m a k e t h e

s t a t e m e n t s m a d e

, i n t h e l i g h t o f t h e c i r c u m s t a n c e s u n d e r w h i c h t h e y

w e r e m a d e

, n o t m i s l e a d i n g i n a t l e a s t t h e f o l l o w i n g p a r t i c u l a r s :

a

. R e l a t i o n S e r v e [ M e d i a ] w a s s e l l i n g i t s s e c u r i t i e s t h r o u g h

u n r e g i s t e r e d a g e n t s a n d b r o k e r / d e a l e r s a n d p a y i n g c o m m i s s i o n s t o

t h e s e u n r e g i s t e r e d a g e n t s a n d b r o k e r / d e a l e r s ;

The text of 15 U.S.C. § 77 l , Civil liabiliti es ar ising in conne ction with prospectuse s 2 4

and communica tions, states, in pertinent part:

(a) I n g ener al

Any person who

. . . .

(2) of

fer s or sells a sec urity

. . . by the use of a

ny means or instruments

of transpor

tation or communication in interstate c ommerce or of the ma ils,

by means of a

prospec tus or oral c ommunication, which includes a n

untrue stateme nt of a mate rial fa ct or omits to state a mater ial fac t

nece ssary in order to make the statements, in the lig ht of the

circ umstances unde r which the y wer e made , not misl eading (the purc haser

not knowing of

such untruth or omission), and who sha ll not sust ain the

burden of proof that he did not know, and in the exercise of rea sonable

car e could not have known, of such untr uth or omission,

shall be liable . . . to the pe rson purc hasing such sec urity from him, who may

sue

either a t law or in equity

in any court of c ompetent jurisdiction, to recove r the

consideration paid for such se curity with interest there on, less the amount of a ny

income re ceive d there on, upon the tender of such se curity , or for

damag es if he no

longe r owns the se curity

.

(empha sis added).

50b

. T h e s a l e o f R e l a t i o n S e r v e [ M e d i a ] s t o c k t h r o u g h u n r e g i s t e r e d

a g e n t s a n d b r o k e r / d e a l e r s w a s i n v i o l a t i o n o f s t a t e a n d f e d e r a l

s e c u r i t i e s l a w s

, w h i c h c a u s e d a s u b s t a n t i a l c o n t i n g e n t l i a b i l i t y f o r

c l a i m s o f r e s c i s s i o n b y i n v e s t o r s a n d e x p o s e d R e l a t i o n S e r v e t o

s u b s t a n t i a l l e g a l f

e e s ; a n d

c

. T h e p o t e n t i a l c i v i l l i a b i l i t y o f R e l a t i o n S e r v e [ M e d i a ] f o r s e l l i n g

s h a r e s o f i t s s t o c k i n v i o l a t i o n o f s t a t e a n d f e d e r a l l a w

, w h i c h w o u l d

h a v e a n a d v e r s e i m p a c t o n t h e R e l a t i o n S e r v e [ M e d i a ] f i n a n c i a l

c o n d i t i o n

.

( C o m p l

. ¶ 5 2 ( e m p h a s i s a d d e d )

. ) C o u n t I t h u s a l l e g e d t h a t M e d i a h a d v i o l a t e d t h e

1 9 3 3 A c t b y s e l l i n g s e c u r i t i e s u n d e r a f a l s e o r m i s l e a d i n g r e g i s t r a t i o n s t a t e m e n t ( s )

,

p r o s p e c t u s

, o r o r a l c o m m u n i c a t i o n

, b y f a i l i n g t o d i s c l o s e i t s u s e o f u n r e g i s t e r e d

b r o k e r s a n d t h e c o n t i n g e n t l i a b i l i t y a r i s i n g t h e r e f r o m ( t h e “ u n r e g i s t e r e d

- b r o k e r

t h e o r y ” )

.

C o u n t I I

, “ V i o l a t i o n o f S e c u r i t i e s A c t o f 1 9 3 3

, ” i n c o r p o r a t e d a l l o f t h e

p r e c e d i n g a l l e g a t i o n s o f t h e c o m p l a i n t

, i n c l u d i n g C o u n t I

. C o u n t I I a l l e g e d t h a t

M e d i a a n d t h e O f

f i c e r s

, w h o w e r e “ c o n t r o l l i n g p e r s o n s

, o f f e r e d a n d s o l d t h e s h a r e s

o f R e l a t i o n S e r v e [ M e d i a ] i n v i o l a t i o n o f 1 5 U

. S

. C

. A

. § 7 7 l

. ” ( C o m p l

. ¶ 5 6

. )

B e c a u s e I c o n s t r u e C o u n t I t o s e e k r e l i e f u n d e r § 1 2

, c o d i f i e d a t 1 5 U

. S

. C

. § 7 7 l

,

C o u n t I I a d d e d n o t h i n g t o C o u n t I

.

C o u n t I I I

, “ V i o l a t i o n o f S e c u r i t i e s E x c h a n g e A c t o f 1 9 3 4

, R u l e 1 0 b

- 5

, ”

i n c o r p o r a t e d a l l o f C o u n t s I a n d I I a n d f u r t h e r a s s e r t e d t h a t M e d i a a n d t h e O f f i c e r s

“ o f f e r e d a n d s o l d t h e s h a r e s o f R e l a t i o n S e r v e [ M e d i a ] i n v i o l a t i o n o f ” t h e

51S e c u r i t i e s E x c h a n g e A c t o f 1 9 3 4 ( t h e “ 1 9 3 4 A c t ” )

, 1 5 U

. S

. C

. § 7 7 q

, a n d R u l e 1 0 b

5

. ( C o m p l

. ¶ 6 0

. ) S e c t i o n 1 0 ( b ) o f t h e 1 9 3 4 A c t

, a n d R u l e 1 0 b

- 5

, p r o v i d e 2 5 2 6 2 7

The c omplaint refe rre d to the 1934 Act, 15 U.S.C. § 77q, and Rule 10b-5. Ac tually

, 2 5

howeve r, § 77q codifie s § 17 of the 1933 Ac t. Section 10 of the 1934 Ac t, which provides the

statutory authority for Rule 10b-5, is c odified at 15 U.S.C. § 78j. The first and se cond ame nded

complaints repe ated the r efe renc e to § 77q. This time, I resolve the pleading ambig uity

by

assuming the citation to § 17 was an e rror ; notwithst anding the citation to § 17, I rea d Count I I I

of the initial complaint, Count I I I of the fir st amended c omplaint, and Count I of the sec ond

amende d complaint to seek re lief only under § 10( b) and Rule 10b- 5.

This results in no prejudice to the pla intiffs or their a ttorney s beca use this circuit has

expressly ref used to rea d a priva te rig ht of ac tion into § 17. C urrie v. Ca y man Res. Corp., 835

F.2d 780, 784–85 ( 11th Cir. 1988) (“We ther efor e hold that sec tion 17(a) doe s not impl y a

private c ause of

action . . . .”) ; see a lso id. at 784 n.8 (noting that the Supre me Court has not

decide d the question). The ref ore, r eading the complaints to seek r elief only under § 10( b)

remove s a roa dblock in the plaintiffs’ pa th to recove ry . I n any

event, the pla intiffs ref

ere nced

the 1934 Act in Count I I I ’s hea der a nd never presse d a 1933 Ac t § 17 claim either in the district

court or in this court. Ac cording ly , notwithstanding the c itation error , from this point forwar d, I

trea t the plaintiffs as bring ing only a § 10(b) claim.

The text of § 10(b) of the 1934 Act, as c odified at 15 U.S.C. § 78j, states, in pertinent 2 6

part:

I t shall be unlawful f or any person, dire ctly

or indirec tly , by

the use of a

ny means

or instrumentality

of interstate commerc e or of the mails, or of a

ny fac ility of any

national sec urities exchang e

. . . .

(b) To use or employ , in connec tion with the purchase or sale of any

secur ity reg istered on a

national sec urities exchang e or a ny secur ity not so

reg istered . . . a

ny manipulative or de ceptive de vice or contrivanc e in

contra vention of such r

ules and re g ulations as the Commiss ion may

presc ribe a s nece ssary

or appr opriate in the public inter est or for the

protec tion of investors.

The text of Rule 10b-5, as codifie d at 17 C.F.R. § 240.10b-5, states tha t: 2 7

I t shall be unlawful f

or any person, dire ctly

or indirec tly , by

the use of a

ny means

or instrumentality

of interstate commerc e, or of the mails or of a

ny fac ility of any

national sec urities exchang e,

(a) To employ

any device , scheme , or ar

tifice to def

raud,

52r e l i e f f

o r a n y p e r s o n w h o r e l i e s o n a f a l s e o r m i s l e a d i n g s t a t e m e n t i n c o n n e c t i o n

w i t h t h e p u r c h a s e o r s a l e o f a s e c u r i t y

.

M o r e s p e c i f

i c a l l y

, C o u n t I I I a l l e g e d t h a t “ [ t ] h e D e f e n d a n t s

. . . o f

f e r e d a n d

s o l d t h e s h a r e s

. . . i n v i o l a t i o n o f

. . . R u l e 1 0 b

- 5

. ” ( C o m p l

. ¶ 6 0

. ) B e c a u s e M e d i a

a n d t h e O f

f i c e r s o n l y “ o f

f e r e d a n d s o l d ” s h a r e s t o t h e p r i v a t e o f f e r i n g p u r c h a s e r s

,

t h e § 1 0 ( b )

, R u l e 1 0 b

- 5 c l a i m w a s l i m i t e d t o t h e p r i v a t e o f f e r i n g s u b c l a s s

. T h e

c o m p l a i n t d i d n o t d i r e c t l y i d e n t i f y a n y f a l s e o r m i s l e a d i n g s t a t e m e n t m a d e b y a n y

d e f e n d a n t i n c o n n e c t i o n w i t h M e d i a ’ s s a l e o f s h a r e s t o T h o m p s o n o r a n y o t h e r

p r i v a t e o f

f e r i n g p u r c h a s e r ; n o r d i d t h e c o m p l a i n t a l l e g e a n y d e v i c e o r s c h e m e t o

d e f r a u d

. T h o m p s o n d i d

, h o w e v e r

, r e f e r t o t h e o m i s s i o n s i n C o u n t I ’ s s e c t i o n 1 1

a n d 1 2 c l a i m s

. ( C o m p l

. ¶ 5 8 ( “ A s s t a t e d h e r e i n

, t h e r e g i s t r a t i o n s t a t e m e n t a n d

p r o s p e c t u s c o n t a i n e d u n t r u e s t a t e m e n t s o f m a t e r i a l f a c t s

. . . . ” )

. ) T h e r e f

o r e

,

T h o m p s o n c l a i m e d t h e p r i v a t e o f f e r i n g p u r c h a s e r s c o u l d r e c o v e r b a s e d o n M e d i a ’ s

f a i l u r e t o d i s c l o s e i t s u s e o f u n r e g i s t e r e d b r o k e r s i n i t s p u b l i c o f f e r i n g d o c u m e n t s

.

T h o m p s o n i n v o k e d t h e d i s t r i c t c o u r t ’ s s u p p l e m e n t a l j u r i s d i c t i o n f o r t h e s t a t e

l a w c l a i m s a s s e r t e d i n C o u n t s I V t h o u g h I X

. S e e 2 8 U

. S

. C

. § 1 3 6 7

. C o u n t I V

(b) To ma ke any

untrue stateme nt of a mate rial fa ct or to omit to state a mater ial

fac t nece ssary

in order to make the statements made , in the light of the

circ umstances unde r which the y wer e made , not misl eading , or

(c) To eng ag e in any

act, pr actice , or cour se of business whic h opera tes or would

opera te as a

fra ud or dec eit upon any

person,

in connec tion with the purchase or sale of any secur ity

.

53a l l e g e d t h a t M e d i a

, a i d e d a n d a b e t t e d b y t h e O f f i c e r s

, s o l d M e d i a s h a r e s t h r o u g h

b r o k e r s

, d e a l e r s

, a n d a g e n t s w h o w e r e n o t r e g i s t e r e d i n F l o r i d a

, i n v i o l a t i o n o f

F l o r i d a S t a t u t e s § § 5 1 7

. 1 2 a n d 5 1 7

. 0 6 1

. C o u n t V a l l e g e d t h a t s a l e s w e r e m a d e i n

I n d i a n a v i a u n r e g i s t e r e d b r o k e r s

, d e a l e r s

, a n d a g e n t s

, i n v i o l a t i o n o f I n d i a n a C o d e

§ 2 3

- 2

- 1

- 8

. C o u n t V I a l l e g e d t h a t M e d i a

, a i d e d a n d a b e t t e d b y t h e O f f i c e r s

, s o l d

M e d i a s h a r e s t h a t w e r e u n r e g i s t e r e d i n v i o l a t i o n o f I n d i a n a C o d e § § 2 3

- 2

- 1

- 2 a n d

2 3

- 2

- 1

- 3

. C o u n t V I I a l l e g e d t h a t M e d i a

, a i d e d a n d a b e t t e d b y t h e O f f i c e r s

, s o l d

M e d i a s h a r e s i n v i o l a t i o n o f t h e a n t i

- f r a u d p r o v i s i o n s o f t h e I n d i a n a S e c u r i t i e s A c t

,

I n d i a n a C o d e § 2 3

- 2

- 1

- 1 2

. C o u n t V I I I a l l e g e d t h a t M e d i a

, a i d e d a n d a b e t t e d b y t h e

O f f i c e r s

, d e f r a u d e d t h e p u r c h a s e r s o f M e d i a s h a r e s

, i n v i o l a t i o n o f I n d i a n a C o d e §

3 5

- 4 3

- 5

- 3

. C o u n t I X a l l e g e d t h a t M e d i a a n d t h e O f f i c e r s d e f r a u d e d t h e p u r c h a s e r s

o f M e d i a s h a r e s

, i n v i o l a t i o n o f t h e c o m m o n l a w

.

A s r e m e d i e s

, T h o m p s o n s o u g h t r e s c i s s i o n o r d a m a g e s f o r t h e f e d e r a l

s e c u r i t i e s c l a i m s b r o u g h t i n C o u n t s I t h r o u g h I I I

. A s f o r t h e s t a t e l a w c l a i m s

,

T h o m p s o n s o u g h t r e s c i s s i o n f o r C o u n t s I V t h r o u g h V I I

, t r e b l e d c o m p e n s a t o r y

d a m a g e s f

o r C o u n t V I I I

, a n d c o m p e n s a t o r y a n d p u n i t i v e d a m a g e s f o r C o u n t I X

.

P r i o r t o f i l i n g h i s c o m p l a i n t

, T h o m p s o n d i s p o s e d o f a l l o f h i s M e d i a s h a r e s

.

A c c o r d i n g l y

, t h e r e m e d y o f r e s c i s s i o n w a s n o t a v a i l a b l e t o h i m i n C o u n t s I t h r o u g h

V I I

. N o r w a s r e s c i s s i o n a v a i l a b l e t o t h e m e m b e r s o f T h o m p s o n ’ s o p e n m a r k e t

54s u b c l a s s b e c a u s e t h e y n e v e r b o u g h t s h a r e s f r o m M e d i a ; t h e r e f

o r e

, t h e y c o u l d n o t

o b t a i n a j u d g m e n t r e q u i r i n g t h e c o m p a n y t o r e t u r n t h e p u r c h a s e p r i c e

— w h i c h t h e y

n e v e r p a i d t o t h e c o m p a n y

— i n e x c h a n g e f o r t h e s h a r e s t h e y s t i l l h e l d

.

2

. T h e D e f

e n d a n t s W a r n T h o m p s o n ’ s A t t o r n e y s t h a t t h e S u i t i s F r i v o l o u s

A f t e r M e d i a r e c e i v e d t h e i n i t i a l c o m p l a i n t

, b u t b e f o r e f i l i n g a r e s p o n s i v e

p l e a d i n g

, T h o m a s F l e m i n g

, o n e o f M e d i a ’ s a t t o r n e y s

, w r o t e t o C o h e n & M a l a d t o 2 8

a d v i s e t h e f

i r m t h a t T h o m p s o n ’ s c l a i m s w e r e f r i v o l o u s a n d t h a t t h e c o m p l a i n t h a d

b e e n f i l e d i n v i o l a t i o n o f R u l e 1 1 ( b )

. W h i l e t h e r e c o r d d o e s n o t c o n t a i n F l e m i n g ’ s

l e t t e r

, i t d o e s c o n t a i n C o h e n & M a l a d ’ s r e p l y

. R i c h a r d B e l l r e p l i e d o n b e h a l f o f

C o h e n & M a l a d

, s t a t i n g :

W e a r e i n r e c e i p t o f y o u r l e t t e r o f O c t o b e r 6

, 2 0 0 6

. W e s t r o n g l y

d i s a g r e e w i t h y o u r a s s e s s m e n t o f t h i s s e c u r i t i e s l i t i g a t i o n f i l e d a g a i n s t

y o u r c l i e n t [ ]

. C o n t r a r y t o y o u r o p i n i o n

, t h e l a w s u i t w a s f i l e d i n g o o d

f a i t h a n d w a s d i l i g e n t l y i n v e s t i g a t e d a n d r e s e a r c h e d b e f o r e i t w a s

f i l e d

. 2 9

. . . .

L a s t l y a t s o m e p o i n t i n t i m e b o t h o u r c l i e n t s w i l l w a n t t o r e s o l v e o r

s e t t l e t h i s c a s e

. S o I w i l l c o m m i t t o b e r e s p e c t f u l o f y o u r l e g a l

p o s i t i o n s e v e n t h o u g h I m a y d i s a g r e e

.

Fleming was a

member of

the New York fir m of Olshan, Gr

undman, Fr ome, 2 8

Rosenzweig & Wolos ky

L L P. The firm withdrew from the c ase on N ovember 17, 2006, and wa s

later r eplac ed as le ad counse l for Media by Whit e & Case.

Rest assured tha t we do plan to ame nd the complaint and will add a dditional 2 9

defe ndants. Our investig ation is ongoing

.

55( P l s

. ’ M o t

. t o C o m p e l D i s c

. E x

. A ( O c t

. 1 1

, 2 0 0 6 L e t t e r f r o m R i c h a r d B e l l t o

T h o m a s F l e m i n g

, a t 1

, 4 ) ( O c t

. 2 4

, 2 0 0 6 ) ( f o o t n o t e i n o r i g i n a l )

. )

3

. T h e D e f

e n d a n t s M o v e t o D i s m i s s

, R e q u e s t t h e C o u r t t o R e t a i n J u r i s d i c t i o n t o

I m p o s e S a n c t i o n s

S h o r t l y t h e r e a f

t e r

, o n O c t o b e r 2 0

, 2 0 0 6

, t h e d e f e n d a n t s m o v e d t o d i s m i s s

T h o m p s o n ’ s c o m p l a i n t o n a s l e w o f g r o u n d s

. A s f o r t h e f e d e r a l s e c u r i t i e s l a w 3 0

c l a i m s

, t h e d e f

e n d a n t s p o i n t e d t o s e v e r a l p l e a d i n g e r r o r s

. T h e C o u n t s I a n d I I

c l a i m s u n d e r § 1 1 a n d § 1 2 o f t h e 1 9 3 3 A c t f a i l e d t o i d e n t i f

y a n y p u r c h a s e m a d e i n

r e l i a n c e o n f

a l s e o r m i s l e a d i n g s t a t e m e n t s i n a r e g i s t r a t i o n s t a t e m e n t o r

p r o s p e c t u s

. T h e C o u n t I I I § 1 0 ( b )

, R u l e 1 0 b

- 5 c l a i m f a i l e d t o i d e n t i f

y a n y f a l s e 3 1

o r m i s l e a d i n g s t a t e m e n t s w i t h t h e p a r t i c u l a r i t y a n d s p e c i f i c i t y r e q u i r e d b y R u l e

9 ( b ) o f t h e F e d e r a l R u l e s o f C i v i l P r o c e d u r e a n d t h e P S L R A

.

T u r n i n g t o T h o m p s o n ’ s s t a t e l a w c l a i m s

, t h e d e f e n d a n t s a r g u e d t h a t t h o s e

c l a i m s w e r e b a r r e d b y t h e S e c u r i t i e s L i t i g a t i o n U n i f o r m S t a n d a r d s A c t

( “ S L U S A ” )

, 1 5 U

. S

. C

. § 7 8 b b

, w h i c h m a n d a t e s

, w i t h l i m i t e d e x c e p t i o n s n o t

Media filed its motion to dism iss on October 20, 2006. K arp f iled her motion to 3 0

dismiss on October

31, 2006. J ehassi soug ht and was g rante d an extension to respond to the

complaint but never

actua lly neede d to respond bec ause Thompson withdre w the complaint and

never ag ain named him as a

defe ndant.

The de fenda

nts also noted that beca

use Thompson had purc hased his shar es in a 3 1

private of fer ing in June 2005—long be fore Relationserve Media filed its initial reg istration

statement on Mar ch 20, 2006—and be cause it had not issued a prospec tus, Thompson could not

make out a violation of §§ 11 or 12 of the 1933 Ac t.

56a p p l i c a b l e h e r e

, t h a t c l a s s a c t i o n c l a i m s i n v o l v i n g t h e p u r c h a s e o r s a l e o f n a t i o n a l l y

t r a d e d s e c u r i t i e s m u s t b e a s s e r t e d u n d e r f e d e r a l s e c u r i t i e s l a w

. 3 2

I n t h e i r m o t i o n s t o d i s m i s s

, d e f e n s e c o u n s e l a l s o n o t i f

i e d T h o m p s o n ’ s

c o u n s e l t h a t t h e y c o n s i d e r e d t h e c l a i m s t o b e b a s e l e s s a n d i n v i o l a t i o n o f R u l e 1 1

.

I n d e e d

, b o t h d e f

e n d a n t s w h o r e s p o n d e d t o t h e c o m p l a i n t m o v e d t h e c o u r t t o

d i s m i s s t h e c a s e a n d t o r e t a i n j u r i s d i c t i o n t o i m p o s e s a n c t i o n s p u r s u a n t t o t h e

P S L R A a n d R u l e 1 1

. 3 3

4

. T h o m p s o n ’ s A t t o r n e y s M o v e t h e C o u r t f o r L e a v e t o A m e n d a n d f o r L i m i t e d

D i s c o v e r y t o A d d I n d i v i d u a l D e f e n d a n t s

T h o m p s o n d i d n o t r e s p o n d t o t h e d e f e n d a n t s ’ m o t i o n s

. I n s t e a d

, o n O c t o b e r

2 4

, h i s a t t o r n e y s m o v e d t h e d i s t r i c t c o u r t f o r l e a v e t o c o n d u c t l i m i t e d d i s c o v e r y t o

I n rele vant par

t, the SL USA provides: 3 2

(f) L imitations on reme dies

(1) Class ac tion lim itations

No cove red c lass action base d upon the statutory or common law

of any State or subdivision thereof ma y be maintained in a

ny State

or F eder al cour

t by any private pa

rty alleg ing—

(A) a misrepre sentation or omission of a mater ial fac t in

connec tion with the purchase or sale of a cove red se curity ; or

(B ) that the de fenda

nt used or employ ed any

manipulative

or dec eptive devic e or c ontrivance in connec tion with the

purcha se or sa le of a

cover ed sec urity

. 15 U.S.C. § 78bb.

Whit e & Case L L P repre sented Media and all individual defe ndants except Kar p, who 3 3

was re prese nted by

McClosky , D’Anna

& D ieterle , L L P; Honig, who wa s repr esente d by Tew

Cardena s L L P; and Hill, who was repr esente d by Genove se Jobl ove & Ba ttist a, P.A.

57o b t a i n t h e l a s t k n o w n a d d r e s s e s f o r f o u r t e e n o f t h e c o m p a n y ’ s o f f i c e r s a n d

d i r e c t o r s s o T h o m p s o n c o u l d a m e n d h i s c o m p l a i n t a n d n a m e t h e m a s d e f e n d a n t s

.

5

. T h e C o u r t G r a n t s t h e A t t o r n e y s L e a v e t o A m e n d a n d L i m i t e d D i s c o v e r y a n d

W a r n s t h e A t t o r n e y s A b o u t R u l e 1 1

O n N o v e m b e r 3

, t h e d i s t r i c t c o u r t h e l d a t e l e p h o n e c o n f e r e n c e t o h e a r

a r g u m e n t o n t h e p e n d i n g m o t i o n s

. D u r i n g t h e c a l l

, T h o m p s o n ’ s c o u n s e l i n f o r m e d

t h e c o u r t t h a t t h e y w i s h e d t o f i l e a n a m e n d e d c o m p l a i n t ; t h e c o u r t g r a n t e d t h e m

l e a v e t o d o s o

. O v e r M e d i a ’ s s t r e n u o u s o b j e c t i o n t h a t T h o m p s o n ’ s r e q u e s t f o r 3 4

l i m i t e d d i s c o v e r y a m o u n t e d t o a s c o r c h e d

- e a r t h l i t i g a t i o n t a c t i c

, t h e c o u r t g r a n t e d 3 5

T h o m p s o n ’ s m o t i o n

. I n g r a n t i n g t h i s m o t i o n

, t h e c o u r t

, a l t h o u g h i t h a d n o t y e t

r e a d t h e c o m p l a i n t

, r e m i n d e d c o u n s e l

,

A l s o

, t h e r e ’ s R u l e E l e v e n w h i c h p r o v i d e s s a n c t i o n s i f t h e r e i s n o

l e g i t i m a t e b a s i s f

o r b r i n g i n g a s u i t o r s e r v i n g t h e v a r i o u s o f f i c e r s a n d

d i r e c t o r s

. . . .

. . . .

. . . I d o n ’ t k n o w w h e t h e r t h e s e o f f i c e r s a n d d i r e c t o r s a r e l e g i t i m a t e

t a r g e t s o r n o t

. T h e r e i s n o w a y I c a n k n o w

. I d o k n o w y o u l a w y e r s

b e i n g e x p e r i e n c e d l a w y e r s k n o w a b o u t R u l e E l e v e n

.

On Novembe r 7, 2006, the district cour t entere d an orde r deny

ing the defe ndants’ 3 4

motions t o dismiss . The orde r stated that the pla intiff had aske d for, a nd had bee n g rante d, leave

to amend his complaint.

Media a rg ued that plaintiff’ s counsel we re pur suing a scorc hed-e arth tac tic in an ef fort 3 5

to “coe rce some money

out of a business whe re the plaintiff lost may be $150,000. He has

asser ted class a ction claims. He ha s tried eve ry trick in the book.” ( Telec onfer ence Tr. 5, Nov.

3, 2006.)

58. . . .

M r

. G o l d b a u m

, I w i l l t e l l y o u

, y o u r e a l l y o u g h t t o t h i n k l o n g a n d h a r d

b e f o r e y o u j u s t a u t o m a t i c a l l y s u e e v e r y o n e t h a t h a p p e n s t o b e o n t h e

l i s t o f o f f i c e r s a n d d i r e c t o r s

. T h a t ’ s f o r y o u t o d e c i d e

. . . .

( T e l e c o n f

e r e n c e T r

. 4

, 6

– 7

, N o v

. 3

, 2 0 0 6

. ) R e s p o n d i n g t o t h i s w a r n i n g

,

T h o m p s o n ’ s c o u n s e l p r o m i s e d t h e c o u r t t h a t t h e y w o u l d b e m i n d f u l o f R u l e 1 1 a n d

w o u l d n a m e o f

f i c e r s a n d d i r e c t o r s a s d e f e n d a n t s o n l y i f t h e y h a d a r e a s o n a b l e b a s i s

f o r d o i n g s o

.

B

. T h e F i r s t A m e n d e d C o m p l a i n t

1

. T h o m p s o n & J a c o b y F i l e t h e F i r s t A m e n d e d C o m p l a i n t

, E a c h P u r p o r t i n g t o

R e p r e s e n t A l l C l a s s M e m b e r s o n A l l C l a i m s

O n N o v e m b e r 1 3

, 2 0 0 6

, T h o m p s o n

, n o w j o i n e d b y n e w c o

- l e a d p l a i n t i f f L

.

A l a n J a c o b y

, f

i l e d a t e n

- c o u n t f

i r s t a m e n d e d c o m p l a i n t a g a i n s t M e d i a

, e l e v e n 3 6

O f f i c e r s a n d t w o n o n

- o f

f i c e r s

. R e c a l l t h a t J a c o b y p u r c h a s e d M e d i a s h a r e s i n t h e 3 7

The fir st amended c omplaint never e x plicitly decla red tha t J acoby was a lead plaintiff. 3 6

I n secur ities actions, the PSL RA require s proposed lea d plaintiffs to file ce rtifications with the

district court. See 15 U .S.C. § 78u-4(a)( 2)(A) (re quiring a sworn sta tement that, for e x ample,

the proposed le ad plaintiff ha s review ed the c omplaint and authorized its filing). B eca use

plaintiffs’ counse l filed J acoby ’s ce rtification in a se para te document a nd incorporated it by

ref ere nce in the f

irst amended c omplaint, Itrea t Thompson and J acoby as co- lead plaintiffs.

(See F irst Am. Compl . ¶ 1.)

The fir st amended c omplaint dropped Oha d J ehassi as a defe ndant. The O ffice rs wer e 3 7

Danielle K arp, Ma

ndee H eller A dler, Warr en “Pete ” Musser ( these thre e had be en name d as

defe ndants in the initial complaint), Scott Young, Scott Hirsch, A dam C. Wasserman, Micha el

H. B rause r, Shawn McN amar a, Paul Soltoff, Eric Obe ck, and D onald Gould, J r. The non- office r

defe ndants wer e Richar d Hill and Ba rry Honig . Hill was a “ founder of Omni Point,” the

company that Relationserve acquir ed on May 16, 2005. (F irst Am. Compl . ¶ 17.) Honig was

“not re g istered with the Sec urities Ex chang e Commissi on” and the ref ore violate d “the se curities

laws” w hen he “ sold RelationServe sec urities to I nvestors and r ece ived re munera tion.” (I d. ¶

59o p e n m a r k e t i n J u l y 2 0 0 5

. B o t h p l a i n t i f f s p u r p o r t e d t o r e p r e s e n t a l l b u y e r s o f

M e d i a s e c u r i t i e s w h o b o u g h t d u r i n g t h e c l a s s p e r i o d a s t o a l l c l a i m s

. ( F i r s t A m

.

C o m p l

. ¶ ¶ 9 9

, 1 0 2

. ) L i k e t h e i n i t i a l c o m p l a i n t

, h o w e v e r

, t h i s c o m p l a i n t h a d t w o

i m p l i c i t s u b c l a s s e s : o n e o f p r i v a t e o f f e r i n g p u r c h a s e r s

, a n d o n e o f o p e n m a r k e t

p u r c h a s e r s

. A l s o l i k e t h e i n i t i a l c o m p l a i n t

, t h i s c o m p l a i n t w a s a s h o t g u n p l e a d i n g

.

T h e n e w c o m p l a i n t d i f

f e r e d b y a d d i n g t o i t s f

e d e r a l s e c u r i t i e s l a w c l a i m s

n e w t h e o r i e s o f t h e d e f

e n d a n t s ’ a l l e g e d l y f

a l s e o r m i s l e a d i n g s t a t e m e n t s

. I n

a d d i t i o n t o T h o m p s o n ’ s u n r e g i s t e r e d

- b r o k e r t h e o r y

, T h o m p s o n a n d J a c o b y a l s o

a l l e g e d t h a t M e d i a f

a i l e d t o d i s c l o s e i t s r e t e n t i o n o f o u t s i d e c o u n s e l t o i n v e s t i g a t e

a c c u s a t i o n s o f e m p l o y e e t h e f t a n d k i c k b a c k s ( t h e “ k i c k b a c k t h e o r y ” ) ; t h a t

b e g i n n i n g i n t h e t h i r d q u a r t e r o f 2 0 0 5

, i t s f i n a n c i a l s t a t e m e n t s r e c o g n i z e d i n c o m e

i n v i o l a t i o n o f G e n e r a l l y A c c e p t e d A c c o u n t i n g P r i n c i p l e s ( “ G A A P ” ) a n d c o m p a n y

p o l i c y ( t h e “ o v e r s t a t e d

- i n c o m e t h e o r y ” ) ; a n d t h a t i t d i d n o t d i s c l o s e t h a t d i r e c t o r

M u s s e r h a d b e e n s u e d b y s t o c k h o l d e r s o f t w o o t h e r c o r p o r a t i o n s f o r s e c u r i t i e s

v i o l a t i o n s ( t h e “ s u e d

- d i r e c t o r t h e o r y ” )

.

18.) Ac cording to the complaint, the re mainder of the def endants we re O ffice rs and/or dire ctors

of Media: Hir sch wa s chief ope rating office r, Wasserman w as chie f financ ial office r, B rause r

was c hairman of

the boar d, McNa mara

was senior

vice pr esident and inter im chief fina ncial

office r, Soltoff was c hief fina ncial off icer , Obec k was pre sident, Gould was chie f financ ial

office r, and Y oung founded Chubasc o, Media’s pr edec essor. The complaint alleg ed that all of

these Of fice rs sig ned or a

uthorized one or more cer tifications with the SEC. (I d. ¶¶ 10–22.)

60T h e p l a i n t i f f s a l s o t r i e d t o s t r e n g t h e n T h o m p s o n ’ s o r i g i n a l u n r e g i s t e r e d

b r o k e r t h e o r y

. T h e y a d d e d a n a l l e g a t i o n t h a t S u m m i t a n d a n o t h e r u n r e g i s t e r e d

b r o k e r

, B a r r y H o n i g

, s o l d s e c u r i t i e s t o a F l o r i d a r e s i d e n t

, S t u a r t F e i c k

. ( F i r s t A m

.

C o m p l

. ¶ ¶ 6 6

– 6 7

. ) A d d i t i o n a l l y

, t h e p l a i n t i f f s e s s e n t i a l l y l i s t e d a l l o f M e d i a ’ s S E C

f i l i n g s t o d a t e

, w i t h o n e n o t a b l e e x c e p t i o n

. T h e f i r s t a m e n d e d c o m p l a i n t d i d n o t 3 8

l i s t M e d i a ’ s J u n e 1 6

, 2 0 0 5 F o r m 8

- K c u r r e n t r e p o r t

, w h i c h r e v e a l e d t h e S u m m i t

c o n s u l t i n g a g r e e m e n t

, a n d

, w i t h i t

, S u m m i t ’ s r e p r e s e n t a t i o n t h a t i t w a s n o t l i c e n s e d

a n d w o u l d n o t a c t a s a b r o k e r / d e a l e r f o r M e d i a

. T h e a m e n d e d c o m p l a i n t a l l e g e d

3 9

t h a t a l l o f t h e l i s t e d S E C f i l i n g s w e r e f

a l s e o r m i s l e a d i n g b e c a u s e t h e y f a i l e d t o

s t a t e t h e m a t e r i a l f

a c t s r e c o u n t e d a b o v e

, i n c l u d i n g M e d i a ’ s u s e o f a n u n r e g i s t e r e d

b r o k e r

— S u m m i t

— t o s e l l i t s s h a r e s

.

The plaintiffs a lleg ed that the f ollowing doc uments contained f alse or mislea ding 3 8

statements due to omissions of material fa ct: (a) the J une 13, 2005 F orm 8-K; (b) the J une 14,

2005 quarte rly

statement F orm 10-QSB filed by Chubasco; (c ) the June 27, 2005 Form 8-K ; (d)

the J une 30, 2005 F orm 8-K; (e ) “se vera l Form 8K’ s [s ic]” filed in J uly , Aug ust and September

2005; (f) the Aug ust 18, 2005 quarter ly statement F orm 10-QSB ; (g ) the Nove mber 18, 2005

quarte rly statement F orm 10-QSB ; (h) “se vera l Form 8K’ s [s ic]” filed in November 2005; (i)

“seve ral” For

m 8-Ks filed on De cembe r 5, 2005; (j) the D ece mber 30, 2005 F orm 8-A

Reg istration Statement; (k) “se vera l Form 8K’ s [s ic]” filed in Fe bruar y 2006; and (l) the Ma

rch

20, 2006 For

m SB-2 and F orm 10-K. ( First Am. Compl. ¶¶ 72–92.)

That the a mended c omplaint contained no explicit refer ence to the J une 16, 2005 3 9

curr ent re port is noteworthy for thre e re asons. Fir st, the plaintiffs chose to list almost every

other SEC filing, made both before and af ter June 16, 2005. Second, Thompson had atteste d in

the subscription ag ree ment he sig ned whe n he purc hased his shar es in the private offe ring that he

had re ad and r eviewe d this J une 16, 2005 filing . See supra note 11 and a ccompa

ny ing te x t.

Third, the plaintiffs c ited the J une 16 filing in the initial complaint verbatim, and the only time

the ag ree ment was disclosed w as in the June 16, 2005 filing.

61C o u n t s I t h r o u g h I I I r e p l i c a t e d n e a r l y v e r b a t i m C o u n t s I t h r o u g h I I I o f t h e

i n i t i a l c o m p l a i n t

. C o u n t I a l l e g e d t h a t M e d i a v i o l a t e d § 1 1 b y f i l i n g a f a l s e

r e g i s t r a t i o n s t a t e m e n t ; C o u n t I I c l a i m e d t h a t M e d i a v i o l a t e d § 1 2 b y i s s u i n g f a l s e

o r m i s l e a d i n g p r o s p e c t u s e s o r o r a l c o m m u n i c a t i o n s ; C o u n t I I I a l l e g e d v i o l a t i o n s o f

§ 1 0 ( b ) a n d R u l e 1 0 b

- 5

. T h e p l a i n t i f f s a d d e d a n e w c o u n t

, C o u n t I V

, “ V i o l a t i o n

O f S e c t i o n 2 0 ( a ) o f T h e E x c h a n g e A c t A g a i n s t t h e I n d i v i d u a l D e f e n d a n t s

. ” T h a t

c o u n t a s s e r t e d t h a t t h e O f f i c e r s w e r e l i a b l e f

o r t h e C o u n t I I I § 1 0 ( b )

, R u l e 1 0 b

- 5

v i o l a t i o n s b e c a u s e t h e O f f i c e r s w e r e c o n t r o l l i n g p e r s o n s u n d e r § 2 0 ( a ) o f t h e 1 9 3 4

A c t

, 1 5 U

. S

. C

. § 7 8 t

. F o r a l l t h r e e f e d e r a l s e c u r i t i e s c l a i m s

, t h e p l a i n t i f f s a l l e g e d 4 0

t h e s a m e m i s l e a d i n g s t a t e m e n t s

— M e d i a ’ s s e c u r i t i e s f i l i n g s m i s l e d b e c a u s e t h e y

o m i t t e d M e d i a ’ s u s e o f a n u n r e g i s t e r e d b r o k e r

, i t s i n v e s t i g a t i o n o f k i c k b a c k s

, i t s

o v e r s t a t e m e n t o f i n c o m e

, a n d i t s s u e d d i r e c t o r

.

S i m i l a r l y

, w i t h t w o n o t a b l e e x c e p t i o n s

, t h e p l a i n t i f f s r e

- p l e d t h e i r s t a t e l a w

c l a i m s a l m o s t v e r b a t i m

. S e e P a r t I I

. A

. 1

, s u p r a

. T h e s t a t e l a w c l a i m s w e r e n o w

p l e d a s C o u n t s V t h r o u g h X ( t h e y w e r e p l e d a s c o u n t s I V t h r o u g h I X i n t h e i n i t i a l

Section 20(a) provides: 4 0

Every person who, dir ectly

or indirec tly , controls any person liable unde r any

provision of [the 1934 Act] or of any rule or r eg ulation thereunde r shall also be

liable jointly

and seve rally

with and to the same e x tent as such c ontrolled person

to any person to whom such c ontrolled person is liable, unless the c ontrolling

person a cted in g ood faith and did not direc tly or indirec tly

induce the a ct or a cts

constituting the violation or ca use of a ction.

15 U.S.C. § 78t(a).

62c o m p l a i n t )

. T h e t w o e x c e p t i o n s i n v o l v e d t h e a l l e g a t i o n s o f f r a u d i n t h e n o w C o u n t

V I I I I n d i a n a S e c u r i t i e s A c t f r a u d c l a i m a n d t h e n o w C o u n t I X I n d i a n a d e c e p t i o n

c l a i m

. I n t h e i n i t i a l c o m p l a i n t ’ s i t e r a t i o n

, T h o m p s o n a l l e g e d t h a t M e d i a

f r a u d u l e n t l y f

a i l e d t o d i s c l o s e : s i z e a b l e c o m m i s s i o n s a n d f e e s i t p a i d t o A l t a v i l l a

,

t h a t t h e s t o c k w a s n o t r e g i s t e r e d a n d t h e r e f o r e r e s t r i c t e d

, a n d t h a t M e d i a h a d h i r e d

“ u n r e g i s t e r e d a g e n t s t o s e l l t h e r e [ s i c ] s e c u r i t i e s

. ” ( C o m p l

. ¶ ¶ 7 6

, 7 8

. ) I n t h e

a m e n d e d c o m p l a i n t

, T h o m p s o n e l i m i n a t e d a n y c l a i m t h a t M e d i a m i s l e d h i m a b o u t

t h e u n r e g i s t e r e d s t a t u s o f h i s s h a r e s a n d p l e d t h e u n r e g i s t e r e d

- b r o k e r

, k i c k b a c k

,

o v e r s t a t e d

- i n c o m e

, a n d s u e d

- d i r e c t o r t h e o r i e s o f m i s r e p r e s e n t a t i o n i n s t e a d

. ( F i r s t

A m

. C o m p l

. ¶ ¶ 1 4 7

, 1 4 9

. )

2

. T h e D e f

e n d a n t s M o v e t o D i s m i s s

, R e q u e s t t h e C o u r t t o R e t a i n J u r i s d i c t i o n t o

I m p o s e S a n c t i o n s

T h e d e f e n d a n t s r e s p o n d e d t o t h e f i r s t a m e n d e d c o m p l a i n t w i t h m o t i o n s t o

d i s m i s s

, w h i c h a r t i c u l a t e d v i r t u a l l y t h e s a m e r a t i o n a l e s a s t h e i r p r e v i o u s m o t i o n s t o

d i s m i s s

. A d d r e s s i n g t h e C o u n t s I a n d I I c l a i m s u n d e r § 1 1 a n d § 1 2 o f t h e 1 9 3 3

A c t

, t h e d e f

e n d a n t s a r g u e d t h a t t h e p r i v a t e o f f e r i n g s u b c l a s s c o u l d n o t h a v e r e l i e d

o n a M e d i a r e g i s t r a t i o n s t a t e m e n t o r p r o s p e c t u s b e c a u s e n o n e h a d b e e n i s s u e d f o r

t h o s e s h a r e s

. A d d r e s s i n g J a c o b y ’ s p u r c h a s e o f 1 0

, 0 0 0 s h a r e s i n t h e o p e n m a r k e t i n

J u l y a n d A u g u s t 2 0 0 5

, t h e d e f e n d a n t s a r g u e d t h a t t h e s e s h a r e s w e r e p u r c h a s e d

u n d e r a r e g i s t r a t i o n s t a t e m e n t a n d p r o s p e c t u s i s s u e d b y C h u b a s c o i n F e b r u a r y 2 0 0 5

63a n d t h u s c o u l d n o t f o r m t h e b a s i s f

o r a § 1 1 o r § 1 2 c l a i m a g a i n s t M e d i a

. T u r n i n g

t o t h e C o u n t I I I § 1 0 ( b )

, R u l e 1 0 b

- 5 c l a i m

, t h e d e f e n d a n t s a r g u e d t h a t t h e p l a i n t i f f s

f a i l e d t o p l e a d t h e c l a i m w i t h t h e p a r t i c u l a r i t y a n d s p e c i f i c i t y d e m a n d e d b y R u l e

9 ( b ) a n d t h e P S L R A

. A s f o r t h e s t a t e l a w c l a i m s

, t h e d e f e n d a n t s a g a i n r e i t e r a t e d

t h a t t h e y w e r e b a r r e d b y t h e S L U S A

, a n d

, e v e n i f t h e y w e r e n o t b a r r e d b y t h e

S L U S A

, t h e y f

a i l e d t o s t a t e a c l a i m

. F i n a l l y

, d e f e n d a n t s M e d i a

, A d l e r

, M u s s e r

,

W a s s e r m a n

, B r a u s e r

, M c N a m a r a

, S o l t o f f

, O b e c k

, G o u l d

, a n d Y o u n g

, a n d

, i n h e r

s e p a r a t e m o t i o n

, d e f

e n d a n t K a r p

, r e i t e r a t e d t h e r e q u e s t t h a t t h e c o u r t r e t a i n

j u r i s d i c t i o n t o i m p o s e s a n c t i o n s

.

I n r e s p o n s e t o t h e d e f

e n d a n t s ’ m o t i o n s

, p l a i n t i f f s ’ c o u n s e l c o n c e d e d t h a t

t h e i r § 1 1 c l a i m h a d n o m e r i t

. A l t h o u g h t h e p l a i n t i f f s a l s o c o n c e d e d t h a t t h e i r § 4 1

1 2 c l a i m c o u l d n o t s u c c e e d o n t h e b a s i s o f a n y f a l s e o r m i s l e a d i n g p r o s p e c t u s

, t h e y

m a i n t a i n e d t h e c l a i m h a d m e r i t b e c a u s e T h o m p s o n r e l i e d o n c e r t a i n ( u n i d e n t i f i e d )

“ o r a l c o m m u n i c a t i o n [ s ] ” i n t h e J u n e p r i v a t e o f f e r i n g

. ( P l s

. ’ R e s p

. t o D e f s

. ’ M o t

. 4 2

I n their re sponse, plaintiffs’ c ounsel stated: “Af ter re viewing the Def

endants’ br iefs 4 1

and fur ther investig ating the claims, Plaintiffs J acoby and Thompson have decide d to abandon

their Section 11 cla ims.” (Pls.’ Resp. to Defs.’ Mot. to Dismiss 26, J an. 29, 2007.)

The fir st amended c omplaint alleg ed that Thompson had r elied on “or al 4 2

communications” fr om Altavilla. Parag raph 56 state d: “B efor e investing Plaintiff Richard F

. Thompson review ed the public state ments on the internet a bout Relationserve [Media], list ened

to the sales pitch of Tony Altavilla and re viewed a ll document[s] prese nted by Tony Altavilla.”

Parag raph 58 state d: “I n order to complete the pur chase of Relationserve [Media] share s by the

Plaintiff Richard F . Thompson, Altavilla neg otiated the fina l purcha se price betwee n the par ties,

and fa cilitated wire transfe rs of money from the Plaintiff to Relationserve [Media] .”

64t o D i s m i s s 2 5

, J a n

. 2 9

, 2 0 0 7

. ) A s f o r t h e § 1 0 ( b )

, R u l e 1 0 b

- 5 c l a i m

, c o u n s e l 4 3

a r g u e d t h a t t h e y h a d m e t t h e s t r i c t p l e a d i n g r e q u i r e m e n t s o f R u l e 9 ( b ) a n d t h e

P S L R A

. ( I d

. a t 1 1

. )

4 4

R e g a r d i n g t h e s t a t e l a w c l a i m s

, t h e p l a i n t i f f s c o n c e d e d t h a t t h e S L U S A

b a r r e d t h e m f

r o m m a i n t a i n i n g t h r e e o f t h e f i v e c l a i m s a s c l a s s a c t i o n s : t h e C o u n t

V I I I I n d i a n a s e c u r i t i e s f r a u d c l a i m

, t h e C o u n t I X I n d i a n a d e c e p t i o n c l a i m

, a n d t h e

C o u n t X c o m m o n l a w f r a u d c l a i m

. T h e y a r g u e d t h a t C o u n t s V

, V I

, a n d V I I w e r e

c o g n i z a b l e

. ( I d

. a t 2 3

– 2 4

. ) C o u n t s V a n d V I a l l e g e d t h a t M e d i a s o l d s e c u r i t i e s v i a

u n r e g i s t e r e d b r o k e r s i n v i o l a t i o n o f F l o r i d a a n d I n d i a n a l a w

, r e s p e c t i v e l y ; C o u n t

V I I a l l e g e d t h a t M e d i a s o l d u n r e g i s t e r e d

, n o n

- e x e m p t s e c u r i t i e s i n v i o l a t i o n o f t h e

I n d i a n a S e c u r i t i e s A c t

. T h e d e f e n d a n t s c o n t e n d e d t h a t t h e s e c l a i m s w e r e “ n o t

w i t h i n t h e p u r v i e w o f S L U S A b e c a u s e t h e c l a i m s d o n o t a l l e g e t h a t t h e D e f e n d a n t s

m i s r e p r e s e n t e d o r o m i t t e d a m a t e r i a l f a c t i n c o n n e c t i o n w i t h t h e p u r c h a s e o r s a l e o f

s u c h s e c u r i t y

. ” ( I d

. a t 2 3 ( q u o t a t i o n o m i t t e d )

. )

3

. T h e C o u r t D i s m i s s e s t h e F i r s t A m e n d e d C o m p l a i n t

Plaintiffs’ counsel a

ppare ntly conclude d that they

lacke d evidentiar

y support, leg al 4 3

support, or both, for the “ora l communication[s] ,” bec ause, w hen they filed the sec ond amende d

complaint, they

did not assert a § 12 c laim.

The plaintiffs’ alleg ations of fra udulent conduct on the pa rt of the Of

fice rs wer e that 4 4

they “omitted to state materia l fac ts” in documents with the SEC. (See F irst Am. Compl . ¶¶

9–22.) F or example, “De fenda nt Danielle Ka

rp wa s the President and Sec reta ry of

Relationserve . Danielle K arp sig ned one or more c ertifications per Sarba nes-Oxley

Act filed

with the SEC which omitt ed to state mate rial fa cts.” (I d. at ¶ 10.)

65T h e d i s t r i c t c o u r t h e a r d t h e d e f e n d a n t s ’ m o t i o n s t o d i s m i s s d u r i n g a

c o n f e r e n c e c a l l w i t h c o u n s e l o n M a r c h 6

, 2 0 0 7

. R e f e r r i n g t o t h e § 1 0 ( b )

, R u l e

1 0 b

- 5 c l a i m s

, t h e c o u r t q u e s t i o n e d w h e t h e r T h o m p s o n w a s a s u i t a b l e c l a s s

r e p r e s e n t a t i v e b e c a u s e o f a p o s s i b l e c o n f l i c t w i t h t h e o p e n m a r k e t p u r c h a s e r s

. T h e

c o u r t a l s o i n d i c a t e d t h a t i t h a d s e r i o u s c o n c e r n s a b o u t t h e a d e q u a c y o f t h e

p l a i n t i f f s ’ p l e a d i n g

. A t o n e p o i n t

, t h e c o u r t s a i d :

S o I d o n ’ t s e e a n y t h i n g w h e r e i t i s a l l e g e d t h a t [ T h o m p s o n a n d

J a c o b y ] r e l i e d o n a n y t h i n g s p e c i f i c

. N o t h i n g i s t i e d t o g e t h e r

. T h e r e

a r e a l o t o f t h i n g s t h r o w n o u t i n t h e f i r s t a m e n d e d c o m p l a i n t

, b u t I s e e

v e r y l i t t l e c o n n e c t i n g o f t h e d o t s

.

S e e m s t o m e t h e r e a r e s o m e r e a l g a p s t h e r e

. S e e m s t o m e y o u m a y

h a v e m o r e t h a n o n e l a w s u i t t i e d i n t o o n e l a w s u i t

. . . .

. . . .

A g a i n

, i t ’ s k i n d o f h a r d t o f o l l o w

. I t ’ s l i k e s o w h a t

, w h o r e l i e d o n i t

,

w h o d i d w h a t ? W h e r e i s t h e r e l i a n c e c a u s a t i o n ?

I d o n ’ t s e e

. . . w h e r e a n y o n e i s a l l e g e d t o h a v e r e l i e d o n a n y

p a r t i c u l a r f

i l i n g w h e t h e r [ a F o r m ] 1 0 [

- ] K

, [ F o r m ] 1 0

- Q [ S B ]

, o r

r e g i s t r a t i o n s t a t e m e n t t h a t l e d t h a t p e r s o n t o p u r c h a s e s o m e t h i n g

.

( H r ’ g T r

. 8

, M a r

. 6

, 2 0 0 7

. ) A f t e r d e t a i l i n g w h y t h e f

e d e r a l s e c u r i t i e s c l a i m s f a i l e d

,

t h e c o u r t o f

f e r e d p l a i n t i f

f s ’ c o u n s e l “ o n e f

i n a l t i m e t o t a k e c a r e o f ” t h e

d e f i c i e n c i e s

. ( I d

. a t 5

. ) T h e c o u r t t h e r e f o r e d i s m i s s e d t h e f

i r s t a m e n d e d c o m p l a i n t

w i t h o u t p r e

j u d i c e

, w i t h l e a v e t o f

i l e a s e c o n d a m e n d e d c o m p l a i n t b y M a r c h 1 9

,

2 0 0 7

.

66C

. T h e S e c o n d A m e n d e d C o m p l a i n t

1

. T h o m p s o n & J a c o b y F i l e t h e S e c o n d A m e n d e d C o m p l a i n t w i t h J a c o b y L e a d i n g

a n O p e n

- M a r k e t P u r c h a s e r S u b c l a s s B r i n g i n g F e d e r a l S e c u r i t i e s C l a i m s a n d w i t h

T h o m p s o n L e a d i n g a P r i v a t e O f f e r i n g P u r c h a s e r S u b c l a s s B r i n g i n g S t a t e L a w

C l a i m s

T h e p l a i n t i f

f s f i l e d a s e c o n d a m e n d e d c o m p l a i n t o n M a r c h 1 9

, 2 0 0 7

. T h i s

c o m p l a i n t

, u n l i k e t h e p r i o r o n e s

, p l e d t w o c l a s s a c t i o n s : o n e u n d e r f e d e r a l

s e c u r i t i e s l a w

, w i t h J a c o b y a s t h e c l a s s r e p r e s e n t a t i v e

, a n d t h e o t h e r u n d e r s t a t e

l a w

, w i t h T h o m p s o n a s t h e c l a s s r e p r e s e n t a t i v e

. B o t h a c t i o n s s o u g h t r e s c i s s i o n o r

d a m a g e s f

o r p u r c h a s e r s o f M e d i a s t o c k

.

A s f o r t h e f e d e r a l c l a i m s

, J a c o b y b r o u g h t h i s c l a s s a c t i o n i n t w o c o u n t s

, I

a n d I I

, “ o n b e h a l f [ o f

] h i m s e l f a n d a l l o t h e r s s i m i l a r l y s i t u a t e d t h a t p u r c h a s e d

R e l a t i o n S e r v e M e d i a

, I n c

. . . . s e c u r i t i e s o n t h e o p e n m a r k e t p r i o r t o M a y 2 3

,

2 0 0 6

. ” ( S e c o n d A m

. C o m p l

. ¶ 1

. ) I n C o u n t I

, e x c e p t f o r t h e c l a s s d e f

i n i t i o n

,

J a c o b y r e p l i c a t e d t h e c l a i m b r o u g h t b y T h o m p s o n i n C o u n t I I I o f t h e i n i t i a l

c o m p l a i n t a n d b y T h o m p s o n a n d J a c o b y i n C o u n t I I I o f t h e f i r s t a m e n d e d

c o m p l a i n t

— t h a t M e d i a a n d t h e O f f i c e r s “ o f f e r e d a n d s o l d R e l a t i o n S e r v e s e c u r i t i e s

i n v i o l a t i o n o f

” § 1 0 ( b ) o f t h e 1 9 3 4 A c t a n d R u l e 1 0 b

- 5

. ( S e c o n d A m

. C o m p l

. ¶ ¶

1 0 1

– 0 3

. ) I n C o u n t I I

, e x c e p t f o r t h e c l a s s d e f

i n i t i o n

, J a c o b y r e p l i c a t e d t h e § 4 5

I n draf ting the se cond ame nded complaint, plaintiffs’ c ounsel did not include the § 11 4 5

and § 12 cla ims asserted in Counts I and I I of the initial and first ame nded complaints, which

wer e base d on misrepre sentations alleg edly made in Media ’s re g istration statement and

prospec tus. See supra pa rts I I .A and B . Nonethele ss, in presenting Count I in the second

672 0 ( a ) c l a i m b r o u g h t b y T h o m p s o n a n d J a c o b y i n C o u n t I V o f t h e f i r s t a m e n d e d

c o m p l a i n t

— “ [ b ] y v i r t u e o f t h e i r p o s i t i o n s a s c o n t r o l l i n g p e r s o n s [ o f M e d i a ]

, t h e

i n d i v i d u a l D e f

e n d a n t s a r e l i a b l e ” f

o r M e d i a ’ s v i o l a t i o n o f § 1 0 ( b ) a n d R u l e 1 0 b

- 5

.

( I d

. ¶ ¶ 1 0 4

– 1 1

. )

T h e b i g g e s t d i f

f e r e n c e b e t w e e n t h e f

e d e r a l s e c u r i t i e s c l a i m s i n t h e f i r s t a n d

s e c o n d a m e n d e d c o m p l a i n t s w a s w h a t t h e s e c o n d a m e n d e d c o m p l a i n t o m i t t e d

.

G o n e w a s T h o m p s o n f

r o m a n y f

e d e r a l s e c u r i t i e s c l a i m ; g o n e w e r e t w o o f t h e

i n d i v i d u a l d e f

e n d a n t s ; g o n e w e r e t h e § 1 1 a n d § 1 2 c l a i m s ; g o n e w e r e t h e

4 6

k i c k b a c k a n d t h e o v e r s t a t e d

- i n c o m e t h e o r i e s o f m i s r e p r e s e n t a t i o n

. O n l y J a c o b y 4 7

r e m a i n e d

, r e p r e s e n t i n g o p e n m a r k e t p u r c h a s e r s a n d b r i n g i n g a § 1 0 ( b )

, R u l e 1 0 b

- 5

c l a i m a n d a p a r a s i t i c § 2 0 ( a ) c l a i m

. J a c o b y a s s e r t e d o n l y t h e u n r e g i s t e r e d

- b r o k e r 4 8

a n d s u e d

- d i r e c t o r t h e o r i e s o f m i s r e p r e s e n t a t i o n

.

amende d complaint, counsel re peate d the alleg ation that “RelationServe [ Media’s] reg istration

statement(s) a

nd prospec tus contained misleading information and omitted mater ial fac ts

nece ssary to make the state ments alleg ed ther ein not misleading .” (Sec ond Am. Compl. ¶ 102.)

The plaintiffs dr opped Richar d Hill and Ba rry Honig

. 4 6

The plaintiffs did not eve n plead the f actua l predica te for the kickbac k theory ; the 4 7

plaintiffs did plead the f

actua l predica te for the overstate d-income the ory (Second A m Compl . ¶¶

60, 61), but did not plead it as an a ctionable omission in the § 10(b), Rule 10b-5 c laim, (id. ¶¶ 3,

80, 95). F urther, in the district c ourt and in this appea l, the plaintiffs adva nced it only

to

demonstrate the defe ndants’ vena l char acte r in support of the plaintiffs’ scienter arg ument.

A § 20(a ) cla im is a parasitic c laim beca use it can only

succe ed if a

predic ate § 10( b), 4 8

Rule 10b-5 claim succ eeds; thus the § 20(a ) cla im lives and dies by the Rule 10b-5 cla im.

68T h o m p s o n a s s e r t e d h i s c l a s s a c t i o n i n C o u n t I I I “ o n b e h a l f o f h i m s e l f a n d a l l

o t h e r s s i m i l a r l y s i t u a t e d t h a t p u r c h a s e d R e l a t i o n S e r v e [ M e d i a ] s e c u r i t i e s b y w a y o f

a p r i v a t e o f

f e r i n g

. ” ( I d

. ¶ 2

. ) C o u n t I I I a l l e g e d t h a t t h e d e f e n d a n t s

v i o l a t e d t h e s e c u r i t i e s l a w s o f C a l i f o r n i a

, C o n n e c t i c u t

, F l o r i d a

,

I l l i n o i s

, I n d i a n a

, N e v a d a

, N e w J e r s e y

, N e w Y o r k

, O h i o

, a n d

P e n n s y l v a n i a b y w a y o f ( 1 ) t h e i r s a l e o f R e l a t i o n S e r v e [ M e d i a ]

s e c u r i t i e s t h r o u g h t h e u s e o f b r o k e r / d e a l e r s a n d a g e n t s w h o w e r e n o t

r e g i s t e r e d w i t h t h e S E C [ a n d t h o s e s t a t e s ] a n d ( 2 ) t h e i r p a y m e n t o f a

c o m m i s s i o n

. 4 9

( I d

. ¶ 1 1 3

. ) F u r t h e r m o r e

,

[ e ] a c h D e f

e n d a n t h a v i n g a c c e s s t o R e l a t i o n S e r v e [ M e d i a ] b u s i n e s s

p r i o r t o a n d d u r i n g R e l a t i o n S e r v e [ M e d i a ’ s ] u s e o f u n r e g i s t e r e d

b r o k e r / d e a l e r s p e r s o n a l l y p a r t i c i p a t e d o r a i d e d i n m a k i n g t h e s a l e s t o

T h o m p s o n a n d h i s p u t a t i v e c l a s s a n d i s j o i n t l y a n d s e v e r a l l y l i a b l e f o r

r e s c i s s i o n i f t h e p u r c h a s e r s t i l l o w n s t h e s e c u r i t y o r f o r d a m a g e s i f t h e

p u r c h a s e r h a s s o l d t h e s e c u r i t y

.

( I d

. ¶ 1 1 4

. ) H e r e a g a i n

, m o s t n o t a b l e w a s w h a t w a s o m i t t e d : g o n e w a s t h e c l a i m

t h a t M e d i a s o l d u n r e g i s t e r e d

, n o n

- e x e m p t s e c u r i t i e s i n v i o l a t i o n o f t h e I n d i a n a

s e c u r i t i e s a c t

, a n d g o n e w e r e a l l o f t h e s t a t e l a w f r a u d c l a i m s

.

T h e f i r s t 1 0 0 p a r a g r a p h s r e s e m b l e d t h e f i r s t 1 1 7 p a r a g r a p h s o f t h e f i r s t

a m e n d e d c o m p l a i n t

. L i k e t h a t c o m p l a i n t

, t h e s e c o n d a m e n d e d c o m p l a i n t o m i t t e d

a n y r e f e r e n c e t o M e d i a ’ s J u n e 1 6

, 2 0 0 5 c u r r e n t r e p o r t

, w h i c h i n d i c a t e d t h a t

S u m m i t w a s n o t r e g i s t e r e d a n d w o u l d n o t a c t a s a b r o k e r / d e a l e r

, b u t

, r a t h e r w o u l d

As it pertained to the se curities laws of Florida and I ndiana, Count I I I

replica ted the 4 9

alleg ations of Counts I V and V of the initial complaint and Counts V and VI of the fir st amended

complaint.

69o n l y a c t a s a f i n d e r

. N e v e r t h e l e s s

, t h e s e c o n d a m e n d e d c o m p l a i n t a d d r e s s e d t h e

l i c e n s i n g i s s u e b y a l l e g i n g t h a t “ R e l a t i o n S e r v e [ M e d i a ]

, a n d i t s o f f i c e r s a n d

d i r e c t o r s

, k n e w a n d f

a i l e d t o r e p o r t

. . . t h a t S u m m i t a n d i t s a g e n t s [ w e ] r e n o t

r e g i s t e r e d w i t h t h e S E C o r t h e s t a t e s e c u r i t i e s d i v i s i o n s

. ” ( S e c o n d A m

. C o m p l

. ¶

4 5

. ) I t a l s o a l l e g e d t h a t t h e O f f i c e r s a c t e d w i t h s c i e n t e r i n f a i l i n g t o r e p o r t t h i s : t h e

O f f i c e r s “ k n e w a n d / o r r e c k l e s s l y d i s r e g a r d e d t h e f a l s i t y a n d m i s l e a d i n g n a t u r e o f

t h e i n f o r m a t i o n w h i c h t h e y c a u s e d t o b e d i s s e m i n a t e d t o t h e i n v e s t i n g p u b l i c

. ” ( I d

.

¶ 8 0

. )

2

. T h e D e f

e n d a n t s M o v e t o D i s m i s s

, a n d D e f e n d a n t K a r p M o v e s f

o r S a n c t i o n s

O n c e a g a i n

, t h e d e f

e n d a n t s m o v e d t o d i s m i s s t h e p l a i n t i f f s ’ c o m p l a i n t

. T h e y

d i d s o o n s e v e r a l g r o u n d s

, a m o n g t h e m t h a t ( 1 ) t h e § 1 0 ( b )

, R u l e 1 0 b

- 5 c l a i m ’ s

a l l e g a t i o n s o f m i s r e p r e s e n t a t i o n a n d s c i e n t e r w e r e i n s u f f i c i e n t u n d e r t h e

h e i g h t e n e d p l e a d i n g r e q u i r e m e n t s o f R u l e 9 ( b ) a n d t h e P S L R A ; a n d ( 2 ) a s a

c o n s e q u e n c e

, t h e p a r a s i t i c § 2 0 ( a ) c l a i m f a i l e d

. A s f

o r T h o m p s o n ’ s s t a t e l a w c l a s s

a c t i o n

, t h e d e f

e n d a n t s p o i n t e d o u t t h a t o f t h e t e n s t a t e s w h e r e M e d i a a l l e g e d l y s o l d

s h a r e s t h r o u g h u n r e g i s t e r e d b r o k e r s

, t h e p l a i n t i f f s h a d i d e n t i f

i e d o n l y o n e s a l e i n

o n l y o n e s t a t e

— s p e c i f

i c a l l y

, M e d i a ’ s s a l e t o T h o m p s o n t h r o u g h S u m m i t i n

I n d i a n a

. A c c o r d i n g l y

, t h e s t a t e l a w c l a i m s i n a l l s t a t e s e x c e p t I n d i a n a f a i l e d f r o m

70t h e g e t

- g o

. A s f o r t h e I n d i a n a s a l e t o T h o m p s o n

, t h e p l a i n t i f f s p o i n t e d o u t t h a t

S u m m i t d i d n o t n e e d t o b e r e g i s t e r e d a s a b r o k e r u n d e r I n d i a n a l a w

.

I n a d d i t i o n t o m o v i n g f

o r t h e d i s m i s s a l o f t h e c o m p l a i n t

, d e f e n d a n t K a r p

m o v e d f o r s a n c t i o n s a g a i n s t t h e p l a i n t i f f s a n d t h e i r a t t o r n e y s u n d e r R u l e 1 1 w i t h

r e s p e c t t o a l l c o u n t s a n d u n d e r t h e P S L R A w i t h r e s p e c t t o t h e C o u n t I § 1 0 ( b )

,

R u l e 1 0 b

- 5 c l a i m a n d t h e C o u n t I I § 2 0 ( a ) c l a i m

. 5 0

3

. T h e C o u r t D i s m i s s e s t h e C o m p l a i n t w i t h P r e j u d i c e b u t D e n i e s S a n c t i o n s

O n J u n e 1 2

, 2 0 0 7

, t h e d i s t r i c t c o u r t e n t e r e d a n o r d e r d i s p o s i n g o f t h e

d e f e n d a n t s ’ m o t i o n s

. T h e c o u r t d i s m i s s e d C o u n t I b e c a u s e i t f a i l e d t o m e e t t h e

h e i g h t e n e d p l e a d i n g s t a n d a r d s o f R u l e 9 ( b ) a n d t h e P S L R A

. I n t h e c o u r t ’ s v i e w

,

t h e § 1 0 ( b )

, R u l e 1 0 b

- 5 e l e m e n t s o f m i s r e p r e s e n t a t i o n a n d s c i e n t e r h a d n o t b e e n

p l e d w i t h t h e r e q u i s i t e s p e c i f i c i t y

. S p e c i f

i c a l l y

, t h e § 1 0 ( b )

, R u l e 1 0 b

- 5 c l a i m d i d

n o t i d e n t i f

y o n e s t a t e m e n t o f s i g n i f i c a n c e i n a n y S E C f

i l i n g t h a t w a s a l l e g e d l y f a l s e

o r m i s l e a d i n g d u e t o t h e o m i s s i o n o f a m a t e r i a l f a c t

, a n d i t p l e d s c i e n t e r i n a

c o n c l u s o r y f

a s h i o n

, t h e r e b y f

a i l i n g t o c r e a t e a s t r o n g i n f e r e n c e o f s e v e r e

r e c k l e s s n e s s o n t h e p a r t o f M e d i a o r t h e O f f i c e r s

. T h e c o u r t d i s m i s s e d C o u n t I I

All defe ndants except J ehassi soug ht Rule 11 sanctions when they moved the district 5 0

court to dismiss the init ial complaint; eleven of thirteen de fenda

nts renew ed this reque st in their

motions t o dismiss the first ame nded complaint; and a ll defenda nts renew ed this reque st in their

motions t o dismiss the sec ond amende d complaint. Kar p was the only

defe ndant who soug ht the

imposit ion of sanctions in a sepa rate motion and was the only defe ndant who appe aled the de nial

of sanc tions.

71b e c a u s e C o u n t I w a s l e g a l l y i n s u f f i c i e n t

. T h e d i s m i s s a l o f C o u n t s I a n d I I l e f t t h e

c o u r t w i t h t h e s t a t e l a w c l a i m s o f C o u n t I I I

. T h e c o u r t d e c l i n e d t o e x e r c i s e i t s

s u p p l e m e n t a l j u r i s d i c t i o n o v e r t h o s e c l a i m s a n d t h e r e f o r e d i s m i s s e d t h e m w i t h o u t

p r e j u d i c e

.

I n a s e p a r a t e o r d e r e n t e r e d o n J u n e 1 2

, t h e c o u r t d e n i e d K a r p ’ s m o t i o n f o r

s a n c t i o n s

. T h e c o u r t f

o u n d “ t h a t P l a i n t i f

f s ’ c l a i m s a r e n o t f

r i v o l o u s

, o r s o d e v o i d

o f e v i d e n t i a r y s u p p o r t a s t o w a r r a n t s a n c t i o n s

. L i k e w i s e

, t h e r e i s n o e v i d e n c e t h a t

P l a i n t i f f s i n s t i t u t e d t h i s a c t i o n f

o r i m p r o p e r p u r p o s e s

, s u c h a s t o h a r a s s [ M e d i a

,

K a r p

, o r a n y o t h e r n a m e d d e f e n d a n t ] o r n e e d l e s s l y i n c r e a s e t h e c o s t o f l i t i g a t i o n

. ”

( S a n c t i o n s O r d e r 1

, J u n e 1 2

, 2 0 0 7 ( i n t e r n a l c i t a t i o n s o m i t t e d )

. ) K a r p c o n t e n d e d 5 1

t h a t s a n c t i o n s w e r e w a r r a n t e d b e c a u s e

, “ [ i ] n d i s m i s s i n g t h e i n s t a n t m a t t e r t h r e e

t i m e s f o r f a i l i n g t o s t a t e a c a u s e o f a c t i o n

, t h e D i s t r i c t C o u r t i n e s s e n c e r u l e d

P l a i n t i f f s ’ c l a i m s w e r e f

r i v o l o u s

. ”

4

. J a c o b y ’ s A p p e a l

, K a r p ’ s C r o s s

- A p p e a l

, a n d t h i s C o u r t ’ s D e c i s i o n

The two pa g e orde r deny ing sa nctions did not ex plicitly

addre ss Rule 11(b) 5 1

compliance under the PSL RA with respec t to: (1) the § 11 claims broug ht as Count Iin the

initial and first amende d complaints; (2) the § 12 c laims broug ht as Count I I in the initial and

first amende d complaints; (3) the § 10(b) , Rule 10b-5 claims broug ht as Count I I I of the initial

complaint and first a mended c omplaints and Count I of the sec ond amende d complaint; or (4)

the § 20(a ) cla ims brought a s Count I V of the f irst amended c omplaint and Count I I of the

second a mended c omplaint. After de clining to e x erc ise jurisdiction over Count I I I of the sec ond

amende d complaint, Thompson’s state law c laims, the district court did not decide w hether Rule

11 sanctions should be imposed for pla intiffs’ prosec ution of those claims.

72S u b s e q u e n t l y

, J a c o b y a p p e a l e d t o t h i s c o u r t a n d K a r p c r o s s

- a p p e a l e d

.

J a c o b y a p p e a l s t h e d i s t r i c t c o u r t ’ s d i s m i s s a l o f t h e § 1 0 ( b )

, R u l e 1 0 b

- 5 a n d § 2 0 ( a )

c l a i m s o f t h e s e c o n d a m e n d e d c o m p l a i n t

. K a r p c r o s s

- a p p e a l s t h e c o u r t ’ s d e n i a l o f

P S L R A R u l e 1 1 s a n c t i o n s f o r t h e f e d e r a l c l a i m s a n d o r d i n a r y R u l e 1 1 s a n c t i o n s f o r

t h e s e c o n d a m e n d e d c o m p l a i n t ’ s s t a t e l a w c l a i m s

.

T o d a y

, t h e c o u r t c o r r e c t l y a f f i r m s t h e d i s m i s s a l o f J a c o b y ’ s f e d e r a l s e c u r i t i e s

l a w c l a i m s

. T h e c o u r t d i s p o s e s o f K a r p ’ s a p p e a l r e g a r d i n g P S L R A s a n c t i o n s b y

v a c a t i n g t h e d i s t r i c t c o u r t ’ s s a n c t i o n s o r d e r a n d r e m a n d i n g t h e c a s e f o r f u r t h e r

p r o c e e d i n g s

, b e c a u s e t h e d i s t r i c t c o u r t ’ s P S L R A o r d e r i s t o o c o n c l u s o r y t o p e r m i t

m e a n i n g f

u l a p p e l l a t e r e v i e w

. T h e c o u r t ’ s d i s p o s i t i o n c o n t a i n s i n s u f f i c i e n t

i n s t r u c t i o n s a s t o p r e c i s e l y w h a t t h e d i s t r i c t c o u r t m u s t d o o n r e m a n d

. I n m y v i e w

,

u n d e r t h e c o u r t ’ s d i s p o s i t i o n

, t h e d i s t r i c t c o u r t m u s t c a r r y o u t i t s P S L R A d u t i e s

f r o m s c r a t c h w i t h r e s p e c t t o a l l p a r t i e s a n d t h e i r r e s p e c t i v e a t t o r n e y s

. F i n a l l y

, t h e

c o u r t m a k e s n o e x p l i c i t h o l d i n g r e g a r d i n g K a r p ’ s m o t i o n f o r o r d i n a r y R u l e 1 1

s a n c t i o n s o n t h e s t a t e l a w c l a i m s

.

I I I

. T h i s C o u r t E r r s b y S u m m a r i l y R e m a n d i n g K a r p ’ s C r o s s

- A p p e a l f o r S a n c t i o n s

U n d e r t h e P S L R A

I n K a r p ’ s c r o s s

- a p p e a l f o r R u l e 1 1 a n d P S L R A s a n c t i o n s

, t h e c o u r t e r r s f o r

t w o r e a s o n s

. F i r s t

, t h e c o u r t ’ s o p i n i o n f a i l s t o m a k e p e r f

e c t l y c l e a r t h a t

, o n

r e m a n d

, t h e d i s t r i c t c o u r t m u s t r e v i e w a n d m a k e “ s p e c i f i c f i n d i n g s r e g a r d i n g ”

73p l a i n t i f

f s a n d p l a i n t i f

f s ’ c o u n s e l ’ s c o m p l i a n c e w i t h e a c h r e q u i r e m e n t o f R u l e 1 1 ( b )

w i t h r e s p e c t t o a l l t h r e e c o m p l a i n t s

. S e c o n d

, t h e c o u r t s h o u l d n o t h a v e r e m a n d e d 5 2

w i t h a b l a n k s l a t e ; a t b o t t o m

, t h e c o u r t s h o u l d h a v e i n s t r u c t e d t h e d i s t r i c t c o u r t t o

s a n c t i o n p l a i n t i f

f s ’ a t t o r n e y s f

o r n o n c o m p l i a n c e w i t h R u l e 1 1 ( b )

. T h i s d i s c u s s i o n

p r o c e e d s i n t w o p a r t s

. P a r t A s e t s o u t t h e d u t i e s t h e P S L R A i m p o s e s o n d i s t r i c t

c o u r t s a n d s h o w s t h a t t h e d i s t r i c t c o u r t m u s t r e v i e w a l l t h r e e c o m p l a i n t s f o r R u l e

1 1 c o m p l i a n c e o n r e m a n d

. P a r t B e x p l a i n s t h a t u n d e r t h e P S L R A

, t h e r e i s n o n e e d

f o r a r e m a n d w h e n t h e r e c o r d d e m o n s t r a t e s c o n c l u s i v e l y t h a t a n a t t o r n e y o r p a r t y

v i o l a t e d R u l e 1 1

.

A

. T h e P S L R A R u l e 1 1 A n a l y t i c a l F r a m e w o r k & R e q u i r e m e n t s

T h e P S L R A m a n d a t e s s a n c t i o n s f o r f i l i n g a n d p r o s e c u t i n g f

r i v o l o u s o r

a b u s i v e s e c u r i t i e s a c t i o n s u n d e r t h e 1 9 3 3 a n d 1 9 3 4 A c t s a n d e m p h a s i z e s t h e n e e d

n o t o n l y t o d e t e r s u c h f

i l i n g s b u t a l s o t o c o m p e n s a t e t h e v i c t i m s

. S e e H

. R

. R e p

.

N o

. 1 0 4

- 3 6 9

, a t 3 9

– 4 0 ( 1 9 9 5 ) ( C o n f

. R e p

. )

, r e p r i n t e d i n 1 9 9 5 U

. S

. C

. C

. A

. N

. 7 3 0

,

7 3 8

– 3 9

. A c c o r d i n g l y

, t h e P S L R A r e q u i r e s b o t h ( 1 ) m a n d a t o r y f i n d i n g s r e g a r d i n g

c o m p l i a n c e w i t h R u l e 1 1

, a n d ( 2 ) m a n d a t o r y s a n c t i o n s w h e n e v e r a n y p o r t i o n o f a

See 15 U.S.C. §§ 77z-1(c), 78u- 4(c) . Full compliance with the PSL RA require s the 5 2

district court to revie w the motions the defe ndants filed in re sponse to the three complaints as

well, but the foc us on remand w ill be the complaints.

74p l a i n t i f

f ’ s c o m p l a i n t f

a i l s t o c o m p l y w i t h R u l e 1 1

. 1 5 U

. S

. C

. 5 3

Section 78u-4(c ), which is mater ially identical to § 77z-1(c) , provides: 5 3

Sanctions for a

busive litigation

(1) Ma ndatory revie w by

court

I n any private a ction arising under this cha pter, upon fina l adjudication of

the ac tion, the court shall include in the r ecor d specific finding s reg arding

compliance by

eac h party

and ea ch attorne y

repr esenting any

party with

eac h require ment of Rule 11(b) of the Fe dera l Rules of Civil Procedur e as

to any complaint, responsive ple ading , or dispositive moti on.

(2) Ma ndatory sanctions

I f the c ourt makes a

finding under pa

rag raph ( 1) that a pa

rty or attorne y violated any

require ment of Rule 11(b) of the Fe dera l Rules of Civil

Procedur e as to a

ny complaint, responsive ple ading , or dispositive moti on,

the cour t shall impose sanctions on such party or attorne y

in acc ordanc e

with Rule 11 of the Fe dera l Rules of Civil Procedur e. Prior to making a

finding that any

party or attorne y

has violated Rule 11 of the Fe dera l

Rules of Civil P roce dure, the court shall g ive such pa rty or attorne y

notice

and an oppor

tunity to respond.

(3) Pre sumption i n favor

of attorne y s’ fe es and c osts

(A) I n g ener al

Subject to subparag raphs ( B) and (C), f or purpose s of par ag raph

(2), the c ourt shall adopt a pr esumption that the appropr iate

sanction—

(i) for failure of any

responsive ple ading or dispositive

motion to comply

with any require ment of Rule 11(b) of

the Fe dera l Rules of Civil Procedur e is an a war d to the

opposing pa

rty of the re asonable attorney s’ fe es and othe r

expenses incurre d as a dire ct re sult of the violation; and

(ii) for substantial f

ailure of any complaint to comply

with

any require ment of Rule 11(b) of the Fe dera l Rules of Civil

Procedur e is an a

war d to the opposing pa

rty of the

rea sonable a ttorney s’ fe es and othe r expenses incurr ed in

the ac tion.

75§ 7 7 z

- 1 ( c ) ; 1 5 U

. S

. C

. § 7 8 u

- 4 ( c )

.

T h e P S L R A

- m a n d a t e d R u l e 1 1 c o m p l i a n c e r e v i e w i s s w e e p i n g

. I n a

p a r a g r a p h e n t i t l e d “ M a n d a t o r y r e v i e w b y c o u r t

, ” t h e s t a t u t e p r o v i d e s t h a t

, i n a n y

p r i v a t e s e c u r i t i e s a c t i o n

, “ t h e c o u r t s h a l l i n c l u d e i n t h e r e c o r d s p e c i f i c f i n d i n g s

r e g a r d i n g c o m p l i a n c e b y e a c h p a r t y a n d e a c h a t t o r n e y

. . . w i t h e a c h r e q u i r e m e n t o f

R u l e 1 1 ( b )

. . . a s t o a n y c o m p l a i n t

, r e s p o n s i v e p l e a d i n g

, o r d i s p o s i t i v e m o t i o n

. ”

1 5 U

. S

. C

. § 7 8 u

- 4 ( c ) ( 1 ) ( e m p h a s i s a d d e d )

. C o n g r e s s i m p o s e d t h i s h e a v y d u t y o n

d i s t r i c t c o u r t s v i a s t a t u t e ; t h u s

, w h e t h e r a p a r t y m o v e d f o r s a n c t i o n s i s i r r e l e v a n t

.

(B ) Rebuttal evidenc e

The pre sumption described in subpar ag raph ( A) may be re butted only

upon proof by

the par ty or attorne y

ag ainst whom sanctions are to be

imposed that—

(i) the a war d of attorne y s’ fe es and othe r expenses will impose an

unrea sonable burde n on that party or attorne y

and would be unjust,

and the f ailure to make such an a

war d would not impose a g rea ter

burden on the party

in whose fa vor sanc tions are to be imposed; or

(ii) the violation of Rule 11(b) of the Fe dera l Rules of Civil

Procedur e wa s de minimis.

(C) Sanctions

I f the pa rty or attorne y

ag ainst whom sanctions are to be imposed meets

its burden under

subpara g raph ( B) , the cour t shall awar d the sanc tions that

the cour t deems appr opriate pur suant to Rule 11 of the F eder al Rules of

Civil Procedur e.

Be cause the two subsections ar e mater ially identical, fr om this poi nt forwa rd, I cite only to 15

U.S.C. § 78u-4(c).

76M o r e o v e r

, b e c a u s e C o n g r e s s e x t e n d e d t h i s d u t y t o “ a n y ” c o m p l a i n t

, w h e n a

p l a i n t i f f f i l e s m u l t i p l e c o m p l a i n t s

, e a c h m u s t b e s c r u t i n i z e d

. S e e R e e v e s v

. A s t r u e

,

5 2 6 F

. 3 d 7 3 2

, 7 3 4 ( 1 1 t h C i r

. 2 0 0 8 ) ( “ S t a t u t o r y i n t e r p r e t a t i o n b e g i n s a n d e n d s w i t h

t h e t e x t o f t h e s t a t u t e s o l o n g a s t h e t e x t ’ s m e a n i n g i s c l e a r

. ” )

. T h e P S L R A d o e s

n o t g r a n t a g e t

- o u t

- o f

- j a i l

- f r e e c a r d

— o n e n o n f

r i v o l o u s c o m p l a i n t d o e s n o t

i m m u n i z e t h e e a r l i e r f

i l i n g o f f r i v o l o u s c o m p l a i n t s

. S e e A T S I C o m m c ’ n s

, I n c

. v

.

S h a a r F u n d

, L t d

. , 5 7 9 F

. 3 d 1 4 3

, 1 5 2 ( 2 d C i r

. 2 0 0 9 ) ( “ T h e P S L R A s a n c t i o n s

p r o v i s i o n f

o r e c l o s e s t h e k i n d o f s a f e h a r b o r a f

f o r d e d i n R u l e 1 1 ( c ) ( 2 )

. T h e P S L R A

e x p l i c i t l y d i r e c t s c o u r t s t o m a k e R u l e 1 1 f i n d i n g s ‘ u p o n f

i n a l a d j u d i c a t i o n o f t h e

a c t i o n ’

. . . a n d i t i s w e l l

- s e t t l e d t h a t n o s a f e h a r b o r c o u l d a p p l y r e t r o a c t i v e l y

. ” )

( q u o t i n g 1 5 U

. S

. C

. § 7 8 u 4

- ( c ) ( 1 ) )

. E v e n i n t h e o r d i n a r y R u l e 1 1 c o n t e x t

, w h e r e a

c o m p l a i n t c o n t a i n s m u l t i p l e c l a i m s

, o n e n o n f r i v o l o u s c l a i m w i l l n o t p r e c l u d e

s a n c t i o n s f

o r f r i v o l o u s c l a i m s

. E

. g

. , R e e d v

. G r e a t L a k e s C o s

. , 3 3 0 F

. 3 d 9 3 1

, 9 3 6

( 7 t h C i r

. 2 0 0 3 ) ( “ T h e f

a c t t h a t R e e d ’ s a c c o m m o d a t i o n c l a i m

, w h i l e i t h a s f a i l e d

,

w a s n o t f r i v o l o u s w o u l d b e n o b a r t o i m p o s i n g s a n c t i o n s f o r p u t t i n g h i s o p p o n e n t

t o t h e e x p e n s e o f o p p o s i n g a f r i v o l o u s c l a i m ( o r d e f

e n s e ) j u s t b e c a u s e h e h a d a

n o n f r i v o l o u s c l a i m a s w e l l

. ” )

. H e r e

, t h e d i s t r i c t c o u r t e r r e d w h e n i t b a s e d i t s

s a n c t i o n s r e v i e w o n o n l y t h e s e c o n d a m e n d e d c o m p l a i n t

. T h e d i s t r i c t c o u r t s h o u l d

77h a v e r e v i e w e d a l l t h r e e c o m p l a i n t s ( a s w e l l a s

, f o r t h a t m a t t e r

, e a c h p a r t y

, e a c h

a t t o r n e y

, a n d e a c h m o t i o n t o d i s m i s s ) f o r c o m p l i a n c e w i t h R u l e 1 1

.

A l t h o u g h t h e P S L R A f

o r c e s a d i s t r i c t c o u r t t o c o n d u c t t h e R u l e 1 1 i n q u i r y

, i t

d o e s n o t a l t e r t h e o r d i n a r y R u l e 1 1 a n a l y s i s

. S i m o n D e B a r t o l o G r o u p

, L

. P

. v

.

R i c h a r d E

. J a c o b s G r o u p

, I n c

. , 1 8 6 F

. 3 d 1 5 7

, 1 6 7 ( 2 d C i r

. 1 9 9 9 )

. R u l e 1 1 i s

v i o l a t e d w h e n : ( 1 ) a p a p e r i s p r e s e n t e d f o r “ a n y i m p r o p e r p u r p o s e

, s u c h a s t o

h a r a s s o r t o c a u s e u n n e c e s s a r y d e l a y o r n e e d l e s s i n c r e a s e i n t h e c o s t o f l i t i g a t i o n ; ”

( 2 ) t h e l e g a l c o n t e n t i o n s a r e n o t “ w a r r a n t e d b y e x i s t i n g l a w ” o r b y a “ n o n f r i v o l o u s

a r g u m e n t ” f

o r c h a n g i n g e x i s t i n g l a w ; o r ( 3 ) t h e f a c t u a l c o n t e n t i o n s l a c k e v i d e n t i a r y

s u p p o r t

. F e d

. R

. C i v

. P

. 1 1 ( b ) ( 2 0 0 6 )

. A R u l e 1 1 ( b ) ( 2 ) o r ( b ) ( 3 ) 5 4

v i o l a t i o n

— b r i n g i n g a l e g a l l y o r f a c t u a l l y f r i v o l o u s c l a i m

— i s o f

t e n p r o b a t i v e o f a

When this case wa s liti g ated, F eder al Rule of Civil P roce dure 11( b) provided: 5 4

(b) Repre sentations to Court. By prese nting to the c ourt (whe ther by signing

, filing, submitting, or

later a dvocating ) a ple ading , written motion, or other pa per,

an attorne y

. . . is certify

ing tha t to the best of the per son’s knowledg e,

information, and be lief, for med af ter a n inquiry rea sonable unde r the

circ umstances,—

(1) it is not being prese nted for a ny improper pur

pose, such a s to harass or to

cause unnece ssary

delay or nee dless incre ase in the c ost of litigation;

(2) the c laims . . . and other leg al contentions there in are war rante d by exis ting

law or by a nonfr ivolous arg ument for the e x tension, modification, or re versa l of

exis ting law

or the e stablishment of new law ;

(3) the a lleg ations and other f actua l contentions have e videntiary support or, if

specific ally

so identified, ar e likely

to have e videntiary

support afte r a r easona

ble

opportunity

for f urther inve stiga tion or discovery

. . . .

Fe d. R. Civ. P . 11 (2006). Rule 11 wa s amende d in 2007 “as pa rt of the g ener al re sty ling of the

Civil Rules,” this amendment wa s “intended to be sty listi c only .” F ed. R. Civ. P. 11 advisory

committee’s note, 2007 amendment. Neve rtheless, I ref er to the 2006 ve rsion of the Rule.

78R u l e 1 1 ( b ) ( 1 ) i m p r o p e r p u r p o s e v i o l a t i o n

. T h e r e f o r e

, i t h e l p s t o b e g i n t h e P S L R A

e x a m i n a t i o n w i t h R u l e 1 1 ( b ) ( 2 ) a n d ( 3 )

.

I n t h i s c i r c u i t

, t h e r e a r e t w o p r o n g s t o t h e R u l e 1 1 ( b ) ( 2 ) a n d ( b ) ( 3 ) i n q u i r y :

w h e t h e r t h e l e g a l c l a i m s o r f a c t u a l c o n t e n t i o n s a r e o b j e c t i v e l y f

r i v o l o u s

, a n d

, i f s o

,

w h e t h e r a r e a s o n a b l y c o m p e t e n t a t t o r n e y s h o u l d h a v e k n o w n t h e y w e r e f r i v o l o u s

.

W o r l d w i d e P r i m a t e s

, I n c

. v

. M c G r e a l

, 8 7 F

. 3 d 1 2 5 2

, 1 2 5 4 ( 1 1 t h C i r

. 1 9 9 6 )

. B o t h

i n q u i r i e s m e a s u r e a t t o r n e y c o n d u c t u n d e r a n o b j e c t i v e r e a s o n a b l y c o m p e t e n t

a t t o r n e y s t a n d a r d

. D o n a l d s o n v

. C l a r k

, 8 1 9 F

. 2 d 1 5 5 1

, 1 5 5 6 ( 1 1 t h C i r

. 1 9 8 7 ) ( e n

b a n c )

.

A l e g a l c l a i m i s f r i v o l o u s i f n o r e a s o n a b l y c o m p e t e n t a t t o r n e y c o u l d

c o n c l u d e t h a t i t h a s a n y “ r e a s o n a b l e c h a n c e o f s u c c e s s ” o r i s a r e a s o n a b l e a r g u m e n t

t o c h a n g e e x i s t i n g l a w

. W o r l d w i d e P r i m a t e s

, 8 7 F

. 3 d a t 1 2 5 4 ( q u o t i n g J o n e s v

.

I n t ’ l R i d i n g H e l m e t s

, L t d

. , 4 9 F

. 3 d 6 9 2

, 6 9 4 ( 1 1 t h C i r

. 1 9 9 5 ) ) ; M c G r e g o r v

. B d

. o f

C o m m ’ r s o f P a l m B e a c h C o u n t y

, 9 5 6 F

. 2 d 1 0 1 7

, 1 0 2 2 ( 1 1 t h C i r

. 1 9 9 2 ) ( “ I f a n

a l l e g a t i o n i n a c o m p l a i n t c o n t a i n s n o c o l o r a b l e c l a i m f o r r e l i e f

, t h e n a R u l e 1 1

s a n c t i o n i s p r o p e r

. ” )

. N o t e v e r y F e d e r a l R u l e o f C i v i l P r o c e d u r e 1 2 ( b ) ( 6 )

d i s m i s s a l w i l l w a r r a n t s a n c t i o n s

, b u t s a n c t i o n s m a y b e i m p o s e d w h e n s e t t l e d

p r e c e d e n t c l e a r l y b a r s a c l a i m

. S e e D a v i s v

. C a r l

, 9 0 6 F

. 2 d 5 3 3

, 5 3 8 ( 1 1 t h C i r

.

1 9 9 0 ) ( n o t i n g t h a t l e g a l c l a i m s a r e f r i v o l o u s i n e g r e g i o u s c i r c u m s t a n c e s s u c h a s

79w h e n a p a r t y i g n o r e s t h e p l a i n l a n g u a g e o f a s t a t u t e o f l i m i t a t i o n s o r c o n c e a l s

c o n t r o l l i n g a u t h o r i t y ) ; c o m p a r e T h o m a s v

. E a r l y C o u n t y

, G a

. , N o

. 0 9

- 1 2 2 3 2

, 2 0 1 0

W L 2 7 9 7 0

, a t * 4 ( 1 1 t h C i r

. J a n

. 7

, 2 0 1 0 ) ( u n p u b l i s h e d ) ( c o n c l u d i n g t h a t R u l e

1 1 ( b ) ( 2 ) h a d b e e n v i o l a t e d w h e r e “ a l l e g a t i o n s o f v i c a r i o u s l i a b i l i t y f a i l a s a m a t t e r

o f l o n g

- e s t a b l i s h e d l a w ” )

, w i t h A n d e r s o n v

. S m i t h f i e l d F o o d s

, I n c

. , 3 5 3 F

. 3 d 9 1 2

,

9 1 5

– 1 6 ( 1 1 t h C i r

. 2 0 0 3 ) ( p e r c u r i a m ) ( a f f i r m i n g a d i s t r i c t c o u r t ’ s d i s m i s s a l o f a

R I C O c o u n t

, b u t r e v e r s i n g t h e i m p o s i t i o n o f s a n c t i o n s w h e n t h e r e w a s “ s c a n t o n

p o i n t a u t h o r i t y ” t o g u i d e t h e a t t o r n e y t o t h e c o n c l u s i o n t h a t t h e c l a i m h a d n o

c h a n c e o f s u c c e s s )

.

A f a c t u a l c l a i m i s f

r i v o l o u s i f n o r e a s o n a b l y c o m p e t e n t a t t o r n e y c o u l d

c o n c l u d e t h a t i t h a s a r e a s o n a b l e e v i d e n t i a r y b a s i s

. D a v i s

, 9 0 6 F

. 2 d a t 5 3 5

– 3 7

.

T h u s

, w h e r e n o e v i d e n c e o r o n l y “ p a t e n t l y f r i v o l o u s ” e v i d e n c e i s o f f e r e d t o

s u p p o r t f a c t u a l c o n t e n t i o n s

, s a n c t i o n s c a n b e i m p o s e d

. I d

. a t 5 3 7

. I f

, h o w e v e r

, t h e

e v i d e n c e s u p p o r t i n g t h e c l a i m i s r e a s o n a b l e

, b u t s i m p l y “ w e a k ” o r “ s e l f

- s e r v i n g

, ”

s a n c t i o n s c a n n o t b e i m p o s e d

. I d

. a t 5 3 6

.

O n c e a c o u r t c o n c l u d e s t h a t e i t h e r t h e f a c t u a l o r l e g a l c o n t e n t i o n s a r e

f r i v o l o u s

, t h e q u e s t i o n b e c o m e s w h e t h e r t h e a t t o r n e y s h o u l d h a v e k n o w n t h e y w e r e

f r i v o l o u s

. W o r l d w i d e P r i m a t e s

, 8 7 F

. 3 d a t 1 2 5 4

. W e a s k w h a t w a s k n o w n o r

r e a s o n a b l y k n o w a b l e w h e n t h e p a p e r w a s “ p r e s e n t [ e d ] t o t h e c o u r t

. ” F e d

. R

. C i v

.

80P

. 1 1 ( b )

. A g a i n

, m e a s u r e d o b j e c t i v e l y

, i f a r e a s o n a b l e i n v e s t i g a t i o n w o u l d h a v e

r e v e a l e d t h e e r r o r t o a r e a s o n a b l y c o m p e t e n t a t t o r n e y

, t h e n s a n c t i o n s c a n b e

i m p o s e d ; i f n o t

, t h e n s a n c t i o n s c a n n o t b e i m p o s e d

. T h e r e a s o n a b l e n e s s o f t h e

i n q u i r y t u r n s o n t h e t o t a l i t y o f t h e c i r c u m s t a n c e s

, i n c l u d i n g

, f o r e x a m p l e

, t h e t i m e

a v a i l a b l e f

o r i n v e s t i g a t i o n a n d w h e t h e r t h e a t t o r n e y h a d t o r e l y o n t h e c l i e n t

,

a n o t h e r m e m b e r o f t h e b a r

, o r o t h e r s

. W o r l d w i d e P r i m a t e s

, 8 7 F

. 3 d a t 1 2 5 4

.

R u l e 1 1 ( b ) ( 1 ) s a n c t i o n s a r e a p p r o p r i a t e w h e n a n a t t o r n e y o r p a r t y p r e s e n t s a

p a p e r f o r a n i m p r o p e r p u r p o s e

. I m p r o p e r p u r p o s e i s o f t e n i n f e r r e d f r o m

c i r c u m s t a n t i a l e v i d e n c e

. F o r e x a m p l e

, i t c a n b e i n f e r r e d f r o m “ ‘ e x c e s s i v e

p e r s i s t e n c e i n p u r s u i n g a c l a i m o r d e f e n s e i n t h e f

a c e o f r e p e a t e d a d v e r s e r u l i n g s

. ’ ”

I n d u s

. R i s k I n s u r e r s v

. M

. A

. N

. G u t e h o f f n u n g s h ü t t e G m b H

, 1 4 1 F

. 3 d 1 4 3 4

, 1 4 4 8

( 1 1 t h C i r

. 1 9 9 8 ) ( q u o t i n g P i e r c e v

. C o m m e r c i a l W a r e h o u s e

, 1 4 2 F

. R

. D

. 6 8 7

,

6 9 0

– 9 1 ( M

. D

. F l a

. 1 9 9 2 ) )

. A “ m o t i v e t o h a r a s s ” c a n a l s o b e i n f e r r e d f r o m a n

a t t o r n e y ’ s f

i l i n g o f f a c t u a l l y o r l e g a l l y f

r i v o l o u s c l a i m s

. C f

. C a r r v

. T i l l e r y

, 5 9 1

F

. 3 d 9 0 9

, 9 1 9

– 2 0 ( 7 t h C i r

. 2 0 1 0 )

.

O r d i n a r i l y

, e v e n i n t h e f a c e o f a b l a t a n t R u l e 1 1 v i o l a t i o n

, a d i s t r i c t c o u r t

r e t a i n s d i s c r e t i o n t o d e c i d e h o w t o s a n c t i o n t h e p a r t y o r e v e n n o t t o i m p o s e

s a n c t i o n s a t a l l

. T h i s d i s c r e t i o n d e r i v e s f r o m R u l e 1 1 ’ s p l a i n t e x t : “ I f

, a f t e r n o t i c e

a n d a r e a s o n a b l e o p p o r t u n i t y t o r e s p o n d

, t h e c o u r t d e t e r m i n e s t h a t R u l e 1 1 ( b ) h a s

81b e e n v i o l a t e d

, t h e c o u r t m a y i m p o s e a n a p p r o p r i a t e s a n c t i o n o n a n y a t t o r n e y

, l a w

f i r m

, o r p a r t y

. . . . ” F e d

. R

. C i v

. P

. 1 1 ( c ) ( 1 ) ( e m p h a s i s a d d e d ) ; s e e a l s o F e d

. R

.

C i v

. P

. 1 1 a d v i s o r y c o m m i t t e e ’ s n o t e

, 1 9 9 3 A m e n d m e n t ( “ [ W ] h a t s a n c t i o n s

, i f a n y

,

t o i m p o s e f

o r a v i o l a t i o n a r e m a t t e r s c o m m i t t e d t o t h e d i s c r e t i o n o f t h e t r i a l

c o u r t

. ” )

. T h u s

, o r d i n a r i l y

, a c o u r t c a n e x c u s e a n a t t o r n e y ’ s n e g l i g e n c e

, m i s t a k e

, o r

p l a i n

- o l d i n c o m p e t e n c e

.

B u t t h e P S L R A s t r i p s t h e d i s t r i c t c o u r t o f t h e d i s c r e t i o n t o g r a n t m e r c y

— t h e

P S L R A f o r c e s a d i s t r i c t c o u r t t o s a n c t i o n a n a t t o r n e y f o r v i o l a t i n g a n y p r o n g o f

R u l e 1 1

. T h e s t a t u t e p r o v i d e s

, i n a p a r a g r a p h e n t i t l e d “ M a n d a t o r y s a n c t i o n s

, ” t h a t

“ [ i ] f t h e c o u r t m a k e s a f i n d i n g

. . . t h a t a p a r t y o r a t t o r n e y v i o l a t e d a n y r e q u i r e m e n t

o f R u l e 1 1 ( b )

. . . a s t o a n y c o m p l a i n t

, r e s p o n s i v e p l e a d i n g

, o r d i s p o s i t i v e m o t i o n

,

t h e c o u r t s h a l l i m p o s e s a n c t i o n s o n s u c h p a r t y o r a t t o r n e y

. . . . ” 1 5 U

. S

. C

. § 7 8 u

4 ( c ) ( 2 ) ( e m p h a s i s a d d e d )

. L i k e w i s e

, t h e P S L R A c u r t a i l s a d i s t r i c t c o u r t ’ s

d i s c r e t i o n i n f

a s h i o n i n g t h e s a n c t i o n

. I t d o e s s o b y e r e c t i n g a r e b u t t a b l e

p r e s u m p t i o n t h a t w h e n a n y c o m p l a i n t “ s u b s t a n t i a l [ l y ] ” f a i l s t o c o m p l y w i t h R u l e

1 1

, t h e s a n c t i o n i s t h e d e f e n d a n t ’ s a t t o r n e y s ’ f

e e s f o r t h e e n t i r e a c t i o n

. I d

. § 7 8 u

4 ( c ) ( 3 ) ( A ) ( i i )

. E v e n w h e n t h e p r e s u m p t i o n i s r e b u t t e d

, a d i s t r i c t c o u r t s t i l l m u s t

5 5 5 6

For responsive ple ading s and dispositive moti ons, the PSL RA ere cts a similar 5 5

presumption but without the requireme nt that the violation be “substantial” a nd limit ing the

awa rd of f ees to those c aused by

the violation. See 15 U.S.C. § 78u-4(c) (3)( A)(i) (stating the

penalty for “ failure of any

responsive ple ading or dispositive moti on to comply with any

require ment of Rule 11(b)” is an “a war d to the opposing pa

rty of the re asonable attorney s’ fe es

82s a n c t i o n t h e p a r t y i n s o m e a p p r o p r i a t e m a n n e r

. I d

. § 7 8 u

- 4 ( c ) ( 3 ) ( C ) ( “ I f t h e p a r t y

o r a t t o r n e y [ t o b e s a n c t i o n e d ] m e e t s i t s b u r d e n u n d e r s u b p a r a g r a p h ( B )

, t h e c o u r t

s h a l l a w a r d t h e s a n c t i o n s t h a t t h e c o u r t d e e m s a p p r o p r i a t e p u r s u a n t t o R u l e 1 1

. . .

. ” ) ( e m p h a s i s a d d e d )

.

T h e P S L R A ’ s m a n d a t e r e g a r d i n g R u l e 1 1 ( b ) c o m p l i a n c e r e s u l t e d f r o m

C o n g r e s s ’ s r e c o g n i t i o n o f “ t h e n e e d t o r e d u c e s i g n i f i c a n t l y t h e f

i l i n g o f m e r i t l e s s

s e c u r i t i e s l a w s u i t s w i t h o u t h i n d e r i n g t h e a b i l i t y o f v i c t i m s o f f r a u d t o p u r s u e

l e g i t i m a t e c l a i m s

. ” H

. R

. R e p

. N o

. 1 0 4

- 3 6 9

, a t 3 9 ( 1 9 9 5 ) ( C o n f

. R e p

. )

, r e p r i n t e d i n

1 9 9 5 U

. S

. C

. C

. A

. N

. 7 3 0

, 7 3 8

. F u r t h e r

, i n e n a c t i n g t h e P S L R A

, C o n g r e s s

c o m m e n t e d t h a t t h e “ [ e ] x i s t i n g R u l e 1 1 h a s n o t d e t e r r e d a b u s i v e s e c u r i t i e s

l i t i g a t i o n ” a n d t h a t t h e P S L R A ’ s s a n c t i o n s r e q u i r e m e n t w o u l d p u t “ t e e t h ” i n t o R u l e

1 1

. I d

. T h e S e n a t e R e p o r t a c c o m p a n y i n g t h e l e g i s l a t i o n f u r t h e r n o t e s

,

A l t h o u g h p r i v a t e s e c u r i t i e s c l a s s a c t i o n s c a n c o m p l e m e n t S E C

e n f o r c e m e n t a c t i o n s

, t h e e v i l s f l o w i n g f r o m a b u s i v e s e c u r i t i e s

l i t i g a t i o n s t a r t w i t h t h e f i l i n g o f t h e c o m p l a i n t a n d c o n t i n u e t h r o u g h t o

t h e f i n a l d i s p o s i t i o n o f t h e a c t i o n

. A c o m p l a i n t a l l e g i n g v i o l a t i o n s o f

t h e F e d e r a l s e c u r i t i e s l a w s i s e a s y t o c r a f t a n d c a n b e f

i l e d w i t h l i t t l e

o r n o d u e d i l i g e n c e

.

and other expenses incurre d as a dire ct re sult of the violation”).

The pre sumption can be re butted if the par ty or attorne y

is able to prove ( 1) that the 5 6

sanction would impose an unr easona ble, unjust burden and tha t a fa ilure to impose the sanc tion

would not impose a g rea ter burde n on the other pa rty ; or (2) tha t the Rule 11(b) violation was de

minimi s. 15 U.S.C. § 78u-4(c)( 3)(B ). Althoug h they had the oppor

tunity to do so when

opposing K arp’ s reque sts for sanc tions, neither the plaintiffs nor the ir counsel ha ve made either

arg ument or off

ere d either ty

pe of pr oof in this case.

83. . . .

M o s t d e f e n d a n t s i n s e c u r i t i e s c l a s s a c t i o n l a w s u i t s c h o o s e t o s e t t l e

r a t h e r t h a n f

a c e t h e e n o r m o u s e x p e n s e o f d i s c o v e r y a n d t r i a l

. O f t h e

a p p r o x i m a t e l y 3 0 0 s e c u r i t i e s l a w s u i t s f i l e d e a c h y e a r

, a l m o s t 9 3 %

s e t t l e a t a n a v e r a g e s e t t l e m e n t c o s t o f $ 8

. 6 m i l l i o n

. T h e s e c a s e s a r e

g e n e r a l l y s e t t l e d b a s e d n o t o n t h e m e r i t s b u t o n t h e s i z e o f t h e

d e f e n d a n t ’ s p o c k e t b o o k

.

T h e f a c t t h a t m a n y o f t h e s e l a w s u i t s a r e f i l e d a s c l a s s a c t i o n s h a s h a d

a n i n t e r r o r e m e f

f e c t o n C o r p o r a t e A m e r i c a

. . . . T h e s e l a w s u i t s h a v e

a d d e d s i g n i f

i c a n t l y t o t h e c o s t o f r a i s i n g c a p i t a l a n d r e p r e s e n t a

“ l i t i g a t i o n t a x ” o n b u s i n e s s

. S m a l l e r s t a r t

- u p c o m p a n i e s b e a r t h e

b r u n t o f a b u s i v e s e c u r i t i e s f r a u d l a w s u i t s

. M a n y o f t h e s e c o m p a n i e s

a r e h i g h

- t e c h n o l o g y c o m p a n i e s w h i c h

, b y t h e i r v e r y n a t u r e

, h a v e

u n p r e d i c t a b l e b u s i n e s s p r o s p e c t s a n d

, c o n s e q u e n t l y

, v o l a t i l e s t o c k

p r i c e s

.

S

. R e p

. N o

. 1 0 4

- 9 8

, a t 8

– 9 ( 1 9 9 5 )

, r e p r i n t e d i n 1 9 9 5 U

. S

. C

. C

. A

. N

. 6 7 9

, 6 8 7

– 8 8

( f o o t n o t e s o m i t t e d )

.

A c c o r d i n g l y

, t h e P S L R A ’ s s a n c t i o n s m a n d a t e r e f l e c t s C o n g r e s s ’ s p o l i c y t o

p r e v e n t t h e m i s u s e o f j u d i c i a l r e s o u r c e s i n t h e s e c u r i t i e s c o n t e x t

. T o e f f e c t u a t e i t s

g o a l s

, C o n g r e s s i m p o s e d a h e a v y b u r d e n o n t h e d i s t r i c t c o u r t s a n d r e m o v e d t h e

c o u r t s ’ d i s c r e t i o n t o g r a n t m e r c y f o r a R u l e 1 1 ( b ) v i o l a t i o n

.

S i g n i f i c a n t l y

, o u r s i s t e r c i r c u i t s a g r e e w i t h t h i s s t r i c t

, l i t e r a l

, a n d u n f o r g i v i n g

i n t e r p r e t a t i o n o f t h e w a y C o n g r e s s h a s c u r t a i l e d t h e d i s t r i c t c o u r t s ’ R u l e 1 1

d i s c r e t i o n t h r o u g h t h e P S L R A ; t h e c o u r t s o f a p p e a l s t h a t h a v e c o n s i d e r e d t h e i s s u e

h a v e u n i f

o r m l y a g r e e d

— C o n g r e s s m e a n t w h a t i t s a i d w h e n i t m a d e R u l e 1 1

84s a n c t i o n s m a n d a t o r y w h e n e v e r a v i o l a t i o n i s f o u n d

. S e e C i t i b a n k G l o b a l M k t s

. ,

I n c

. v

. R o d r i g u e z S a n t a n a

, 5 7 3 F

. 3 d 1 7

, 3 1 ( 1 s t C i r

. 2 0 0 9 ) ( “ T h e s t a t u t e r e q u i r i n g

s u c h f i n d i n g s d o e s n o t a p p e a r t o b r o o k a n y e x c e p t i o n s ” ) ; M o r r i s v

. W a c h o v i a S e c

. ,

I n c

. , 4 4 8 F

. 3 d 2 6 8

, 2 7 6 ( 4 t h C i r

. 2 0 0 6 ) ( “ B e c a u s e t h e s a n c t i o n s ‘ i n s t r u c t i o n c o m e s

i n t e r m s o f t h e m a n d a t o r y “ s h a l l

, ” w h i c h n o r m a l l y c r e a t e s a n o b l i g a t i o n i m p e r v i o u s

t o j u d i c i a l d i s c r e t i o n ’

. . . t h e d i s t r i c t c o u r t m u s t i m p o s e s a n c t i o n s f o r e a c h

v i o l a t i o n f

o u n d

. ” ) ( q u o t i n g L e x e c o n I n c

. v

. M i l b e r g W e i s s B e r s h a d H y n e s &

L e r a c h

, 5 2 3 U

. S

. 2 6

, 3 5

, 1 1 8 S

. C t

. 9 5 6

, 9 6 2 ( 1 9 9 8 ) ) ; G u r a r y v

. N u

- T e c h B i o

- M e d

,

I n c

. , 3 0 3 F

. 3 d 2 1 2

, 2 1 5 ( 2 d C i r

. 2 0 0 2 ) ( “ I f t h e c o u r t d e t e r m i n e s t h a t a v i o l a t i o n h a s

o c c u r r e d

, t h e i m p o s i t i o n o f s a n c t i o n s i s m a n d a t o r y

. ” )

.

I n a d d i t i o n t o m a n d a t i n g t h e R u l e 1 1 i n q u i r y a n d m a n d a t i n g s a n c t i o n s f o r

a n y R u l e 1 1 v i o l a t i o n

, t h e P S L R A i m p o s e s t h r e e p r o c e d u r a l r e q u i r e m e n t s

. F i r s t

,

t h e d i s t r i c t c o u r t ’ s d u t y t o c o n d u c t t h e R u l e 1 1 c o m p l i a n c e r e v i e w i s t r i g g e r e d o n l y

“ u p o n f i n a l a d j u d i c a t i o n o f t h e a c t i o n

. ” 1 5 U

. S

. C

. § 7 8 u

- 4 ( c ) ( 1 )

. S e c o n d

, i f

, a f t e r

e x a m i n i n g t h e c o m p l a i n t s

, r e s p o n s i v e p l e a d i n g s

, o r d i s p o s i t i v e m o t i o n s

, t h e c o u r t

c o n c l u d e s t h a t s a n c t i o n s m a y b e i n o r d e r

, t h e c o u r t “ s h a l l g i v e [ t h e ] p a r t y o r

a t t o r n e y [ a g a i n s t w h o m s a n c t i o n s m i g h t b e i m p o s e d ] n o t i c e a n d a n o p p o r t u n i t y t o

r e s p o n d

. ” I d

. § 7 8 u

- 4 ( c ) ( 2 )

. A l t h o u g h t h e s t a t u t e d o e s n o t s p e c i f y t h e t y p e o f

n o t i c e t h a t s h o u l d i s s u e

, a n o r d e r d i r e c t i n g t h e p a r t y o r a t t o r n e y “ t o s h o w c a u s e ”

85w h y s a n c t i o n s s h o u l d n o t b e i m p o s e d w o u l d s u f f i c e

. C f

. F e d

. R

. C i v

. P

. 1 1

a d v i s o r y c o m m i t t e e ’ s n o t e

, 1 9 9 3 A m e n d m e n t ( “ T h e p o w e r o f t h e c o u r t t o a c t o n i t s

o w n i n i t i a t i v e i s r e t a i n e d

, b u t w i t h t h e c o n d i t i o n t h a t t h i s b e d o n e t h r o u g h a s h o w

c a u s e o r d e r

. ” )

. T h i r d

, a d i s t r i c t c o u r t m u s t r e d u c e i t s R u l e 1 1 c o m p l i a n c e r e v i e w

t o “ s p e c i f

i c f i n d i n g s

. ” T h e s e s p e c i f

i c f i n d i n g s a r e a k i n t o t h e f i n d i n g s o f f

a c t a n d

c o n c l u s i o n s o f l a w a d i s t r i c t c o u r t m a k e s p u r s u a n t t o F e d e r a l R u l e o f C i v i l

P r o c e d u r e 5 2 ( a ) a t t h e c o n c l u s i o n o f a b e n c h t r i a l

. T h e s e f i n d i n g s a i d t h e c o u r t o f

a p p e a l s i n r e v i e w i n g t h e d i s t r i c t c o u r t ’ s s a n c t i o n s d e c i s i o n

. I n t h i s c a s e

, i n a d d i t i o n

t o e r r i n g b y f

o c u s i n g s o l e l y o n t h e s e c o n d a m e n d e d c o m p l a i n t

, t h e d i s t r i c t c o u r t

e r r e d b y e n t e r i n g o n l y a c o n c l u s o r y o r d e r

.

B

. A C o u r t o f A p p e a l s S h o u l d N o t R e m a n d f o r R u l e 1 1 F i n d i n g s W h e n i t C a n

D e t e r m i n e C o n c l u s i v e l y t h a t t h e D i s t r i c t C o u r t A b u s e d i t s D i s c r e t i o n i n D e n y i n g

S a n c t i o n s

T h e P S L R A d o e s n o t e x p l a i n h o w a c o u r t o f a p p e a l s s h o u l d r e v i e w a d i s t r i c t

c o u r t ’ s f a i l u r e t o c o n d u c t a n a d e q u a t e P S L R A e x a m i n a t i o n e v i d e n c e d b y “ s p e c i f i c

f i n d i n g s ” r e g a r d i n g t h e p a r t i e s ’ a n d t h e i r a t t o r n e y s ’ c o m p l i a n c e w i t h R u l e 1 1

.

T o d a y

, t h e c o u r t e q u i v o c a t e s o n w h e t h e r i t i s p o s s i b l e f o r a n a p p e l l a t e c o u r t t o

d e t e r m i n e P S L R A R u l e 1 1 c o m p l i a n c e w h e n f a c e d w i t h c o n c l u s o r y f

i n d i n g s a n d

d e c l i n e s t o d o s o i n t h i s c a s e

. M a j

. O p

. a t 2 0

, 2 3

. T h a t c o n c l u s i o n

, h o w e v e r

,

i g n o r e s t h e p r e c e d e n t o f t h i s c i r c u i t

, w i l l s e t t h e s t a g e f o r e r r o r o n r e m a n d

, w i l l

86g e n e r a t e a n o t h e r a p p e a l

, a n d w i l l w a s t e t h e t i m e a n d r e s o u r c e s o f t h e d i s t r i c t c o u r t

,

t h i s c o u r t

, a n d t h e l i t i g a n t s

. I n m y v i e w

, u n d e r t h e P S L R A

, w h e n i t c a n b e

d e t e r m i n e d c o n c l u s i v e l y t h a t a n a t t o r n e y o r p a r t y v i o l a t e d R u l e 1 1

, t h e c o u r t o f

a p p e a l s s h o u l d h o l d t h a t s a n c t i o n s m u s t b e i m p o s e d

. T h i s i s s o e v e n w h e r e

, a s

h e r e

, t h e c o u r t o f a p p e a l s c a n r e a c h t h a t h o l d i n g o n l y a s t o s o m e o f t h e c l a i m s o r

d e f e n s e s

.

W e r e v i e w a d i s t r i c t c o u r t ’ s R u l e 1 1 d e t e r m i n a t i o n f o r a b u s e o f d i s c r e t i o n

.

S o u r a n v

. T r a v e l e r s I n s

. C o

. , 9 8 2 F

. 2 d 1 4 9 7

, 1 5 0 7 n

. 1 0 ( 1 1 t h C i r

. 1 9 9 3 )

. “ ‘ A

d i s t r i c t c o u r t w o u l d n e c e s s a r i l y a b u s e i t s d i s c r e t i o n i f i t b a s e d i t s r u l i n g o n a n

e r r o n e o u s v i e w o f t h e l a w o r o n a c l e a r l y e r r o n e o u s a s s e s s m e n t o f t h e e v i d e n c e

. ’ ”

M c G r e g o r v

. B d

. o f C o m m ’ r s o f P a l m B e a c h C o u n t y

, 9 5 6 F

. 2 d 1 0 1 7

, 1 0 2 2 ( 1 1 t h

C i r

. 1 9 9 2 ) ( q u o t i n g C o o t e r & G e l l v

. H a r t m a x C o r p

. , 4 9 6 U

. S

. 3 8 4

, 4 0 5

, 1 1 0 S

. C t

.

2 4 4 7

, 2 4 6 1 ( 1 9 9 0 ) )

.

T h e c o u r t s e e m s t o d o u b t w h e t h e r i t c a n r e v i e w t h e d i s t r i c t c o u r t ’ s e x e r c i s e

o f d i s c r e t i o n i n t h i s c a s e b e c a u s e t h e r e c o r d c o n t a i n s o n l y a c o n c l u s o r y

,

u n r e v i e w a b l e o r d e r

. A c c o r d i n g l y

, t h e c o u r t r e m a n d s t h e c a s e t o t h e d i s t r i c t c o u r t

s o t h a t i t c a n m a k e f

i n d i n g s o f f

a c t a n d c o n c l u s i o n s o f l a w r e g a r d i n g t h e p a r t i e s ’

a n d c o u n s e l ’ s c o m p l i a n c e w i t h R u l e 1 1

. T h e r e i s n o d o u b t

, h o w e v e r

, t h a t e v e n

w i t h o u t e x t e n s i v e f

i n d i n g s

, i t i s p o s s i b l e f

o r t h i s c o u r t t o r e v i e w P S L R A R u l e 1 1

87d e t e r m i n a t i o n s u n d e r t h e a b u s e o f d i s c r e t i o n s t a n d a r d

. S o m e t i m e s

, t h e r e c o r d o n

a p p e a l w i l l d i s c l o s e R u l e 1 1 v i o l a t i o n s t h a t a r e s o e g r e g i o u s t h a t a n y r e f u s a l b y t h e

d i s t r i c t c o u r t t o i m p o s e s a n c t i o n s w o u l d n e c e s s a r i l y c o n s t i t u t e a n a b u s e o f

d i s c r e t i o n

. T o s e e w h y

, i t i s n e c e s s a r y t o u n p a c k t h e a b u s e o f d i s c r e t i o n s t a n d a r d

a n d t h e e l e m e n t s o f a R u l e 1 1 v i o l a t i o n

.

T h e c r i t i c a l d i f

f e r e n c e b e t w e e n a b u s e o f d i s c r e t i o n r e v i e w a n d d e n o v o

r e v i e w i s t h a t a b u s e o f d i s c r e t i o n “ r e c o g n i z e s [ a ] r a n g e o f p o s s i b l e c o n c l u s i o n s t h e

t r i a l j u d g e m a y r e a c h

. ” U n i t e d S t a t e s v

. F r a z i e r

, 3 8 7 F

. 3 d 1 2 4 4

, 1 2 5 9 ( 1 1 t h C i r

.

2 0 0 4 ) ( e n b a n c )

. M o r e s p e c i f i c a l l y

,

[ b ] y d e f i n i t i o n

. . . u n d e r t h e a b u s e o f d i s c r e t i o n s t a n d a r d o f r e v i e w

t h e r e w i l l b e o c c a s i o n s i n w h i c h w e a f f i r m t h e d i s t r i c t c o u r t e v e n

t h o u g h w e w o u l d h a v e g o n e t h e o t h e r w a y h a d i t b e e n o u r c a l l

. T h a t

i s h o w a n a b u s e o f d i s c r e t i o n s t a n d a r d d i f f e r s f r o m a d e n o v o s t a n d a r d

o f r e v i e w

. A s w e h a v e s t a t e d p r e v i o u s l y

, t h e a b u s e o f d i s c r e t i o n

s t a n d a r d a l l o w s “ a r a n g e o f c h o i c e f o r t h e d i s t r i c t c o u r t

, s o l o n g a s t h a t

c h o i c e d o e s n o t c o n s t i t u t e a c l e a r e r r o r o f j u d g m e n t

. ”

I d

. ( q u o t i n g R a s b u r y v

. I

. R

. S

. , 2 4 F

. 3 d 1 5 9

, 1 6 8 ( 1 1 t h C i r

. 1 9 9 4 ) )

. T h a t s a i d

,

a b u s e o f d i s c r e t i o n n e v e r g i v e s t h e d i s t r i c t c o u r t u n f e t t e r e d d i s c r e t i o n : t h e c o u r t

m u s t n o t b a s e i t s d i s c r e t i o n a r y d e c i s i o n o n a n e r r o n e o u s v i e w o f t h e l a w o r a

c l e a r l y e r r o n e o u s a s s e s s m e n t o f t h e e v i d e n c e

. A c c o r d i n g l y

, t h e “ r a n g e o f p o s s i b l e

c o n c l u s i o n s ” v a r i e s w i t h t h e n a t u r e o f t h e i n q u i r y ( l e g a l v

. f a c t u a l ) a n d t h e r e l a t i v e

m e r i t o f t h e p a r t i e s ’ c o m p e t i n g p o s i t i o n s ( w h e t h e r t h e q u e s t i o n i s c l o s e )

. I n s u m

,

88w h e n r e v i e w i n g t h e e l e m e n t s o f a d i s t r i c t c o u r t ’ s d e c i s i o n o f w h e t h e r t o i m p o s e

s a n c t i o n s

, t h e r e l e v a n t q u e s t i o n i s n o t w h e t h e r w e w o u l d h a v e c o m e t o t h e s a m e

d e c i s i o n i f d e c i d i n g t h e i s s u e i n t h e f i r s t i n s t a n c e

. T h e r e l e v a n t i n q u i r y

, r a t h e r

, i s

w h e t h e r t h e d i s t r i c t c o u r t ’ s d e c i s i o n w a s t e n a b l e

— i n t h e “ r a n g e o f p o s s i b l e

c o n c l u s i o n s

, ” o r

, m e t a p h o r i c a l l y

, “ i n t h e b a l l p a r k

. ”

I n t h e n o n

- P S L R A c o n t e x t

, t h e R u l e 1 1 b a l l p a r k i s l a r g e b e c a u s e

, a s

d i s c u s s e d a b o v e

, a d i s t r i c t c o u r t h a s d i s c r e t i o n t o g r a n t m e r c y f o r a v i o l a t i o n o f

R u l e 1 1

. M o r e o v e r

, n o h a r d l e g a l t e s t g o v e r n s t h e c o u r t ’ s e x e r c i s e o f t h i s a b i l i t y t o

b e m e r c i f

u l

. T h u s

, i n a n o r d i n a r y R u l e 1 1 c a s e

, a l t h o u g h a d i s t r i c t c o u r t c o u l d n o t

a r b i t r a r i l y i g n o r e a R u l e 1 1 v i o l a t i o n

, i t h a s v e r y b r o a d d i s c r e t i o n

, a n d a r e m a n d

w i l l a l m o s t a l w a y s b e n e c e s s a r y

. T h e P S L R A

, h o w e v e r

, e l i m i n a t e s t h i s w e l l s p r i n g

o f d i s c r e t i o n

.

I t f o l l o w s t h a t t h e P S L R A R u l e 1 1 b a l l p a r k i s m u c h s m a l l e r

. A n d w h i l e i t i s

d i f f i c u l t t o m a k e g e n e r a l i z a t i o n s a b o u t t h e s i z e o f i t s f e n c e s

, b e c a u s e t h e R u l e 1 1

i n q u i r y i s g o v e r n e d b y a n o b j e c t i v e s t a n d a r d

, i t i s c l e a r t h a t t h e y w i l l s o m e t i m e s b e

s o s m a l l a s t o a d m i t o n l y o n e c o n c l u s i o n

. A s d i s c u s s e d i n p a r t I I I

. A

, s u p r a

, t o

c o n c l u d e t h a t R u l e 1 1 h a s b e e n v i o l a t e d

, a d i s t r i c t c o u r t m u s t m a k e t w o

d e t e r m i n a t i o n s

. F i r s t

, t h e c o u r t m u s t d e t e r m i n e t h a t a p a p e r w a s f i l e d f o r a n

i m p r o p e r p u r p o s e

, o r c o n t a i n e d l e g a l l y f r i v o l o u s c l a i m s

, o r c o n t a i n e d f a c t u a l l y

89f

r i v o l o u s c l a i m s

. F e d

. R

. C i v

. P

. 1 1 ( b )

. S e c o n d

, t h e c o u r t m u s t d e c i d e t h a t a

r e a s o n a b l e i n v e s t i g a t i o n u n d e r t h e c i r c u m s t a n c e s w o u l d h a v e d i s c l o s e d t h e

f r i v o l i t y

. I d

. T h u s

, i f

, f o r e x a m p l e

, a s t a t u t e o f l i m i t a t i o n s c l e a r l y b a r s a c l a i m

, 5 7

a n d t h e r e c o r d m a k e s c l e a r t h a t t h e a t t o r n e y h a d a m p l e t i m e f o r p r e

- f i l i n g

r e s e a r c h

, a d i s t r i c t c o u r t c o u l d o n l y c o n c l u d e t h a t R u l e 1 1 h a s b e e n v i o l a t e d

5 8

w i t h o u t a b u s i n g i t s d i s c r e t i o n

. P u t d i f f e r e n t l y

, i f t h e d i s t r i c t c o u r t h a d t h e c o r r e c t 5 9

v i e w o f t h e l a w a n d f

a c t s i n m i n d

, i t c o u l d o n l y c o n c l u d e t h a t t h e c l a i m i s

f r i v o l o u s

. S e e M c G r e g o r

, 9 5 6 F

. 2 d a t 1 0 2 2 ( “ A d i s t r i c t c o u r t w o u l d n e c e s s a r i l y

a b u s e i t s d i s c r e t i o n i f i t b a s e d i t s r u l i n g o n a n e r r o n e o u s v i e w o f t h e l a w o r o n a

The Rule 11(b) (2) de termination is whether counsel’s vie w of the la

w supporting the 5 7

plaintiff’s cla im is t enable , or in the ballpar k, which is a leg al ra ther than a fac tual deter

mination.

Thoug h the re asonable inquiry under the circ umstances pr ong will sometim es 5 8

nece ssitate a re mand for f indings, most complaints are not resea rche d and filed a t the eleve nthhour. Ther efor e, in most cases, a rea sonably

competent a ttorney

will have had time to discove r

the violation.

I n this case, f

or example, plaintiffs’ c ounsel wer e fully informed a s to the circumstanc es

surrounding Thompson’s and Jacoby ’s purc hases of Media stock, ha d complete a cce ss to

Media’s SEC filings, a

nd had ample time to re sear ch and c onsider the va lidity of the c laims they

asser ted in the three complaints prese nted to the district court. This is evident bec ause the

plaintiffs broug ht a claim base d on substantially the same f

acts in I ndiana c ircuit court f ive

months before filing this suit. I t is obvious t hat under the objective sta

ndard, f ive months is

more than e noug h time to resea rch a claim.

By contra st, under the PSL RA, if the Rule 11 deter mination focuses on whe ther the 5 9

paper was filed f

or an imprope r purpose , a re mand will more likely be nec essar

y beca use the

district court has wide r discre tion with respect to fa ctual dete rminations. Where the ba llpark

would admit more than one conclusion, a r emand is nec essar y

.

90c l e a r l y e r r o n e o u s a s s e s s m e n t o f t h e e v i d e n c e

. ” ) ( e m p h a s i s a d d e d ) ( q u o t i n g C o o t e r

,

4 9 6 U

. S

. a t 4 0 5

, 1 1 0 S

. C t

. a t 2 4 6 1 )

.

E n c a p s u l a t i n g t h i s i n a s t a n d a r d : u n d e r t h e P S L R A

, w h e n t h e c o u r t o f

a p p e a l s c a n d e t e r m i n e c o n c l u s i v e l y t h a t R u l e 1 1 h a s b e e n v i o l a t e d

, i t s h o u l d h o l d

t h a t s a n c t i o n s m u s t b e i m p o s e d

. I n s u c h a c a s e

, w e w o u l d r e v e r s e t h e d i s t r i c t

c o u r t ’ s d e c i s i o n w i t h r e s p e c t t o t h e c l a i m s a r e a s o n a b l y c o m p e t e n t a t t o r n e y c o u l d

n o t h a v e p r e s e n t e d a n d r e m a n d t h e c a s e f o r t h e i m p o s i t i o n o f s a n c t i o n s

. T h i s

s t a n d a r d f

i n d s s u p p o r t i n p r e c e d e n t a n d a v o i d s w a s t i n g t h e c o u r t s ’ a n d l i t i g a n t s ’

t i m e a n d r e s o u r c e s

.

T h i s s t a n d a r d i s c o n s i s t e n t w i t h t h e c l e a r p r e c e d e n t o f t h i s C i r c u i t

. P e l l e t i e r

v

. Z w e i f e l

, 9 2 1 F

. 2 d 1 4 6 5

, 1 5 1 4

, n

. 8 7 ( 1 1 t h C i r

. 1 9 9 1 ) ( c o n c l u d i n g t h a t a r e m a n d

i s u n n e c e s s a r y w h e n t h e r e c o r d “ d e m o n s t r a t e s b e y o n d a n y q u e s t i o n t h a t R u l e 1 1

s a n c t i o n s a r e i n o r d e r ” )

. I t a l s o c o m p o r t s w i t h h o w o u r s i s t e r c i r c u i t s d i s p o s e o f

c a s e s w h e n a d i s t r i c t c o u r t ’ s s a n c t i o n s d e c i s i o n i s u n r e v i e w a b l e b e c a u s e n o

e x p l a n a t i o n i s g i v e n

, b u t t h e o u t c o m e i s c l e a r

. S e e

, e

. g

. , C a r r v

. T i l l e r y

, 5 9 1 F

. 3 d

9 0 9

, 9 1 9

– 2 0 ( 7 t h C i r

. 2 0 1 0 ) ( i m p o s i n g § 1 9 2 7 s a n c t i o n s b e c a u s e t h e s u i t w a s “ s o

l a c k i n g i n m e r i t ” t h a t i t s f i l i n g “ i n d i c a t e s a m o t i v e t o h a r a s s ” m a d e c o n c l u s i v e b y

t h e t o n e o f t h e c o m p l a i n t a n d t h e b r i e f s o n a p p e a l

, e v e n t h o u g h t h e d i s t r i c t c o u r t

d e n i e d t h e m o t i o n “ w i t h o u t e x p l a n a t i o n ” ) ; c f

. C i t i b a n k G l o b a l M k t s

. , 5 7 3 F

. 3 d a t

913 2 ( c o n c l u d i n g t h a t “ n o p u r p o s e w o u l d b e s e r v e d b y r e m a n d i n g t h i s c a s e t o t h e

d i s t r i c t c o u r t f

o r R u l e 1 1 f

i n d i n g s ” p u r s u a n t t o t h e P S L R A b e c a u s e

, i n p a r t

, t h e

r e c o r d r e v e a l e d n o b a s i s f o r f i n d i n g a R u l e 1 1 v i o l a t i o n ) ; D e l l a s t a t i o u s v

. W i l l i a m s

,

2 4 2 F

. 3 d 1 9 1

, 1 9 7 n

. 5 ( 4 t h C i r

. 2 0 0 1 ) ( f i n d i n g n o b a s i s f

o r s a n c t i o n s u n d e r t h e

P S L R A a n d

, t h u s

, c o n c l u d i n g t h a t “ a r e m a n d h e r e w o u l d b e u n n e c e s s a r y ” )

. 6 0

A c a s e t h e c o u r t r e l i e s u p o n t o j u s t i f y i t s d e c i s i o n t o r e m a n d

, G u r a r y v

.

W i n e h o u s e

, 1 9 0 F

. 3 d 3 7 ( 2 d C i r

. 1 9 9 9 ) ( “ G u r a r y I ” )

, i l l u s t r a t e s h o w a n

u n n e c e s s a r y r e m a n d c a n i n v i t e e r r o r a n d w a s t e r e s o u r c e s

. I n G u r a r y I

, b e c a u s e t h e

d i s t r i c t c o u r t m a d e c o n c l u s o r y P S L R A R u l e 1 1 f i n d i n g s

, t h e c o u r t o f a p p e a l s

r e m a n d e d t h e c a s e

. I d

. a t 4 7

. O n r e m a n d

, t h e d i s t r i c t c o u r t a s s u m e d t h e c o u r t o f

a p p e a l s “ r e g a r d e d [ i t s ] f i n d i n g s a s m e r e l y f

o r m a l i s t i c ” a n d s i m p l y g a v e a m o r e

d e t a i l e d e x p l a n a t i o n o f i t s o r i g i n a l d e c i s i o n

. G u r a r y v

. W i n e h o u s e

, N o

.

9 7 C I V 3 8 0 3

, 2 0 0 0 W L 2 0 7 0 6

, a t * 1 ( S

. D

. N

. Y

. J a n

. 1 2

, 2 0 0 0 )

. O n a p p e a l f r o m

t h a t o r d e r

, t h e S e c o n d C i r c u i t r e v e r s e d b e c a u s e t w o o f t h e p l a i n t i f f ’ s c l a i m s w e r e

b a r r e d b y “ b o t h t h e p l a i n l a n g u a g e o f t h e E x c h a n g e A c t a n d w e l l

- s e t t l e d c a s e l a w

. ”

G u r a r y v

. W i n e h o u s e

, 2 3 5 F

. 3 d 7 9 2

, 7 9 8

– 9 9 ( 2 d C i r

. 2 0 0 0 ) ( “ G u r a r y I I ” )

.

Note that whe n Citi bank and D ellastatious conclude d that a re mand was unne cessa ry 6 0

beca use there was no ba sis for sanc tions under the PSL RA, they wer e implicitly

holding that a

district court would nec essar ily abuse its discre tion if it i mposed sanctions. Ther e is no

meaning ful diffe renc e betwe en this and the c onclusion that a district court would ne cessa rily

abuse its discre tion if it refused to impose sanc tions.

92S p e c i f

i c a l l y

, t h e G u a r y I I c o u r t h e l d t h a t t h e p l a i n l a n g u a g e o f R u l e 1 0 b

- 5 w o u l d

“ p r o h i b i t a c o u r t f

r o m a d o p t i n g a r u l e t h a t w o u l d s u p p o r t G u r a r y ’ s c l a i m

. ” I d

. a t

7 9 9

. A c c o r d i n g l y

, t h e c o u r t r e m a n d e d t h e c a s e f o r a d e t e r m i n a t i o n o f t h e a m o u n t

o f s a n c t i o n s

. U l t i m a t e l y

, i t t o o k a t h i r d a p p e a l a n d o n e m o r e r e m a n d t o c l o s e t h e

c a s e

, b u t t h e p a r t i e s a n d t h e c o u r t w o u l d h a v e a v o i d e d c o n s i d e r a b l e t i m e a n d 6 1

e x p e n s e h a d t h e G u r a r y I c o u r t p o i n t e d o u t t h e o b v i o u s

.

T o b e s u r e

, c o u r t s o f a p p e a l s m u s t e x e r c i s e c a u t i o n w h e n d e c i d i n g w h e t h e r

t o r e m a n d a c a s e

. S o m e t i m e s t h e R u l e 1 1 v i o l a t i o n w i l l n o t b e s o c l e a r a s t o a d m i t

o n l y o n e c o n c l u s i o n

. S o m e t i m e s t h e p a r t y o r a t t o r n e y a g a i n s t w h o m s a n c t i o n s

h a v e b e e n i m p o s e d d i d n o t h a v e t h e o p p o r t u n i t y t o b e h e a r d

. S o m e t i m e s t h e

p r o c e d u r a l h i s t o r y o f t h e c a s e w i l l i n d i c a t e t h a t e x t e n u a t i n g c i r c u m s t a n c e s a l t e r e d

t h e s t a n d a r d o f c a r e f

o r t h e p r e f

i l i n g i n q u i r y

. S o m e t i m e s

, p a r t i c u l a r l y w i t h r e s p e c t

t o t h e f a c t

- h e a v y p r o n g s o f R u l e 1 1

, t h e r e c o r d w i l l n o t a l l o w t h e c o u r t o f a p p e a l s

t o d e t e r m i n e c o n c l u s i v e l y w h e t h e r s a n c t i o n s w e r e w a r r a n t e d

. I n t h o s e c a s e s

, a

r e m a n d w o u l d b e a p p r o p r i a t e

. B u t n o t i n t h i s c a s e

.

I V

. W i t h R e s p e c t t o P l a i n t i f f s ’ F e d e r a l S e c u r i t i e s L a w C l a i m s

, t h e D i s t r i c t C o u r t

A b u s e d i t s D i s c r e t i o n i n D e n y i n g S a n c t i o n s

Gura ry v. Nu-tec h Bio-Me d, I nc., 303 F .3d 212 (2d Cir. 2002) (“ Gura ry I I I ”). 6 1

93A f

t e r c l e a r i n g t h e g r o u n d o f a n y o b j e c t i o n p l a i n t i f

f s a n d t h e i r a t t o r n e y s

m i g h t h a v e t o a c o n c l u s i o n t h a t t h e y v i o l a t e d R u l e 1 1

, I e x p l a i n w h y t h e p l a i n t i f f s ’

f e d e r a l s e c u r i t i e s l a w c l a i m s a n d s o m e o f t h e f a c t u a l a l l e g a t i o n s a r e s o f r i v o l o u s

t h a t t h e d i s t r i c t c o u r t n e c e s s a r i l y a b u s e d i t s d i s c r e t i o n w h e n i t d e n i e d s a n c t i o n s

.

T h a t i s

, t h e v i o l a t i o n s a r e s o c l e a r t h a t n o m a t t e r w h a t r a t i o n a l e t h e d i s t r i c t c o u r t

m i g h t h a v e h a d

, i t a b u s e d i t s d i s c r e t i o n w h e n i t d e n i e d s a n c t i o n s

. P a r t A e x a m i n e s

t h e f e d e r a l s e c u r i t i e s l a w c l a i m s i n a l l t h r e e c o m p l a i n t s f o r R u l e 1 1 ( b ) ( 2 )

c o m p l i a n c e ; P a r t B e x a m i n e s a l l t h r e e c o m p l a i n t s ’ f a c t u a l a l l e g a t i o n s p e r t a i n i n g t o

t h e s e c u r i t i e s l a w c l a i m s f o r R u l e 1 1 ( b ) ( 3 ) c o m p l i a n c e ; P a r t C t h e n t u r n s t o

w h e t h e r t h e p l a i n t i f

f s b r o u g h t t h i s a c t i o n f

o r a n i m p r o p e r p u r p o s e u n d e r R u l e

1 1 ( b ) ( 1 ) ; P a r t D e x p l a i n s h o w t h e d i s t r i c t c o u r t s h o u l d p r o c e e d o n r e m a n d

.

F i r s t

, t h e g r o u n d c l e a r i n g

. T h e p l a i n t i f f s ’ a t t o r n e y s i n t h i s c a s e h a d a d e q u a t e

n o t i c e o f t h e p o s s i b i l i t y o f s a n c t i o n s a n d t h e p o s s i b l e g r o u n d s f o r t h e s a m e

. T h e

6 2

This is certainly

so with respec t to the plaintiffs’ leg al contentions. As for the 6 2

evidentiar y support Rule 11(b)(3) require d for those c laims, Karp’ s separ ate motion for sa nctions

expressly discussed fa ctual def

iciencie s in the plaintiffs’ complaint. Even if this were not the

case , “Rule 11 alone should constitute sufficient notice of the attorne y ’s re sponsibili ties since the

rule e x plicitly

require s the attorney

to cer tify that a complaint is well g rounded in fa ct.”

Donaldson v. Clark, 819 F .2d 1551, 1560 (11th Cir. 1987) (e n banc) ; id. at 1561 (“When an

attorney has fa iled to present ne cessa ry fac tual support for c laims despite sever al opportunities to

do so, for e x ample, fur

ther he aring

on the sanc tions iss ue may well be not only

unnece ssary

but

also a wa ste of judicial re source s.”). Nota bly , in their brief

s to this court, plaintiffs said nothing

about the ade quacy

of the notice they

rec eived r eg arding the possibilit y of sanc tions ag ainst

them or their a ttorney s.

94P S L R A i t s e l f g a v e s t a t u t o r y n o t i c e

. S e e A T S I C o m m c ’ n s v

. S h a a r F u n d

, L t d

. , 5 7 9

F

. 3 d 1 4 3

, 1 5 2 ( 2 d C i r

. 2 0 0 9 ) ( “ B y v i r t u e o f t h i s s t a t u t o r y n o t i c e

, c o n s i d e r a t i o n o f

s a n c t i o n s i n t h e P S L R A c o n t e x t c a n n e v e r b e s u a s p o n t e a n d c a n n e v e r c o m e a s a

s u r p r i s e

, b e c a u s e C o n g r e s s

, n o t t h e c o u r t

, h a s p r o m p t e d a n d m a n d a t e d a R u l e 1 1

f i n d i n g

. ” )

. M o r e o v e r

, a s d i s c u s s e d a b o v e

, i n t h e i r m o t i o n s t o d i s m i s s t h e t h r e e

c o m p l a i n t s

, t h e d e f

e n d a n t s a s k e d t h e c o u r t t o r e t a i n j u r i s d i c t i o n t o i m p o s e

s a n c t i o n s

. I n r e s p o n s e t o t h e s e c o n d a m e n d e d c o m p l a i n t

, K a r p a l s o s o u g h t

s a n c t i o n s i n a s e p a r a t e m o t i o n

. F i n a l l y

, t h e d i s t r i c t c o u r t p e r s o n a l l y w a r n e d t h e

p l a i n t i f f s ’ a t t o r n e y s a b o u t t h e r e q u i r e m e n t s o f R u l e 1 1

. I n r e s p o n s e t o t h e s e

m o t i o n s a n d i n t h e i r b r i e f s t o t h i s c o u r t

, t h e p l a i n t i f f s ’ a t t o r n e y s n e v e r a t t e m p t e d t o

e x c u s e t h e i r f

i l i n g o f f r i v o l o u s c l a i m s b e c a u s e e x t e n u a t i n g c i r c u m s t a n c e s

p r e c l u d e d a n a d e q u a t e p r e f i l i n g i n v e s t i g a t i o n

. N o r c o u l d t h e y h a v e

. T h e p l a i n t i f f s ’

a t t o r n e y s b r o u g h t t h i s c a s e f i v e m o n t h s a f

t e r f i l i n g a s i m i l a r c o m p l a i n t a g a i n s t

M e d i a i n a n I n d i a n a c i r c u i t c o u r t ; t h e n

, t h e d i s t r i c t c o u r t g a v e t h e p l a i n t i f f s t w o

c h a n c e s t o a m e n d t h e i r i n i t i a l c o m p l a i n t

. B e c a u s e t h e p l a i n t i f f s ’ a t t o r n e y s h a d

a d e q u a t e n o t i c e a n d a m p l e t i m e t o r e s e a r c h t h e c l a i m s

, a l l t h a t r e m a i n s t o b e

d e c i d e d i s w h e t h e r t h e c o m p l a i n t s c o n t a i n e d f r i v o l o u s l e g a l c l a i m s o r f a c t u a l

a l l e g a t i o n s

, o r w e r e b r o u g h t f o r a n i m p r o p e r p u r p o s e

.

A

. R u l e 1 1 ( b ) ( 2 ) C o m p l i a n c e

95R u l e 1 1 ( b ) ( 2 ) p r o h i b i t s c l a i m s t h a t a r e n o t “ w a r r a n t e d b y e x i s t i n g l a w o r b y

a n o n f r i v o l o u s a r g u m e n t f

o r [ c h a n g i n g ] e x i s t i n g l a w o r t h e e s t a b l i s h m e n t o f n e w

l a w

. ” F e d

. R

. C i v

. P

. 1 1 ( b ) ( 2 ) ( 2 0 0 6 )

. T h e p l a i n t i f f s a s s e r t e d c l a i m s u n d e r f o u r

f e d e r a l s e c u r i t i e s l a w p r o v i s i o n s w h i c h a r e s u b j e c t t o t h e P S L R A ’ s m a n d a t o r y

s a n c t i o n s r e v i e w : ( 1 ) t h e 1 9 3 3 A c t § 1 1 c l a i m s

, b r o u g h t b y T h o m p s o n i n t h e i n i t i a l

c o m p l a i n t a n d T h o m p s o n a n d J a c o b y i n t h e f i r s t a m e n d e d c o m p l a i n t ; ( 2 ) t h e 1 9 3 3

A c t § 1 2 c l a i m s

, b r o u g h t b y T h o m p s o n i n t h e i n i t i a l c o m p l a i n t a n d T h o m p s o n a n d

J a c o b y i n t h e f

i r s t a m e n d e d c o m p l a i n t ; ( 3 ) t h e 1 9 3 4 A c t § 1 0 ( b )

, R u l e 1 0 b

- 5 c l a i m s

( t h e “ R u l e 1 0 b

- 5 c l a i m ( s ) ” )

, b r o u g h t b y T h o m p s o n i n t h e i n i t i a l c o m p l a i n t

,

T h o m p s o n a n d J a c o b y i n t h e f i r s t a m e n d e d c o m p l a i n t

, a n d J a c o b y i n t h e s e c o n d

a m e n d e d c o m p l a i n t ; a n d ( 4 ) t h e 1 9 3 4 A c t § 2 0 ( a ) c l a i m s b r o u g h t b y T h o m p s o n

a n d J a c o b y i n t h e f

i r s t a m e n d e d c o m p l a i n t a n d J a c o b y i n t h e s e c o n d a m e n d e d

c o m p l a i n t

.

1

. T h e S e c t i o n 1 1 C l a i m s

T h e § 1 1 c l a i m s a d v a n c e d i n b o t h t h e i n i t i a l a n d t h e f i r s t a m e n d e d

c o m p l a i n t s a r e l e g a l l y f r i v o l o u s

. S e c t i o n 1 1 p r o h i b i t s f a l s e o r m i s l e a d i n g

s t a t e m e n t s i n a r e g i s t r a t i o n s t a t e m e n t

. 1 5 U

. S

. C

. § 7 7 k

. S e c t i o n 1 1 p r o v i d e s

, i n

r e l e v a n t p a r t

, “ [ i ] n c a s e a n y p a r t o f t h e r e g i s t r a t i o n s t a t e m e n t

, w h e n s u c h p a r t

b e c a m e e f

f e c t i v e

, c o n t a i n e d a n u n t r u e s t a t e m e n t o f m a t e r i a l f a c t o r o m i t t e d t o s t a t e

96a m a t e r i a l f a c t r e q u i r e d t o b e s t a t e d t h e r e i n o r n e c e s s a r y t o m a k e t h e s t a t e m e n t s

t h e r e i n n o t m i s l e a d i n g

, a n y p e r s o n a c q u i r i n g s u c h s e c u r i t y ” m a y s u e

. I d

. § 7 7 k ( a )

.

T h u s

, t o s t a t e a § 1 1 c l a i m

, a p l a i n t i f f m u s t s h o w ( 1 ) t h e p u r c h a s e o f a s e c u r i t y

u n d e r a r e g i s t r a t i o n s t a t e m e n t

, ( 2 ) a f t e r t h e r e g i s t r a t i o n s t a t e m e n t b e c a m e e f f e c t i v e

,

a n d ( 3 ) t h a t t h e r e g i s t r a t i o n s t a t e m e n t c o n t a i n e d a “ m a t e r i a l m i s s t a t e m e n t o r

o m i s s i o n

. ” H e r m a n & M a c L e a n v

. H u d d l e s t o n

, 4 5 9 U

. S

. 3 7 5

, 3 8 1

– 8 2

, 1 0 3 S

. C t

.

6 8 3

, 6 8 7

, 7 4 L

. E d

. 2 d 5 4 8 ( 1 9 8 3 )

. B e c a u s e t h e § 1 1 c l a i m s i n t h e i n i t i a l a n d f i r s t

a m e n d e d c o m p l a i n t s d i f f e r e d

, I a d d r e s s e a c h i n t u r n

.

a

. T h e I n i t i a l C o m p l a i n t ’ s S e c t i o n 1 1 C l a i m

I n t h e i n i t i a l c o m p l a i n t

, T h o m p s o n w a s t h e o n l y p l a i n t i f f

, a n d t h e

u n r e g i s t e r e d

- b r o k e r t h e o r y w a s t h e o n l y a l l e g e d m a t e r i a l m i s s t a t e m e n t o r o m i s s i o n

.

T h o m p s o n p u r c h a s e d M e d i a s t o c k i n t w o t r a n s a c t i o n s : 5 0

, 0 0 0 s h a r e s i n t h e 2 0 0 5

J u n e p r i v a t e o f

f e r i n g

, a n d 1 0

, 0 0 0 s h a r e s i n t h e o p e n m a r k e t a f t e r h i s s h a r e s w e r e

r e g i s t e r e d

.

T h o m p s o n ’ s p r i v a t e o f

f e r i n g p u r c h a s e c o u l d n e v e r h a v e f o r m e d t h e b a s i s f

o r

a § 1 1 c l a i m b e c a u s e h e d i d n o t p u r c h a s e t h e s h a r e s u n d e r a n y e f f e c t i v e r e g i s t r a t i o n

s t a t e m e n t

. B y d e f

i n i t i o n

, a p r i v a t e o f

f e r i n g m e a n s t h a t t h e s h a r e s w e r e i s s u e d i n

r e l i a n c e o n a n e x e m p t i o n f r o m r e g i s t r a t i o n

. I t w o u l d h a v e b e e n i m p o s s i b l e f o r

T h o m p s o n t o r e l y o n a r e g i s t r a t i o n s t a t e m e n t t h a t n e v e r e x i s t e d

. A c c o r d i n g l y

, a s a

97p r i v a t e o f

f e r i n g p u r c h a s e r

, T h o m p s o n c o u l d n e v e r h a v e s u c c e e d e d o n a § 1 1 c l a i m

.

B e c a u s e

, h o w e v e r

, T h o m p s o n c l a i m e d t o r e p r e s e n t t h e o p e n m a r k e t

p u r c h a s e r s

— p r e s u m a b l y b a s e d o n h i s J u l y 2 0 0 6 o p e n m a r k e t

p u r c h a s e

— T h o m p s o n a n d s o m e o f h i s c l a s s m e m b e r s p u r c h a s e d s h a r e s t h a t h a d

b e e n r e g i s t e r e d

. T h e c l a s s p e r i o d s t r e t c h e d f r o m M a y 2 4

, 2 0 0 5 t o A u g u s t 2 8

, 2 0 0 6

( T h o m p s o n f

i r s t f i l e d t h i s s u i t o n A u g u s t 2 8

, 2 0 0 6 )

. D u r i n g t h a t t i m e

, o n l y t w o

r e g i s t r a t i o n s t a t e m e n t s e x i s t e d : C h u b a s c o ’ s F e b r u a r y 2 0 0 5 s t a t e m e n t

, i n e f f e c t f o r

t h e e n t i r e c l a s s p e r i o d

, a n d M e d i a ’ s J u l y 2 0 0 6 r e g i s t r a t i o n s t a t e m e n t

, i n e f f e c t a f t e r

J u l y 1 4

, 2 0 0 6

. T h e r e f

o r e

, w i t h t h e e x c e p t i o n o f o n e m o n t h

, t h e s o l e r e g i s t r a t i o n

s t a t e m e n t i n e f

f e c t d u r i n g t h e c l a s s p e r i o d w a s C h u b a s c o ’ s

.

I t w o u l d h a v e b e e n i m p o s s i b l e

, h o w e v e r

, f o r C h u b a s c o ’ s r e g i s t r a t i o n

s t a t e m e n t t o m i s r e p r e s e n t o r o m i t M e d i a ’ s u s e o f a n u n r e g i s t e r e d b r o k e r b e c a u s e i t

b e c a m e e f

f e c t i v e i n F e b r u a r y 2 0 0 5

— w e l l b e f o r e a n y o f t h i s a l l e g e d w r o n g d o i n g

t o o k p l a c e

. I n d e e d

, a s o f F e b r u a r y 2 0 0 5

, R e l a t i o n s e r v e h a d n o t e v e n b e e n

o r g a n i z e d

. W i t h o u t a c r y s t a l b a l l

, i t w o u l d h a v e b e e n i m p o s s i b l e f o r C h u b a s c o t o

p r e d i c t t h a t R e l a t i o n s e r v e w o u l d s u g g e s t a m e r g e r

, m u c h l e s s t h a t i t w o u l d u s e a n

u n r e g i s t e r e d b r o k e r

. T h e r e f o r e

, n o o p e n m a r k e t p u r c h a s e r w h o b o u g h t b e f o r e J u l y

1 4

, 2 0 0 6

, c o u l d e v e r h a v e s u c c e e d e d o n a § 1 1 c l a i m

.

98M e d i a f i r s t f i l e d t h e o t h e r r e g i s t r a t i o n s t a t e m e n t o n M a r c h 2 0

, 2 0 0 6

, t o a l l o w

i t s p r i v a t e o f

f e r i n g p u r c h a s e r s t o s e l l t h e i r s h a r e s

. T h i s r e g i s t r a t i o n s t a t e m e n t w a s

a m e n d e d t h r e e t i m e s a n d b e c a m e e f f e c t i v e o n J u l y 1 4

, 2 0 0 6

. T h u s

, f o r p u r c h a s e r s

o f M e d i a s t o c k b e t w e e n J u l y 1 4 a n d A u g u s t 2 8

, 2 0 0 6

, T h o m p s o n c o u l d a t l e a s t

i d e n t i f y a n e f f e c t i v e r e g i s t r a t i o n s t a t e m e n t t h a t w a s i s s u e d a f t e r t h e a l l e g e d u s e o f

a n u n r e g i s t e r e d b r o k e r

.

S t i l l

, f o r t h e § 1 1 c l a i m t o h a v e a n y c h a n c e o f s u c c e s s

, t h e J u l y 1 4

r e g i s t r a t i o n s t a t e m e n t w o u l d h a v e h a d t o f a i l t o d i s c l o s e M e d i a ’ s u s e o f a n

u n r e g i s t e r e d b r o k e r w h e n i t b e c a m e e f f e c t i v e

. A g a i n

, t h e u n r e g i s t e r e d

- b r o k e r

t h e o r y w a s t h e o n l y m i s r e p r e s e n t a t i o n o r o m i s s i o n i d e n t i f i e d i n t h e i n i t i a l

c o m p l a i n t

. T h e J u l y 1 4 s t a t e m e n t

, h o w e v e r

, d i s c l o s e d T h o m p s o n ’ s s t a t e c o u r t

a c t i o n a n d T h o m p s o n ’ s a l l e g a t i o n t h a t M e d i a f a i l e d t o d i s c l o s e a c o m m i s s i o n i t

p a i d t o S u m m i t a n d A l t a v i l l a

. A n d i n d e e d

, T h o m p s o n e v e n t u a l l y c o n t e n d e d t h a t

t h e M a y 2 0 a m e n d m e n t t o t h i s r e g i s t r a t i o n s t a t e m e n t c o r r e c t e d t h e a l l e g e d

o m i s s i o n o f M e d i a ’ s u s e o f a n u n r e g i s t e r e d b r o k e r

. ( S e e S e c o n d A m

. C o m p l

. ¶ 7 3

( “ B e t w e e n R e l a t i o n S e r v e ’ s t h e [ s i c ] M a y 2 3

, 2 0 0 6 d i s c l o s u r e [ i n M e d i a ’ s a m e n d e d

r e g i s t r a t i o n s t a t e m e n t ] a n d J u n e 1 5

, 2 0 0 6

, R e l a t i o n S e r v e [ M e d i a ’ s ] s h a r e s f e l l

. . . .

T h i s d r o p w a s c a u s e d b y t h e p u b l i c ’ s k n o w l e d g e o f T h o m p s o n ’ s l a w s u i t

. ” )

. ) T h u s

,

99e v e n f

o r t h i s c l a s s o f p u r c h a s e r s

, T h o m p s o n f a i l e d t o i d e n t i f

y a n y m i s s t a t e m e n t o r

o m i s s i o n

.

E v e n p u t t i n g a l l o f t h i s a s i d e

, T h o m p s o n c o u l d n e v e r h a v e r e c o v e r e d o n a §

1 1 c l a i m b a s e d o n h i s o p e n m a r k e t p u r c h a s e

. S e c t i o n 1 1 e x p r e s s l y p r o h i b i t s

r e c o v e r y b y p e r s o n s w h o “ a t t h e t i m e o f [ t h e ] a c q u i s i t i o n [ ]

. . . k n e w o f s u c h

u n t r u t h o r o m i s s i o n

. ” 1 5 U

. S

. C

. § 7 7 k ( a )

. B y h i s o w n a d m i s s i o n

, T h o m p s o n k n e w

o f M e d i a ’ s a l l e g e d u s e o f a n u n r e g i s t e r e d

- b r o k e r w h e n h e p u r c h a s e d t h e 1 0

, 0 0 0

s h a r e s i n J u l y 2 0 0 6

. A c c o r d i n g l y

, T h o m p s o n c o u l d n e v e r h a v e s u c c e e d e d o r

a d e q u a t e l y r e p r e s e n t e d t h e o p e n m a r k e t p u r c h a s e r s o n a § 1 1 c l a i m

.

P a r t i c u l a r l y e g r e g i o u s w a s t h e i n i t i a l c o m p l a i n t ’ s § 1 1 c l a i m a g a i n s t t h e

i n d i v i d u a l O f

f i c e r s

. F o r a n i n d i v i d u a l t o b e l i a b l e u n d e r § 1 1

, t h e i n d i v i d u a l m u s t

h a v e e i t h e r ( 1 ) s i g n e d t h e r e g i s t r a t i o n s t a t e m e n t

, ( 2 ) b e e n a d i r e c t o r o f t h e i s s u e r a t

t h e t i m e o f t h e f

i l i n g

, ( 3 ) b e e n n a m e d a s a b o u t t o b e c o m e a d i r e c t o r

, ( 4 ) b e e n

n a m e d a s a p e r s o n h a v i n g p r e p a r e d o r c e r t i f i e d a n y r e p o r t o r v a l u a t i o n u s e d i n

c o n n e c t i o n w i t h t h e r e g i s t r a t i o n s t a t e m e n t

, o r ( 5 ) b e e n a n u n d e r w r i t e r

. I d

. N o n e o f

t h e i n d i v i d u a l d e f

e n d a n t s w e r e e v e n a f

f i l i a t e d w i t h e i t h e r M e d i a o r C h u b a s c o w h e n

e i t h e r r e g i s t r a t i o n s t a t e m e n t w a s f i r s t f i l e d

. N o r d o t h e i r n a m e s a p p e a r a s h a v i n g 6 3

Thompson sued Danie lle Kar p, Mandee Heller

Adler, O had Jehassi, and Warre n 6 3

“Pete” Musser. Ka

rp stopped wor

king f or Media on F ebrua

ry 3, 2006; Adler on Nove mber 11,

2005; Musser on Octobe r 31, 2005. Althoug h it is unclear whe n J ehassi ende d his tenure, he was

100c e r t i f

i e d a n y r e p o r t o r v a l u a t i o n u s e d i n e i t h e r r e g i s t r a t i o n s t a t e m e n t

. F i n a l l y

t h e r e i s n o a l l e g a t i o n a n d t h e r e i s n o e v i d e n c e t h a t a n y o f t h e s e O f f i c e r s s o l d s t o c k

u n d e r t h e r e g i s t r a t i o n s t a t e m e n t

, t h u s i t w o u l d h a v e b e e n i m p o s s i b l e f o r t h e s e

i n d i v i d u a l s t o a c t a s u n d e r w r i t e r s

. N e v e r t h e l e s s

, t h e p l a i n t i f f s s o u g h t t o h o l d

“ [ M e d i a ] a n d t h e i n d i v i d u a l D e f e n d a n t s ” l i a b l e f

o r v i o l a t i n g § 1 1

. ( C o m p l

. ¶ 5 4

. )

O v e r a l l

, T h o m p s o n ’ s § 1 1 c l a i m i n t h e i n i t i a l c o m p l a i n t i s f r i v o l o u s b e y o n d

d o u b t

. N o n e o f t h e i n d i v i d u a l d e f e n d a n t s h a d a n y t h i n g t o d o w i t h e i t h e r

r e g i s t r a t i o n s t a t e m e n t

. A s a g a i n s t M e d i a

, t h e i n i t i a l c o m p l a i n t a t t e m p t e d t o s t a t e a

§ 1 1 c l a i m o n t h e b a s i s o f a r e g i s t r a t i o n s t a t e m e n t t h a t d i d n o t e x i s t ( T h o m p s o n ’ s

p r i v a t e o f

f e r i n g p u r c h a s e )

, o r

, a l t e r n a t i v e l y

, a r e g i s t r a t i o n s t a t e m e n t t h a t n e v e r

c o n t a i n e d a m a t e r i a l m i s s t a t e m e n t o r o m i s s i o n w h e n i t b e c a m e e f f e c t i v e

( C h u b a s c o ’ s r e g i s t r a t i o n s t a t e m e n t b e c a m e e f f e c t i v e l o n g b e f

o r e a n y o f t h e a l l e g e d

m i s c o n d u c t t o o k p l a c e a n d b y t h e t i m e M e d i a ’ s J u l y 1 4 r e g i s t r a t i o n s t a t e m e n t

b e c a m e e f

f e c t i v e

, i t

, t o o

, h a d b e e n c u r e d o f a l l d e f i c i e n c i e s )

. F i n a l l y

, T h o m p s o n

a d m i t t e d l y k n e w o f t h e a l l e g e d f r a u d w h e n h e p u r c h a s e d h i s s h a r e s

, s o t h e § 1 1

c l a i m w o u l d f

a i l e v e n h a d t h e J u l y 1 4 r e g i s t r a t i o n s t a t e m e n t o m i t t e d t h e a l l e g e d

f r a u d

. N o a r g u m e n t f

o r t h e m o d i f

i c a t i o n o f e x i s t i n g l a w c o u l d b e d e e m e d

r e a s o n a b l e i n v i e w o f T h o m p s o n ’ s c o m p l e t e f a i l u r e t o s a t i s f

y t h e b a s i c e l e m e n t s o f

never a dire ctor, a

nd never signe d a re g istration statement in any capa city

.

101§ 1 1

. T h e r e f o r e

, t h e d i s t r i c t c o u r t n e c e s s a r i l y a b u s e d i t s d i s c r e t i o n b y f a i l i n g t o

s a n c t i o n T h o m p s o n ’ s a t t o r n e y s f o r b r i n g i n g t h i s § 1 1 c l a i m

.

b

. T h e F i r s t A m e n d e d C o m p l a i n t ’ s S e c t i o n 1 1 C l a i m

T h e f i r s t a m e n d e d c o m p l a i n t ’ s § 1 1 c l a i m d i f f e r e d f r o m t h e i n i t i a l

c o m p l a i n t ’ s i t e r a t i o n b y a d d i n g J a c o b y a s a c o

- l e a d p l a i n t i f f

, a d d i n g t e n n e w

i n d i v i d u a l d e f

e n d a n t s

, a n d a d d i n g t h r e e n e w t h e o r i e s o f m i s r e p r e s e n t a t i o n

.

N e v e r t h e l e s s

, l i k e t h e i n i t i a l c o m p l a i n t

, t h e f i r s t a m e n d e d c o m p l a i n t ’ s § 1 1 c l a i m i s

f r i v o l o u s : J a c o b y l a c k e d s t a n d i n g t o s u e ; T h o m p s o n k n e w o f t h e a l l e g e d f r a u d

.

A s d i s c u s s e d a b o v e

, a n y v i a b l e § 1 1 c l a i m c o u l d o n l y h a v e b e e n b a s e d o n

M e d i a ’ s J u l y 1 4

, 2 0 0 6

, r e g i s t r a t i o n s t a t e m e n t

. T o h a v e s t a n d i n g t o s u e u n d e r § 1 1

,

a p l a i n t i f f m u s t h a v e b o u g h t t h e s h a r e s “ p u r s u a n t t o ” a n e f f e c t i v e r e g i s t r a t i o n

s t a t e m e n t

. H u d d l e s t o n

, 4 5 9 U

. S

. a t 3 8 2

, 1 0 3 S

. C t

. a t 6 8 7

. T h a t i s

, a p l a i n t i f f m u s t

b e a b l e t o “ ‘ t r a c e t h e p u r c h a s e o f h i s s e c u r i t i e s t o t h e r e g i s t r a t i o n s t a t e m e n t t h a t

a l l e g e d l y v i o l a t e d s e c t i o n 1 1

. ’ ” I n r e H a m i l t o n B a n k c o r p

. , I n c

. S e c

. L i t i g

. , 1 9 4 F

.

S u p p

. 2 d 1 3 5 3

, 1 3 5 6

– 5 7 ( S

. D

. F l a

. 2 0 0 2 ) ( q u o t i n g I n r e U n i c a p i t a l C o r p

. S e c

.

L i t i g

. , 1 4 9 F

. S u p p

. 2 d 1 3 5 3

. 1 3 6 9 ( S

. D

. F l a

. 2 0 0 1 ) )

. H e r e

, J a c o b y s w o r e t h a t h i s

o n l y p u r c h a s e s o f M e d i a s t o c k o c c u r r e d i n J u l y a n d A u g u s t o f 2 0 0 5

. I t t h e r e f o r e

w o u l d h a v e b e e n i m p o s s i b l e f o r J a c o b y t o t r a c e h i s s t o c k t o t h e J u l y 1 4

, 2 0 0 6

,

r e g i s t r a t i o n s t a t e m e n t a n d h i s § 1 1 c l a i m i s c l e a r l y f r i v o l o u s

.

102T u r n i n g t o T h o m p s o n ’ s t w o p u r c h a s e s

, h i s a t t o r n e y s ’ n e w t h e o r i e s o f

a l l e g e d f r a u d d i d n o t r e n d e r T h o m p s o n ’ s § 1 1 c l a i m n o n

- f r i v o l o u s

. T h e J u l y 1 4

r e g i s t r a t i o n s t a t e m e n t d i d n o t d i s c l o s e t h e f a c t s u n d e r l y i n g t h e k i c k b a c k

, o v e r s t a t e d

i n c o m e

, a n d s u e d

- d i r e c t o r t h e o r i e s

, b u t

, e v e n s o

, T h o m p s o n c o u l d n e v e r h a v e

p r e v a i l e d

. F o r o n e

, t h e s u e d

- d i r e c t o r t h e o r y i s s i m p l y f r i v o l o u s o n t h e m e r i t s :

M e d i a h a d n o d u t y t o d i s c l o s e t h e f a c t t h a t a f

o r m e r d i r e c t o r h a d b e e n s u e d

— b u t

n o t n e c e s s a r i l y f

o u n d l i a b l e

— f

o r s e c u r i t i e s v i o l a t i o n s

. A s s u m i n g t h a t M e d i a h a d 6 4

a d u t y t o d i s c l o s e t h e o v e r s t a t e d i n c o m e a n d k i c k b a c k s

, T h o m p s o n ’ s c l a i m i s s t i l l

f r i v o l o u s b e c a u s e

, a s d i s c u s s e d a b o v e

, T h o m p s o n a d m i t t e d t h a t h e k n e w o f t h e

f a c t s u n d e r l y i n g t h e a l l e g e d f r a u d w h e n h e c o m p l e t e d h i s J u l y 2 0 0 6 o p e n m a r k e t

p u r c h a s e

. ( S e e F i r s t A m

. C o m p l

. ¶ ¶ 9 7

, 8 0

, 7 1

, 8 1

, 6 2

, 3

. )

6 5

The sued dir ector , direc tor Musser, ser ved on the boa

rd fr om J une 2005 to Octobe r 6 4

2005. No re g istration statement was issued dur ing tha t period and the re is no duty to disclose

information about the law suits of past directors. See 17 C.F.R. § 228.401(d) ( 2005) (“ Desc ribe

any of the following

events . . . that a

re ma terial to an e valuation of the a bility or integ rity

of any

direc tor, person nominate d to become a direc tor, executive off

icer , . . . of the small business

issuer.”) . What is m ore, the plaintiffs alleg ed only that direc tor Musser ha d been sue d for

secur ities law violations, not that he had ac tually been f ound liable, which is a pr ere quisite for

repor ting. 17 C.F .R. § 228.401(d)(4) (2005) ( “B eing found by a cour t of compete nt jurisdiction

(in a c ivil action) [or by ] t he Commissi on . . . to have violated a fede ral or sta te sec urities . . .

law . . . .”)

.

Thompson’s claim may

well be f rivolous for anothe r re ason: he suff ere d no damag es 6 5

that could be tra ced to the disc losure of a ny of the a lleg ed misrepr esenta tions. Under § 11, a

plaintiff nee d not plead dama g es or loss ca usation as a pa

rt of a pr ima fac ie ca se, Huddleston,

459 U.S. at 382, 103 S. Ct . at 687. Moreove r, the da mag es ar e pre sumed to be the diff ere nce

betwee n the hig her of

the price paid or the of

fer ing pr ice a

nd the “va lue” of

the sec urity

at the

time of the suit. 15 U.S.C. § 77k (emphasis added) . Acc ording ly , even w here , as her e, the

lawsuit at issue is the first disclosure of the alleg ed misrepr esenta tion, a plaintiff ca n arg ue that

103M o s t t r o u b l i n g

, i n b o t h p l a i n t i f f s ’ § 1 1 c l a i m s

, t h e p l a i n t i f f s ’ a t t o r n e y s

r e p e a t e d t h e i r e g r e g i o u s c l a i m s a g a i n s t t h r e e o f t h e i n i t i a l c o m p l a i n t ’ s i n d i v i d u a l

d e f e n d a n t s w h o c o u l d n e v e r h a v e b e e n h e l d l i a b l e f o r a n y § 1 1 v i o l a t i o n b a s e d o n

t h e J u l y 1 4 r e g i s t r a t i o n s t a t e m e n t

. W o r s e

, i n t h e f a c e o f t h e d i s t r i c t c o u r t ’ s R u l e 1 1

w a r n i n g n o t t o s u e o f

f i c e r s j u s t b e c a u s e t h e y w e r e o f f i c e r s

, t h e p l a i n t i f

f s ’ a t t o r n e y s

a d d e d t e n n e w d e f

e n d a n t s

, f

o u r o f w h o m h a d n o t h i n g t o d o w i t h t h e J u l y 1 4

, 2 0 0 6

,

r e g i s t r a t i o n s t a t e m e n t

. T h i s b r o u g h t t h e t o t a l o f i n d i v i d u a l s w h o w e r e a l l e g e d l y

l i a b l e f o r t h e § 1 1 v i o l a t i o n t o t h i r t e e n

, s e v e n o f w h o m c o u l d n e v e r h a v e b e e n

l i a b l e u n d e r t h e p l a i n l a n g u a g e o f § 1 1

. S p e c i f i c a l l y

, a s t o d e f

e n d a n t s K a r p

, A d l e r

,

M u s s e r

, Y o u n g

, H i l l

, H o n i g

, a n d H i r s c h

, t h e p l a i n t i f f s ’ § 1 1 c l a i m i s f

r i v o l o u s

b e y o n d a n y d o u b t

. Y o u n g

, H i l l

, a n d H o n i g n e v e r w o r k e d f o r M e d i a ; K a r p

, 6 6

the damag es ar e the diff

ere nce be tween the marke t price on the day the suit was filed a

nd the

actua l value of the stock on that day . See Gr ossman v. Waste Mgmt. Sy s., I nc., 589 F . Supp.

395, 415–16 (N.D. I ll. 1984). Thompson, however , could neve r succ eed on suc h a theor y

beca use he boug ht Media stock in the open ma rket a nd sold it one day

later; a ccor dingly , he both

purcha sed and sold over -value d stock and suff ere d no loss. See I n re I

nitial Pub. Offering Sec.

L itig., 241 F . Supp. 2d 281, 347 (S.D.N.Y. 2003).

Def endants Soltoff, Wasserman, Mc Namar a, and B rause r sig ned the initial Marc h 20 6 6

iteration of the July

14, 2006, reg istration statement; Gould signe d the third amendme nt to this

reg istration statement. Obec k was not a dire ctor a nd did not sign or c ertify

the re g istration

statement, but sold stock under the July 14, 2006, reg istration statement and may have be en a

control per son underwr iter. See 15 U .S.C. § 77b(11) (“The term ‘unde rwriter ’ mea ns any person

who . . . offe rs or sells for an issuer in c onnection with[] the distribution of any secur ity

. . . . [T] he ter m ‘issuer’ sha ll include . . . any person dire ctly

or indirec tly

controlling or controlled by

the issuer . . . .” ).

104A d l e r

, M u s s e r

, a n d H i r s c h a l l e n d e d t h e i r t e n u r e w i t h M e d i a w e l l b e f o r e t h e

r e g i s t r a t i o n s t a t e m e n t w a s f i r s t f i l e d o n M a r c h 2 0

, 2 0 0 6

. 6 7

2

. T h e S e c t i o n 1 2 C l a i m s

T h e § 1 2 c l a i m s

— b r o u g h t a s C o u n t I I i n b o t h t h e i n i t i a l a n d f i r s t a m e n d e d

c o m p l a i n t s

— a r e l e g a l l y f r i v o l o u s b e y o n d d o u b t

. S e c t i o n 1 2 p r o h i b i t s a n y p e r s o n

f r o m o f f e r i n g o r s e l l i n g s e c u r i t i e s b y m e a n s o f a f a l s e o r m i s l e a d i n g s t a t e m e n t i n a

p r o s p e c t u s o r o r a l c o m m u n i c a t i o n

. 1 5 U

. S

. C

. § 7 7 l

. B e c a u s e t h e 1 9 3 3 A c t

r e q u i r e s

, i n r e l e v a n t p a r t

, t h a t a p r o s p e c t u s i n c l u d e t h e “ i n f o r m a t i o n c o n t a i n e d i n

t h e r e g i s t r a t i o n s t a t e m e n t

, ” 1 5 U

. S

. C

. § 7 7 j ( a ) ( 1 )

, t h e r e i s s u b s t a n t i a l o v e r l a p

b e t w e e n § 1 1 a n d § 1 2

. T h e m a j o r d i f f e r e n c e b e t w e e n t h e t w o s t a t u t e s i s t h a t § 1 2

i m p o s e s a p r i v i t y r e q u i r e m e n t n o t f o u n d i n § 1 1 a n d § 1 2 a l l o w s l i a b i l i t y f o r “ o r a l

c o m m u n i c a t i o n s

. ” S e e I n r e M o r g a n S t a n l e y I n f o

. F u n d S e c

. L i t i g

. , 5 9 2 F

. 3 d 3 4 7

,

3 5 8 ( 2 d C i r

. 2 0 1 0 )

. T h u s

, e v e n a s s u m i n g t h a t § 1 2 ’ s p r i v i t y r e q u i r e m e n t i s

s a t i s f i e d h e r e

, T h o m p s o n ’ s a n d J a c o b y ’ s § 1 2 c l a i m s a r e f r i v o l o u s f

o r t h e s a m e

r e a s o n s a s t h e i r § 1 1 c l a i m s

. 6 8

Adler stopped w orking at Media on N ovember 11, 2005; Karp on F ebrua ry 3, 2006; 6 7

Musser on Oc tober 31, 2005; Hirsc h on Fe bruar y 2, 2006.

I t is very unlikely that the privity

require ment could be sa tisfied here beca use Media 6 8

did not sell the stock, its private offe ring purcha sers did. See Ehle rt v. Singe r, 245 F .3d 1313,

1316 (11th Cir. 2001) (“ Section 12 liability extends to t hose who tra

nsfer title to the security

and

to those who succe ssfully solicit the purchase .”); Thomas L ee H azen, Tre atise on the L aw of

Securities Reg ulation § 7(7) (6th e d.) (“ The issuer w ill not ordinarily be a se ction 12 seller since

105N e v e r t h e l e s s

, i n r e s p o n d i n g t o t h e d e f e n d a n t ’ s m o t i o n t o d i s m i s s t h e f i r s t

a m e n d e d c o m p l a i n t

, t h e p l a i n t i f f s ’ a t t o r n e y s d e f

e n d e d T h o m p s o n ’ s § 1 2 c l a i m s o n

t h e b a s i s o f c e r t a i n o r a l c o m m u n i c a t i o n s b y A l t a v i l l a

. ( S e e P l s

. ’ R e s p

. t o D e f s

. ’

M o t

. t o D i s m i s s F i r s t A m

. C o m p l

. , J a n

. 2 9

, 2 0 0 7

. ) T h i s a r g u m e n t i s f r i v o l o u s

b e c a u s e t h e p l a i n t i f

f s n e v e r i d e n t i f

i e d t h e s e o r a l c o m m u n i c a t i o n s i n a n y

c o m p l a i n t

. ( S e e

, e

. g

. , C o m p l

. ¶ ¶ 5 5

– 5 6 ; F i r s t A m

. C o m p l

. ¶ ¶ 1 2 2

– 2 3

. )

6 9

the pre sence of an unde rwriter as an inter

mediary means that the issuer

is not in privit y

with the

purcha ser of

the sec urity .”); id (“ [O] rdinarily an issuer’ s office rs and dire ctors will not have a

sufficie ntly

substantial connec tion to qualify as seller s . . . .”).

Even ha d Thompson pled the alleg ed “or al communications,” his cla im would sti ll 6 9

border on frivolous bec ause the oral c ommunications were made in conne ction with his J une

private of fer ing pur chase . The Supreme Court has made c lear that the only

oral c ommunications

that count ar e those that “ rela te to a prospe ctus.” Gustaf son v. Alloy d Co., 513 U.S. 561,

567–68, 115 S. Ct . 1061, 1065–66, 131 L . Ed. 2d. 1 (1995). A nd, by defining“prospe ctus” a s a

“ter m of art r efe rring to a document that de scribes a public offe ring of sec urities by an issuer or

controlling share holder,” the Supreme Court ha s limi ted § 12 claims to public offe ring s. See id.

at 584, 115 S. Ct. at 1073–74.

Thompson’s claim would “bor der” on frivolous bec ause it is not on all fours with

Gustafson. Gustaf

son involved a private seconda ry sale of se curities fr om one equity holder to

another , id. at 564–65, 115 S. Ct . 1064–65; Thompson purchase d Media shar es in a priva te

primary sale fr om an issuer. See , e.g ., Yung v. L ee, 432 F .3d 142, 148 (2d Cir. 2005) (noting

that the Second Circuit had y et to “re ach the issue of whe ther the r ationale f or . . . Gustaf

son . . .

nece ssarily

prec ludes a Sec tion 12(a)( 2) cla im with respect to any private se curities tra

nsaction).

But whe n the plaintiffs’ a ttorney s filed the initial and first ame nded complaints, at lea st three

circ uits had alrea dy

held that no § 12 claim could lie in any private of

fer ing. See id. (citing

L ewis v. F resne , 252 F.3d 352, 357 ( 5th Cir. 2001); Maldonado v. Doming uez, 137 F.3d 1, 8 (1st

Cir. 1998); J oseph v. Wiles, 223 F.3d 1155, 1161 (10th Cir. 2000)). N ever theless, this circuit

had not ruled on the question prior to Thompson’s suit. Theref ore, ha d Thompson alleg ed the

oral c ommunications, I would rema nd so that the district court could make the Rule 11

deter mination in the first instance. I n any event, I note my deep c oncer

n that Thompson’s

attorney s never

mentioned Gustafson a

nd simply justified the § 12 claims bec ause “ an ora l

communication is sufficient so long as an instrument of inter state commer ce is involved.” (Pls.’

Resp. to Defs.’ Mot. to Dismi ss First Am. Compl. 25, J an. 29, 2007.)

1063

. T h e S e c t i o n 1 0 ( b )

, R u l e 1 0 b

- 5 C l a i m s

T o e v a l u a t e t h e l e g a l s u f f i c i e n c y o f t h e R u l e 1 0 b

- 5 c l a i m s i n a l l t h r e e

c o m p l a i n t s

, i t i s f

i r s t n e c e s s a r y t o c l a r i f

y w h o b r o u g h t t h e c l a i m

. I n t h e i n i t i a l

c o m p l a i n t

, T h o m p s o n a l o n e b r o u g h t t h e c l a i m ; i n t h e f i r s t a m e n d e d c o m p l a i n t

,

T h o m p s o n a n d J a c o b y b r o u g h t t h e c l a i m t o g e t h e r ; i n t h e s e c o n d a m e n d e d

c o m p l a i n t

, J a c o b y a l o n e b r o u g h t t h e c l a i m

. I f i r s t d i s c u s s T h o m p s o n ’ s R u l e 1 0 b

- 5

c l a i m s i n t h e i n i t i a l a n d f i r s t a m e n d e d c o m p l a i n t s

, a n d t h e n t u r n t o J a c o b y ’ s i n t h e

f i r s t a n d s e c o n d a m e n d e d c o m p l a i n t s

.

I m p l e m e n t i n g § 1 0 ( b )

, R u l e 1 0 b

- 5 f o r b i d s

, i n r e l e v a n t p a r t

, “ a n y p e r s o n

,

d i r e c t l y o r i n d i r e c t l y

. . . ( b ) T o m a k e a n y u n t r u e s t a t e m e n t o f a m a t e r i a l f a c t o r t o

o m i t t o s t a t e a m a t e r i a l f a c t n e c e s s a r y i n o r d e r t o m a k e t h e s t a t e m e n t s m a d e

, i n t h e

l i g h t o f t h e c i r c u m s t a n c e s u n d e r w h i c h t h e y w e r e m a d e

, n o t m i s l e a d i n g

. . . . ” 1 7

C

. F

. R

. § 2 4 0

. 1 0 b

- 5 ( 2 0 0 5 )

. T o s t a t e a c l a i m f o r a n o m i s s i o n

, a p l a i n t i f f m u s t p l e a d

s i x e l e m e n t s w i t h p a r t i c u l a r i t y : ( 1 ) a n o m i s s i o n o f m a t e r i a l f a c t

, ( 2 ) m a d e w i t h

s c i e n t e r

, ( 3 ) i n c o n n e c t i o n w i t h t h e p u r c h a s e o r s a l e o f a s e c u r i t y

, ( 4 ) r e l i a n c e o n

t h e o m i s s i o n

, ( 5 ) e c o n o m i c l o s s

, a n d ( 6 ) l o s s c a u s a t i o n ( a c a u s a l r e l a t i o n s h i p

b e t w e e n t h e o m i s s i o n a n d t h e e c o n o m i c l o s s )

. S e e D u r a P h a r m s

. , I n c

. v

. B r o u d o

,

5 4 4 U

. S

. 3 3 6

, 3 4 1

– 4 2

, 1 2 5 S

. C t

. 1 6 2 7

, 1 6 3 0

– 3 1

, 1 6 1 L

. E d

. 2 d

. 5 7 7 ( 2 0 0 5 )

.

107U l t i m a t e l y

, I c o n c l u d e t h a t a l l o f t h e R u l e 1 0 b

- 5 c l a i m s a r e s o f r i v o l o u s t h a t

t h e d i s t r i c t c o u r t n e c e s s a r i l y a b u s e d i t s d i s c r e t i o n w h e n i t d e n i e d s a n c t i o n s

.

T h o m p s o n ’ s c l a i m s a r e f r i v o l o u s b e c a u s e h e n e v e r i d e n t i f i e d a f a l s e o r m i s l e a d i n g

s t a t e m e n t a n d b e c a u s e h e k n e w o f t h e a l l e g e d f r a u d w h e n h e p u r c h a s e d h i s s h a r e s

.

J a c o b y ’ s c l a i m s a r e f

r i v o l o u s b e c a u s e h e t o o f a i l e d t o a l l e g e a n y a c t i o n a b l e

o m i s s i o n

, h e e g r e g i o u s l y f a i l e d t o a l l e g e s c i e n t e r w i t h t h e s p e c i f i c i t y r e q u i r e d b y

t h e P S L R A a n d R u l e 9 ( b )

, a n d b e c a u s e h e a d v a n c e d a f r i v o l o u s a r g u m e n t s o a s t o

c h e r r y

- p i c k t h e s t a r t i n g p o i n t f o r m e a s u r i n g l o s s c a u s a t i o n

.

a

. T h o m p s o n ’ s R u l e 1 0 b

- 5 C l a i m s

N e i t h e r o f T h o m p s o n ’ s p u r c h a s e s f o r m t h e b a s i s f

o r a n o n f r i v o l o u s R u l e

1 0 b

- 5 c l a i m

. A s f

o r t h e p u r c h a s e i n t h e 2 0 0 5 J u n e p r i v a t e o f f e r i n g

, T h o m p s o n

n e v e r i d e n t i f

i e d a n y f a l s e o r m i s l e a d i n g s t a t e m e n t

. A s f o r t h e J u l y 2 0 0 6 o p e n

m a r k e t p u r c h a s e

, T h o m p s o n a d m i t t e d l y k n e w a b o u t t h e a l l e g e d f r a u d w h e n h e

b o u g h t t h e s t o c k a n d s u f f e r e d n o l o s s t h a t c o u l d h a v e b e e n t r a c e d t o a n y f r a u d o n

t h e p a r t o f t h e d e f

e n d a n t s

.

T h o m p s o n i d e n t i f

i e d n o a c t i o n a b l e f

a l s e o r m i s l e a d i n g s t a t e m e n t i n

c o n n e c t i o n w i t h h i s 2 0 0 5 J u n e p r i v a t e o f f e r i n g p u r c h a s e

. T h e P S L R A r e q u i r e s

p l a i n t i f f s t o “ s p e c i f

y e a c h s t a t e m e n t a l l e g e d t o h a v e b e e n m i s l e a d i n g [ a n d ] t h e

r e a s o n o r r e a s o n s w h y t h e s t a t e m e n t i s m i s l e a d i n g ” 1 5 U

. S C

. § 7 8 u

- 4 ( b ( 1 )

. I n t h e

108i n i t i a l c o m p l a i n t ’ s R u l e 1 0 b

- 5 c l a i m

, T h o m p s o n a l l e g e d o n l y t h e u n r e g i s t e r e d

b r o k e r t h e o r y o f m i s r e p r e s e n t a t i o n

. E

. g

. C o m p l

. ¶ 3 7

. T h e t r o u b l e i s t h a t t h e 7 0

2 0 0 5 J u n e p r i v a t e o f

f e r i n g f o r m e d t h e b a s i s f

o r t h i s a l l e g e d o m i s s i o n

, t h u s n o S E C

f i l i n g p r i o r t o T h o m p s o n ’ s p u r c h a s e c o u l d h a v e d i s c l o s e d t h e a l l e g e d c o n t i n g e n t

l i a b i l i t y

— t h e c o n t i n g e n c y h a d n o t h a p p e n e d y e t

. M o r e o v e r

, M e d i a d i d d i s c l o s e 7 1

S u m m i t ’ s u n r e g i s t e r e d s t a t u s i n t h e J u n e 1 6 c u r r e n t r e p o r t

, w h i c h T h o m p s o n

c e r t i f i e d t h a t h e h a d r e a d

. T h o m p s o n t h u s d i d n o t

— a n d c o u l d n o t

— p o i n t t o a n y

s p e c i f i c s t a t e m e n t t h a t w a s m i s l e a d i n g b e c a u s e o f M e d i a ’ s u s e o f a n u n r e g i s t e r e d

b r o k e r p r i o r t o T h o m p s o n ’ s J u n e 2 0 0 5 p u r c h a s e

.

I n h i s I n d i a n a s t a t e s e c u r i t i e s l a w f r a u d c l a i m ( b r o u g h t i n C o u n t V I I o f t h e

i n i t i a l c o m p l a i n t )

, T h o m p s o n d i d a l l e g e o t h e r s p e c i f i c o m i s s i o n s

. G i v i n g

T h o m p s o n ’ s a t t o r n e y s t h e b e n e f i t o f t h e d o u b t

, I w i l l a s s u m e t h a t T h o m p s o n m e a n t

t o p l e a d t h e s e s a m e o m i s s i o n s i n h i s R u l e 1 0 b

- 5 c l a i m

. O n t h i s a s s u m p t i o n

,

T h o m p s o n a l l e g e d t h a t M e d i a : ( 1 ) f a i l e d t o d i s c l o s e “ s i z e a b l e c o m m i s s i o n s a n d

f e e s t o A l t a v i l l a ” a n d ( 2 ) f a i l e d t o e x p l a i n t h a t t h e s h a r e s i n t h e p r i v a t e o f f e r i n g

I n the first ame nded complaint, Thompson adde d the kickbac k theory , the over stated- 7 0

income theor

y , and the sue d-direc tor theory . Any Rule 10b-5 claim base d on these theor ies is

frivolous bec ause Thompson c ompletely failed to plea d loss causation. See pa g e 95–96, infra

.

This fac t is especially

signific ant bec ause throug hout this l itigation, Thompson’s 7 1

purcha se wa s the only

purcha se spec ifically

identified as ha

ving be en illeg ally

broker ed by

Summi t.

109w e r e r e s t r i c t e d s e c u r i t i e s a n d w e r e n o t r e g i s t e r e d

. ( C o m p l

. ¶ 7 8

. ) B u t M e d i a

d i s c l o s e d a l l o f t h i s i n t h e s u b s c r i p t i o n a g r e e m e n t T h o m p s o n s i g n e d

. T h o m p s o n

“ a c k n o w l e d g e [ d ] t h a t

. . . [ h e ] h a s r e a d a n d e v a l u a t e d

. . . t h e C o m p a n y ’ s C u r r e n t

R e p o r t o n F o r m 8

- K

. . . o n J u n e 1 6

, 2 0 0 5

. ” R e l a t i o n s e r v e M e d i a I n c

. , C u r r e n t

R e p o r t ( F o r m 8

- K )

, E x

. 4

. 1 ( S u b s c r i p t i o n A g r e e m e n t )

, ¶ 1

. 4 ( J u n e 3 0

, 2 0 0 5 )

. T h e

J u n e 1 6

, 2 0 0 5 F o r m 8

- K a t t a c h e d M e d i a ’ s a g r e e m e n t w i t h S u m m i t

, i n c l u d i n g t h e

p r o v i s i o n t h a t S u m m i t w o u l d b e p a i d a s e v e n p e r c e n t f i n d e r ’ s f e e

. T h o m p s o n a l s o

r e c o g n i z e [ d ] t h a t t h e p u r c h a s e o f U n i t s i n v o l v e s a h i g h d e g r e e o f r i s k

i n t h a t

. . . ( i i ) t h e U n i t s a r e n o t r e g i s t e r e d u n d e r t h e S e c u r i t i e s A c t o f

1 9 3 3

. . . o r a n y s t a t e s e c u r i t i e s l a w ; ( i i i ) t h e r e i s n o t r a d i n g m a r k e t f o r

t h e U n i t s

, n o n e i s e v e r l i k e l y t o d e v e l o p

, a n d t h e S u b s c r i b e r m a y n o t

b e a b l e t o l i q u i d a t e h i s i n v e s t m e n t

.

I d

. ¶ 1

. 2

.

E v e n f u r t h e r a s s u m i n g T h o m p s o n h a d a l l e g e d

— a s h e d i d i n I n d i a n a c i r c u i t

c o u r t

— t h a t A l t a v i l l a n e v e r p r o v i d e d h i m w i t h t h e f u l l s u b s c r i p t i o n a g r e e m e n t a n d

t o l d h i m t h e s h a r e s w o u l d b e r e g i s t e r e d a n d c o u l d b e q u i c k l y s o l d f o r a p r o f i t

, i t

w o u l d n o t s a v e h i s R u l e 1 0 b

- 5 c l a i m

. T h e s u b s c r i p t i o n a g r e e m e n t e x p r e s s l y

r e q u i r e d T h o m p s o n t o

r e p r e s e n t [ ] t h a t

, e x c e p t a s e x p r e s s l y s e t f o r t h i n t h e O f

f e r i n g

D o c u m e n t s

, n o r e p r e s e n t a t i o n s o r w a r r a n t i e s h a v e b e e n m a d e t o t h e

S u b s c r i b e r b y t h e C o m p a n y o r a n y a g e n t

, e m p l o y e e o r a f f i l i a t e o f t h e

C o m p a n y a n d i n e n t e r i n g i n t o t h i s t r a n s a c t i o n

, t h e S u b s c r i b e r i s n o t

r e l y i n g o n a n y i n f

o r m a t i o n

, o t h e r t h a n t h a t c o n t a i n e d i n t h e O f f e r i n g

110d o c u m e n t s a n d t h e r e s u l t s o f i n d e p e n d e n t i n v e s t i g a t i o n b y t h e

S u b s c r i b e r

.

I d

. a t ¶ 1

. 1 4

. I n v i e w o f t h i s r e p r e s e n t a t i o n

, a n y a r g u m e n t t h a t T h o m p s o n

j u s t i f i a b l y r e l i e d o n A l t a v i l l a ’ s m i s r e p r e s e n t a t i o n i s f r i v o l o u s

. S e e R i s s m a n v

.

R i s s m a n

, 2 1 3 F

. 3 d 3 8 1

, 3 8 3

– 8 4 ( 7 t h C i r

. 2 0 0 0 ) ( j o i n i n g t w o c o u r t s o f a p p e a l s i n

h o l d i n g “ t h a t n o n

- r e l i a n c e c l a u s e s i n w r i t t e n s t o c k

- p u r c h a s e a g r e e m e n t s p r e c l u d e

a n y p o s s i b i l i t y o f d a m a g e s u n d e r t h e f e d e r a l s e c u r i t i e s l a w s f

o r p r i o r o r a l

s t a t e m e n t s ” )

. A n d b e c a u s e j u s t i f i a b l e r e l i a n c e o n a m i s r e p r e s e n t a t i o n i s a

p r e r e q u i s i t e t o a R u l e 1 0 b

- 5 r e c o v e r y

, e v e n t h i s h y p o t h e t i c a l R u l e 1 0 b

- 5 c l a i m

u t t e r l y f a i l s

.

A n y R u l e 1 0 b

- 5 c l a i m b a s e d o n T h o m p s o n ’ s J u l y 2 0 0 6 o p e n m a r k e t

p u r c h a s e i s p r e p o s t e r o u s

. I t i s h o r n b o o k l a w t h a t a n i n v e s t o r w h o i s a w a r e o f t h e

f r a u d u l e n t c o n d u c t c a n n o t r e c o v e r i n a R u l e 1 0 b

- 5 a c t i o n p r e d i c a t e d o n t h a t s a m e

f r a u d u l e n t c o n d u c t b e c a u s e i t i s i m p o s s i b l e t o p r o v e r e l i a n c e o r t r a n s a c t i o n

c a u s a t i o n

. S e e T h o m a s L e e H a z e n

, T r e a t i s e o n t h e L a w o f S e c u r i t i e s R e g u l a t i o n §

1 2 ( 1 0 ) ( 6 t h e d

. ) ; s e e

, e

. g

. , G u r a r y v

. W i n e h o u s e

, 1 9 0 F

. 3 d 3 7

, 4 4

– 4 5 ( 2 d C i r

.

1 9 9 9 )

. A n d i n d e e d

, b y T h o m p s o n ’ s o w n a d m i s s i o n

, h e b e c a m e a w a r e o f t h e

a l l e g e d f r a u d o n M a y 1

, 2 0 0 6

, f

u l l y t w o m o n t h s b e f

o r e h i s o p e n m a r k e t p u r c h a s e

.

( F i r s t A m

. C o m p l

. ¶ 9 7 ( “ T h o m p s o n d i d n o t d i s c o v e r t h e o m i s s i o n s s e t f o r t h a b o v e

111u n t i l M a y 0 1

, 2 0 0 6

. ” )

. ) W o r s e t h a n s i m p l y k n o w i n g o f t h e a l l e g e d f r a u d

, w h e n

w e a r i n g t h e o p e n m a r k e t p u r c h a s e r h a t

, T h o m p s o n c a u s e d h i s o w n h a r m

.

S p e c i f i c a l l y

, h e b r o u g h t s u i t i n a n I n d i a n a c i r c u i t c o u r t

, t h e n

, f i v e m o n t h s l a t e r

,

s u e d i n f e d e r a l c o u r t p u r p o r t i n g t o r e p r e s e n t a c l a s s o f s h a r e h o l d e r s i n j u r e d b y

M e d i a ’ s f

a i l u r e t o d i s c l o s e t h e f

a c t u a l b a s i s o f h i s I n d i a n a l a w s u i t

. T h u s

, t h e r e c a n

b e n o d o u b t t h a t T h o m p s o n p u r c h a s e d M e d i a s t o c k i n t h e o p e n m a r k e t w i t h f u l l

a w a r e n e s s o f t h e a l l e g e d f r a u d

, i f f r a u d t h e r e w a s

, a n d c o u l d n o t

, u n d e r a n y

c i r c u m s t a n c e s

, h a v e s u c c e e d e d i n a R u l e 1 0 b

- 5 c l a i m b a s e d o n t h a t p u r c h a s e

.

E v e n a s s u m i n g T h o m p s o n d i d n o t h a v e k n o w l e d g e

, h e c o u l d n e v e r h a v e

p r o v e d l o s s c a u s a t i o n

. T h o m p s o n p u r c h a s e d 1 0

, 0 0 0 s h a r e s o n J u l y 1 7

, 2 0 0 6

, a t

. 4 2

c e n t s a s h a r e

, o n l y t o s e l l t h e m t h e v e r y n e x t d a y a t

. 3 9 c e n t s p e r s h a r e

. T o p r o v e

l o s s c a u s a t i o n

, T h o m p s o n w o u l d h a v e n e e d e d t o s h o w t h a t t h e m a r k e t b e c a m e

a w a r e o f t h e a l l e g e d f

r a u d i n t h e t w e n t y

- f

o u r h o u r s b e t w e e n h i s p u r c h a s e a n d s a l e

.

T h o m p s o n a l l e g e d n o s u c h d i s c l o s u r e

, n o r c o u l d I f i n d o n e

. I n f

a c t

, M e d i a d i d n o t

f i l e a n y S E C d o c u m e n t s o n J u l y 1 7 t h o r J u l y 1 8 t h

, o r a n y d a y t h e r e a f t e r u n t i l

A u g u s t 1 4

, 2 0 0 6

.

F o r m a n y o f t h e s a m e r e a s o n s

, T h o m p s o n c o u l d n e v e r h a v e “ f a i r l y a n d

a d e q u a t e l y ” r e p r e s e n t e d t h e s u b c l a s s o f p u r c h a s e r s w h o b o u g h t M e d i a ’ s s h a r e s i n

t h e o p e n m a r k e t a s r e q u i r e d b y F e d e r a l R u l e o f C i v i l P r o c e d u r e R u l e 2 3 ( a ) ( 4 )

.

112U n l i k e T h o m p s o n

, m o s t o p e n m a r k e t p u r c h a s e r s w h o p u r c h a s e d b e f o r e t h e

d i s c l o s u r e o f T h o m p s o n ’ s I n d i a n a l a w s u i t

, w o u l d n o t h a v e h a d a c t u a l k n o w l e d g e

o f M e d i a ’ s u s e o f a n u n r e g i s t e r e d b r o k e r

. S e e

, e

. g

. , G a r y P l a s t i c P a c k a g i n g C o r p

.

v

. M e r r i l l L y n c h

, P i e r c e

, F e n n e r & S m i t h

, I n c

. , 9 0 3 F

. 2 d 1 7 6

, 1 8 0 ( 2 d C i r

. 1 9 9 0 )

( “ [ C ] l a s s c e r t i f

i c a t i o n i s i n a p p r o p r i a t e w h e r e a p u t a t i v e c l a s s r e p r e s e n t a t i v e i s

s u b j e c t t o u n i q u e d e f

e n s e s w h i c h t h r e a t e n t o b e c o m e t h e f o c u s o f t h e l i t i g a t i o n

. . . .

t h e r e i s a d a n g e r t h a t t h e a b s e n t c l a s s m e m b e r s w i l l s u f f e r i f t h e i r r e p r e s e n t a t i v e i s

p r e o c c u p i e d w i t h d e f

e n s e s u n i q u e t o i t

. ” ) ( i n t e r n a l c i t a t i o n s o m i t t e d )

. 7 2

W o r s e

, T h o m p s o n h a d a f u n d a m e n t a l c o n f

l i c t o f i n t e r e s t w i t h t h e o p e n

m a r k e t p u r c h a s e r s

. A s s u m i n g

, f o r t h e s a k e o f a r g u m e n t

, t h a t T h o m p s o n c o u l d

h a v e r e s c i n d e d h i s p r i v a t e o f f e r i n g p u r c h a s e

, M e d i a ’ s i l l e g a l s a l e o f s e c u r i t i e s g a v e

h i m a d e f

a c t o “ p u t o p t i o n ” a t t w o d o l l a r s p e r

- s h a r e

. A p u t o p t i o n g r a n t s t h e h o l d e r

t h e r i g h t t o s e l l t h e s e c u r i t i e s a t a g i v e n p r i c e ( t h e s e l l e r p r o m i s e s t o b u y t h e

I n addition to Thompson’s inabilit y to satisfy the Rule 23(a) (4) r equire ment of “f airly 7 2

and ade quately ” re prese nting the c lass, Thompson’s class would likely fail for want of ty

picality

and commonality . Fe d. R. Civ. P . 23(a) (2)–( 3); see Coope r v. Southern Co., 390 F.3d 695, 713

(11th Cir. 2004) (“ A class r epre sentative must possess the same inter est and suff er the same

injury as the c lass members in orde r to be ty pical under

Rule 23(a) (3). Ty

picality measure s

whether a suff icient nexus ex ists between the c laims of the named r epre sentatives and those of

the class a t larg e.”) (interna l citations and quotations omitt ed) ( overr uled on other g rounds by

, Ash v. Ty son Foods, I nc., 546 U.S. 454, 457, 126 S.Ct. 1195, 1197, 163 L . Ed. 2d 1053 (2006))

. Be cause Thompson’s initial purchase w as in a priva te offe ring , Thompson had re ceive d and

relied on infor

mation (the off

ering documents and subsc ription ag ree ment) not ava ilable to those

who boug ht shares in the ope n marke t. Accor dingly , it is hi g hly doubtful that he could ha ve

fulfilled the ty

picality and commonality

require ments of Rule 23(a) (2) a nd (3).

113s e c u r i t i e s a t t h a t p r i c e )

. T h u s i f T h o m p s o n c o u l d h a v e r e s c i n d e d h i s p u r c h a s e

,

M e d i a w o u l d h a v e h a d t o r e t u r n h i s f u l l p u r c h a s e p r i c e ( t w o d o l l a r s p e r s h a r e ) i n

e x c h a n g e f

o r t h e s e c u r i t i e s ( 5 0

, 0 0 0 s h a r e s p l u s w a r r a n t s )

. O f c o u r s e

, T h o m p s o n

w o u l d n e v e r h a v e e x e r c i s e d t h i s r i g h t i f t h e v a l u e o f h i s s h a r e s g r e w b e y o n d t w o

d o l l a r s p e r s h a r e ; b u t i f t h e y f e l l

, h e c o u l d h a v e r e c o u p e d h i s e n t i r e i n v e s t m e n t l e s s

t h e c o s t o f e n f

o r c e m e n t

. T h o m p s o n e s s e n t i a l l y h a d a r i s k

- f r e e i n v e s t m e n t t h a t

h a r m e d t h e o p e n m a r k e t p u r c h a s e r s

. A c c o r d i n g l y

, T h o m p s o n “ d e r i v e [ d ] a n e t

e c o n o m i c b e n e f

i t f r o m t h e v e r y s a m e c o n d u c t a l l e g e d t o b e w r o n g f u l ” t o t h e o p e n

m a r k e t p u r c h a s e r s

. V a l l e y D r u g C o

. v

. G e n e v a P h a r m

. , I n c

. , 3 5 0 F

. 3 d 1 1 8 1

, 1 1 9 0

( 1 1 t h C i r

. 2 0 0 3 )

. W h e n a n a m e d p l a i n t i f f h a s s u c h a c o n f

l i c t w i t h t h e p r o p o s e d

c l a s s

, t h e n a m e d p l a i n t i f f c a n n e v e r a d e q u a t e l y r e p r e s e n t t h e c l a s s

. S e e i d

. a t 1 1 8 9

( “ A f u n d a m e n t a l c o n f

l i c t e x i s t s w h e r e s o m e p a r t y m e m b e r s c l a i m t o h a v e b e e n

h a r m e d b y t h e s a m e c o n d u c t t h a t b e n e f i t t e d o t h e r m e m b e r s o f t h e c l a s s

. I n s u c h a

s i t u a t i o n

, t h e n a m e d r e p r e s e n t a t i v e s c a n n o t ‘ v i g o r o u s l y p r o s e c u t e t h e i n t e r e s t s o f

t h e c l a s s t h r o u g h q u a l i f i e d c o u n s e l

. ’ ” ) ( q u o t i n g I n r e H e a l t h S o u t h

, 2 1 3 F

. R

. D

. 4 4 7

,

4 6 1

– 6 2 ( N

. D

. A l a

. 2 0 0 3 ) )

. N o r e a s o n a b l y c o m p e t e n t a t t o r n e y c o u l d h a v e

c o n t e n d e d o t h e r w i s e

. 7 3

Her e, of c ourse, the pla intiffs’ attorne y s did so contend by arg uing to the district c ourt 7 3

that “ther e is no conflict be tween Plaintiffs a nd other c lass members—a ll investors are a ligne d in

the common intere st of rec overing the maxim um possible damag es fr om defe ndants.” (Me m. of

114b

. J a c o b y ’ s R u l e 1 0 b

- 5 C l a i m s

I n o w t u r n t o J a c o b y ’ s R u l e 1 0 b

- 5 c l a i m s i n t h e f i r s t a n d s e c o n d a m e n d e d

c o m p l a i n t s

. U n d e r a l i t e r a l r e a d i n g

, J a c o b y ’ s c l a i m i s s i m p l y l a u g h a b l e

. J a c o b y

a l l e g e d t h a t M e d i a a n d i t s o f f i c e r s “ o f f e r e d a n d s o l d R e l a t i o n s e r v e [ M e d i a ]

s e c u r i t i e s i n v i o l a t i o n o f 1 5 U

. S

. C

. A

. § 1 7 q a n d R u l e 1 0 b

- 5

. ” ( S e c o n d A m

. C o m p l

.

¶ 1 0 3 ( e m p h a s i s a d d e d ) ; s e e a l s o F i r s t A m

. C o m p l

. ¶ 1 2 7 ( “ T h e D e f e n d a n t s

,

i n c l u d i n g t h e I n d i v i d u a l D e f e n d a n t s

. . . o f

f e r e d a n d s o l d t h e s h a r e s o f

R e l a t i o n s e r v e [ M e d i a ]

. . . . ” ) ( e m p h a s i s a d d e d )

. ) J a c o b y p u r p o r t e d t o b r i n g t h i s

c l a i m o n b e h a l f o f t h e o p e n m a r k e t p u r c h a s e r s

, b u t M e d i a n e v e r “ o f f e r e d a n d s o l d ”

s e c u r i t i e s i n a n y p u b l i c o f f e r i n g

. R a t h e r

, M e d i a o n l y s o l d s e c u r i t i e s i n e x e m p t

p r i v a t e o f

f e r i n g s

. N o R u l e 1 0 b

- 5 c l a i m c a n s u r v i v e o n t h e b a s i s o f a n o f f e r a n d

s a l e o f s e c u r i t i e s t h a t n e v e r e x i s t e d

.

I n a n a b u n d a n c e o f c a u t i o n

, h o w e v e r

, I w i l l r e a d J a c o b y ’ s R u l e 1 0 b

- 5 c l a i m

b r o a d l y t o i n v o k e t h e f

r a u d

- o n

- t h e

- m a r k e t d o c t r i n e

. U n d e r t h e f r a u d

- o n

- t h e

m a r k e t d o c t r i n e

, a p l a i n t i f f m u s t s t i l l p l e a d a l l t h e e l e m e n t s o f a R u l e 1 0 b

- 5 c l a i m

,

b u t b e n e f

i t s f r o m a p r e s u m p t i o n t h a t t h e p l a i n t i f f i n d i r e c t l y r e l i e d o n t h e a l l e g e d

m i s r e p r e s e n t a t i o n b y r e l y i n g o n t h e i n t e g r i t y o f t h e s t o c k p r i c e e s t a b l i s h e d b y t h e

L aw in Supp. of Pls.’ Mot. for Appointment as Co-L ead Pls. 12, Nov. 3, 2006.)

115m a r k e t

. S e e B a s i c

, 4 8 5 U

. S

. a t 2 4 2

, 1 0 8 S

. C t

. a t 9 8 9 ( c i t i n g P e i l v

. S p e i s e r

, 8 0 6

F

. 2 d 1 1 5 4

, 1 1 6 0

– 6 1 ( 3 d C i r

. 1 9 8 6 ) )

.

R e a d b r o a d l y

, J a c o b y c l a i m e d t h a t M e d i a m i s s t a t e d i t s f i n a n c i a l h e a l t h i n

s u n d r y S E C f

i l i n g s b y f

a i l i n g t o r e p o r t “ $ 2

, 0 0 0

, 0 0 0 i n c o n t i n g e n t c i v i l a n d c r i m i n a l

l i a b i l i t i e s a n d o t h e r m a t e r i a l i n f o r m a t i o n t o t h e i n v e s t i n g p u b l i c

. ” ( E

. g

. S e c o n d

A m

. C o m p l

. ¶ 1 1

. ) I n t h e f i r s t a m e n d e d c o m p l a i n t

, J a c o b y a s s e r t e d f o u r t h e o r i e s o f

f r a u d u l e n t o m i s s i o n s

, w h i c h f o r m e d t h e b a s i s o f t h i s l i a b i l i t y : t h e u n r e g i s t e r e d

b r o k e r t h e o r y

, t h e k i c k b a c k t h e o r y

, t h e o v e r s t a t e d

- i n c o m e t h e o r y a n d t h e s u e d

d i r e c t o r t h e o r y

. I n t h e s e c o n d a m e n d e d c o m p l a i n t

, J a c o b y o n l y r e p l i c a t e d t h e

u n r e g i s t e r e d

- b r o k e r t h e o r y

. W h e t h e r b a s e d o n a n y o f t h e s e t h e o r i e s

, J a c o b y ’ s 7 4

R u l e 1 0 b

- 5 c l a i m i s l e g a l l y f r i v o l o u s

.

T h e t h r e e a b a n d o n e d t h e o r i e s a r e t h e e a s i e s t t o c o n c l u d e a r e f r i v o l o u s

.

A s s u m i n g M e d i a h a d a d u t y t o d i s c l o s e t h e k i c k b a c k s

, o v e r s t a t e d i n c o m e

, a n d s u e d

d i r e c t o r

, J a c o b y n e v e r a l l e g e d t h a t t h e t r u t h b e c a m e k n o w n t o t h e m a r k e t a n d t h a t

t h i s f a i l u r e c a u s e d a n y e c o n o m i c l o s s t o h i m

. N o R u l e 1 0 b

- 5 c l a i m c a n s u r v i v e

Actually , J acoby

also pled the sued- direc tor theory of liability . (Second A m. Compl

. ¶ 7 4

95(b).) I n J acoby ’s re sponse to the def endants’ motion to dismiss , howeve r, Jacoby abandone d

it and did not press it here. ( See, e.g ., Pls.’ Mem. in Resp. to Defs.’ Mot. to Dismiss 7, n.3, April

30, 2007 (“Jacoby

withdraws this alleg ation as [Media] is corr ect in its . . . assertion that ther e is

no nexus between this specific failure and Jacoby ’s damag es.”) .) Simil arly , J acoby did plead the

fac ts underly ing the overstate d-income the ory , but did not assert it as an ac tionable Rule 10b-5

omission. (S ee Sec ond Am. Compl. ¶¶ 60, 3, 86, 95.) J acoby did not press any

claim base d on

overstate d income her e.

116w i t h o u t t h e s e e l e m e n t s ; J a c o b y c o m p l e t e l y f a i l e d t o p l e a d t h e m

— d e s p i t e t h r e e

c h a n c e s t o d o s o

— r e n d e r i n g a n y c l a i m b a s e d o n t h e t h e o r i e s f r i v o l o u s

. 7 5

O n l y t h e u n r e g i s t e r e d

- b r o k e r t h e o r y r e m a i n s

. O n t h i s t h e o r y

, J a c o b y ’ s

f r a u d

- o n

- t h e

- m a r k e t

, R u l e 1 0 b

- 5 c l a i m f a i l s b e c a u s e J a c o b y n e v e r i d e n t i f i e d a n

a c t i o n a b l e o m i s s i o n

, u t t e r l y f a i l e d t o p l e a d s c i e n t e r

, a n d a d v a n c e d a n u n t e n a b l e

t h e o r y o f l o s s c a u s a t i o n

.

i

. J a c o b y F a i l e d t o I d e n t i f y a n A c t i o n a b l e O m i s s i o n

M o s t i m p o r t a n t l y

, J a c o b y n e v e r i d e n t i f i e d a n y a c t i o n a b l e o m i s s i o n

. U n d e r

t h e p l a i n l a n g u a g e o f R u l e 1 0 b

- 5

, f o r t h e o m i s s i o n o f a m a t e r i a l f a c t t o b e

a c t i o n a b l e

, t h e r e m u s t h a v e b e e n a d u t y t o d i s c l o s e t h e f a c t

. 1 7 C

. F

. R

. § 2 4 0

. 1 0 b

- 5

( 2 0 0 5 ) ( p r o h i b i t i n g t h e o m i s s i o n o f a m a t e r i a l f a c t “ n e c e s s a r y t o m a k e t h e

s t a t e m e n t s m a d e

. . . n o t m i s l e a d i n g

. ” ) ; B a s i c

, 4 8 5 U

. S

. a t 2 3 9

, n

. 1 7

, 1 0 8 S

. C t

. a t

9 8 7

, n

. 1 7 ( “ S i l e n c e

, a b s e n t a d u t y t o d i s c l o s e

, i s n o t m i s l e a d i n g u n d e r R u l e

1 0 b

- 5

. ” )

. M o s t c o m m o n l y

, a d u t y t o d i s c l o s e i s t r i g g e r e d e i t h e r b e c a u s e t h e

o m i t t e d f a c t w a s n e c e s s a r y t o r e n d e r a p r e e x i s t i n g s t a t e m e n t n o t m i s l e a d i n g

, o r

b e c a u s e t h e s e c u r i t i e s l a w o t h e r w i s e r e q u i r e d i t s d i s c l o s u r e

. T h o m a s L e e H a z e n

,

s u p r a

, § 1 2

. 1 9 ( 1 )

.

This rea soning a lso applies to any claim base d on these a lleg ed omissions by 7 5

Thompson in the first amende d complaint.

117H e r e

, J a c o b y i d e n t i f i e d n o s p e c i f

i c s t a t e m e n t s m a d e b y t h e d e f e n d a n t s

r e n d e r e d a c t u a l l y m i s l e a d i n g b y t h e a l l e g e d o m i s s i o n

, o r a n y o t h e r d u t y t o s p e a k

.

T h e c l o s e s t J a c o b y c a m e w a s q u o t i n g t h e S a r b a n e s

- O x l e y A c t c e r t i f i c a t i o n s s i g n e d

b y O f f i c e r s A d l e r a n d W a s s e r m a n o n M e d i a ’ s A u g u s t 2 0 0 5 F o r m 1 0

- Q S B

.

( S e c o n d A m

. C o m p l

. ¶ 5 8

. ) J a c o b y a l l e g e d t h a t A d l e r a n d W a s s e r m a n c e r t i f i e d 7 6

t h a t t h e Q u a r t e r l y R e p o r t “ c o m p l i e [ d ] w i t h t h e r e q u i r e m e n t s o f S e c t i o n 1 3 ( a ) o r

1 5 ( d ) o f t h e S e c u r i t i e s E x c h a n g e A c t o f 1 9 3 4 [ a n d t h a t ] t h e i n f o r m a t i o n c o n t a i n e d

i n t h e R e p o r t f

a i r l y p r e s e n t [ e d ]

, i n a l l m a t e r i a l r e s p e c t s

, t h e f i n a n c i a l c o n d i t i o n a n d

r e s u l t s o f t h e o p e r a t i o n s o f t h e C o m p a n y

. ” ( I d

. ) J a c o b y f u r t h e r a l l e g e d t h a t t h e

“ s t a t e m e n t s ” A d l e r a n d W a s s e r m a n m a d e i n t h e i r c e r t i f i c a t i o n s “ w e r e f

a l s e a n d

J acoby also pointed to other Sarba nes-Oxley

cer tifications. I say

this was the closest 7 6

J acoby came beca

use the Aug ust 2005 certific ations were closest in time to Sum mit’s alleg ed

illega l conduct.

J acoby also pointed to Media’s f ailure to disclose Summit’s involvement in the J une

private of fer ing on SEC For

m D filed on Jul y

16, 2005. The 2005 F orm D re quired disclosure of

cer tain backg round informa tion with respect to “e ach pe rson who has be en or w ill be paid or

g iven, direc tly

or indirec tly , any

commission or simi lar re munera tion for solicitation of

purcha sers in conne ction with sales of sec urities in the offe ring .” Assuming , for the sa ke of

arg ument, that Media kne w that Summit “solicited” pur chase rs—which would g o bey ond mere ly

acting as a f

inder—this amounted to an omission. The trouble f or Jacoby is that he did not base

his claim on this omi ssion. Rather, he a lleg ed that Media failed to disclose a

nd acc ount for the

$2 milli on conting ent liability flowing from the use of an unr eg istered br oker. I ndeed, if the

For m D omission had formed the ba sis for his claim, this alleg ed omission was corr ecte d on

Marc h 20, 2006, when Me dia disclosed its Aug ust 2005 pay ment to Summ it of a total “succ ess

fee ” of $28,500 “ in connec tion with a private plac ement of its common stock.” Rela tionserve

Media, I nc., Reg istration Statement under the Sec urities Act of 1933 ( For m SB-2), a t F-22

(Mar ch 20, 2005). Jacoby , howeve r, alleg ed that the omission was not corr ecte d until the May

23, 2006 disclosure of T hompson’s I ndiana law suit.

118m i s l e a d i n g b e c a u s e t h e y f a i l e d t o i n d i c a t e t h a t R e l a t i o n s e r v e [ M e d i a ] a n d i t s

o f f i c e r s a n d d i r e c t o r s h a d v i o l a t e d s t a t e a n d f e d e r a l s e c u r i t i e s l a w

, p r e s e n t i n g a

$ 2

, 0 0 0

, 0 0 0

. 0 0 c o n t i n g e n t c i v i l a n d c r i m i n a l l i a b i l i t y

. ” ( I d

. ¶ 5 9

. ) A s t h e d i s t r i c t

c o u r t a p t l y n o t e d

, h o w e v e r

, “ J a c o b y ’ s a r g u m e n t i s c i r c u l a r b e c a u s e i t c o n t e n d s t h a t

t h e f i l i n g w a s m i s l e a d i n g p r e c i s e l y b e c a u s e t h e f i l i n g p r o m i s e d n o t t o b e

m i s l e a d i n g

. ” ( D i s m i s s a l O r d e r 7

, J u n e 1 2

, 2 0 0 7

. )

A g a i n e n d e a v o r i n g t o g i v e t h e p l a i n t i f f s ’ l a w y e r s t h e b e n e f

i t o f t h e d o u b t

, I

w i l l n o t s t o p h e r e

. I w i l l a s s u m e t h a t J a c o b y m e a n t t o s a y t h a t

, a f t e r t h e J u n e 2 0 0 5

p r i v a t e o f

f e r i n g

, M e d i a h a d a d u t y t o r e p o r t t h e c o n t i n g e n t l i a b i l i t y o n i t s f i n a n c i a l

s t a t e m e n t s o r S E C r e p o r t s e i t h e r b e c a u s e o f s p e c i f i c S E C d i s c l o s u r e r e q u i r e m e n t s

o r a G A A P v i o l a t i o n ( b e c a u s e M e d i a p r o m i s e d t o c o m p l y w i t h G A A P )

. E v e n 7 7

s o

, J a c o b y d i d n o t p o i n t t o a n a c t i o n a b l e o m i s s i o n

.

A s r e l e v a n t h e r e

, t w o l i n e

- i t e m s o n t h e 2 0 0 5 F o r m 1 0

- Q S B r e q u i r e d

m a n a g e m e n t t o d i s c l o s e c e r t a i n c o n t i n g e n t l i a b i l i t i e s

. S e e 1 7 C

. F

. R

. § 2 2 8

. 1 0 e t

s e q

. ( 2 0 0 5 ) ( r e p e a l e d 2 0 0 8 )

. F i r s t

, I t e m 1 0 3 o f R e g u l a t i o n S

- B r e q u i r e d d i s c l o s u r e

o f “ a n y p e n d i n g l e g a l p r o c e e d i n g ” o r o f “ a n y p r o c e e d i n g t h a t a g o v e r n m e n t a l

a u t h o r i t y i s c o n t e m p l a t i n g ( i f t h e s m a l l b u s i n e s s i s s u e r i s a w a r e o f t h e

Relationserve Media I

nc., Qua rterly Report (F orm 10-QSB ), at 6 (A ug . 18, 2005) 7 7

(“The consolidated fina

ncial stateme nts are pr epar ed in ac corda nce w ith ge nera lly

acc epted

acc ounting pr inciples in the United States of Ame rica (‘US GAA P’).”)

.

119p r o c e e d i n g )

. ” i d

. § 2 2 8

. 1 0 3

. S e c o n d

, I t e m 3 0 3 o f R e g u l a t i o n S

- B r e q u i r e d

d i s c l o s u r e o f “ [ a ] n y k n o w n

. . . u n c e r t a i n t i e s t h a t h a v e o r a r e r e a s o n a b l y l i k e l y t o

h a v e a m a t e r i a l i m p a c t o n t h e s m a l l b u s i n e s s i s s u e r ’ s s h o r t

- t e r m o r l o n g

- t e r m

l i q u i d i t y

. ” I d

. § 2 2 8

. 3 0 3 ( b ) ( 1 ) ( i ) ( e m p h a s i s a d d e d )

. 7 8

F o r i t s p a r t

, a t t h e t i m e

, G A A P

, v i a F i n a n c i a l S t a n d a r d s A c c o u n t i n g B o a r d

( “ F A S B ” )

, F i n a n c i a l A c c o u n t i n g S t a n d a r d s 5 ( “ F A S 5 ” )

, r e q u i r e d t h e r e p o r t i n g o f 7 9

a “ l o s s c o n t i n g e n c y ” w h e n “ t h e r e [ w a ] s a t l e a s t a r e a s o n a b l e p o s s i b i l i t y t h a t a l o s s 8 0

o r a n a d d i t i o n a l l o s s m a y h a v e b e e n i n c u r r e d

. ” F A S 5

, ¶ 1 0 ; s e e a l s o i d

. ¶ 3

( d i s t i n g u i s h i n g l o s s c o n t i n g e n c i e s t h a t a r e “ p r o b a b l e

, ” t h a t i s

, “ t h e f u t u r e e v e n t o r

e v e n t s a r e l i k e l y t o o c c u r ; ” f r o m t h o s e t h a t a r e “ r e a s o n a b l y p o s s i b l e

, ” t h a t i s

, “ t h e

c h a n c e o f t h e f

u t u r e e v e n t o r e v e n t s o c c u r r i n g i s m o r e t h a n r e m o t e b u t l e s s t h a n

l i k e l y ; ” f r o m t h o s e t h a t a r e “ r e m o t e

, ” t h a t i s

, “ t h e c h a n c e o f t h e f u t u r e e v e n t o r

The a ssumption t hat I tem 303 of Reg ulation S-B would impose an a ctionable duty to 7 8

speak unde r Rule 10b-5 is g ener ous. At least the Third Circuit has e x pressly held that “a

violation of SK-303’s re porting require ments does not automatically g ive rise to a ma terial

omission under Rule 10b-5” a nd that wher e plaintiffs fa il to plead “any actionable

misrepre sentation or omission” under Rule 10b- 5, I tem 303 cannot pr ovide a ba sis for liability

. Ora n v. Stafford, 226 F .3d 275, 288 (3d Cir. 2000). I tem 303 of the 2005 iteration of Reg ulation

S-B a nd I tem 303 of Reg ulation S-K are materia lly identical.

See City of Monroe Employ ees Ret. Sy s. v. Br idge stone Corp., 399 F.3d 651, 677–78 7 9

(6th Cir. 2005) (identify

ing F AS 5 as GAAP); Ga nino v. Cit izens Util s. Co., 228 F.3d 154, 160

n.4 (2d Cir. 2000) (“ The SEC treats the F ASB’s standa rds as a uthoritative.”). F AS 5 has since

been supe rsede d by

FASB ’s codific ation of GAA P, which beca me ef fec tive in 2009.

FAS 5 def

ined a “ conting ency ” as “ an existi ng condition, situation, or set of 8 0

circ umstances involving uncer tainty as to possible g ain . . . or loss.” F AS 5, ¶ 1.

120e v e n t s o c c u r r i n g i s s l i g h t ” )

. G A A P d i d n o t r e q u i r e d i s c l o s u r e o f l o s s c o n t i n g e n c i e s

a r i s i n g o u t o f “ u n a s s e r t e d c l a i m s ” w h e n t h e r e w a s n o i n d i c a t i o n t h a t t h e p o t e n t i a l

c l a i m a n t w a s a w a r e o f t h e c l a i m

, u n l e s s i t w a s b o t h “ p r o b a b l e t h a t a c l a i m w [ o u l d ]

b e a s s e r t e d ” a n d t h e r e w a s a “ r e a s o n a b l e p o s s i b i l i t y t h a t t h e o u t c o m e w [ o u l d ] b e

u n f a v o r a b l e

. ” F A S 5

, ¶ 1 0

. 8 1

D e s p i t e J a c o b y ’ s s h o t g u n p l e a d i n g s

, h i s a l l e g a t i o n s d o n o t e v e n r e m o t e l y

s u g g e s t t h a t M e d i a o r a n y o f i t s o f f i c e r s k n e w e n o u g h a b o u t T h o m p s o n ’ s p o s s i b l e

c l a i m t o t r i g g e r a r e p o r t i n g o b l i g a t i o n u n d e r R e g u l a t i o n S

- B o r G A A P

. F o r o n e

, a s

o f A u g u s t 2 0 0 5

, M e d i a h a d n o d u t y t o r e p o r t t h e c l a i m a s a p e n d i n g l e g a l

p r o c e e d i n g

. O t h e r t h a n T h o m p s o n ’ s M a r c h 3

, 2 0 0 6

, I n d i a n a l a w s u i t

, J a c o b y d i d

n o t a l l e g e t h a t a n y p r i v a t e p l a c e m e n t p u r c h a s e r s u e d M e d i a

. N o r d i d J a c o b y a l l e g e

a n y g o v e r n m e n t i n v e s t i g a t i o n i n t o M e d i a ’ s c o n t r a c t w i t h S u m m i t ( d e s p i t e M e d i a ’ s

Appendix A of FAS 5 g ave this example: 8 1

[A] n enter

prise may believe the re is a possibility that it has infring ed on anothe r

enter prise’s pa tent rig hts, but the enterpr ise owning the patent r ights ha s not

indicated a

n intention to take any

action and ha s not even indica ted an a war eness

of the possible infring ement. I n that case , a judg ment must first be made a s to

whether the asser tion of a cla im is probable. I f the judg ment is that assertion is

not probable, no a ccr

ual or disclosure would be re quired. On the other ha nd, if

the judg ment is that assertion is probable, the n a sec ond judgme nt must be made

as to the deg ree of proba

bility of an unf avora ble outcome. . . . I f an unf avora ble

outcome is probable but the amount of loss cannot be rea sonably estimated,

acc rual would not be a

ppropriate , but disclosure would be r equire d . . . .

FAS 5 at ¶ 35.

121f

u l l d i s c l o s u r e o f t h a t a g r e e m e n t i n t h e J u n e 2 0 0 5 F o r m 8

- K )

. A s a r e s u l t

, M e d i a

h a d a b s o l u t e l y n o d u t y t o r e p o r t t h e s o

- c a l l e d c o n t i n g e n t l i a b i l i t y a s a p e n d i n g l e g a l

p r o c e e d i n g

.

N o r d i d J a c o b y a l l e g e f a c t s t h a t w o u l d h a v e r e q u i r e d d i s c l o s u r e u n d e r I t e m

3 0 3 o f R e g u l a t i o n S

- B

, “ M a n a g e m e n t ’ s D i s c u s s i o n a n d A n a l y s i s

. ” J a c o b y c l a i m e d

t h a t M e d i a s h o u l d h a v e d i s c l o s e d a c o n t i n g e n t l i a b i l i t y a r i s i n g o u t o f t h e c o n d u c t o f

a n o t h e r e n t i t y

, S u m m i t

. I n t h e c o n s u l t i n g a g r e e m e n t

, S u m m i t r e p r e s e n t e d t h a t i t

w a s n o t a r e g i s t e r e d b r o k e r a n d t h a t i t d i d n o t n e e d t o b e a r e g i s t e r e d b r o k e r

,

b e c a u s e i t w o u l d o n l y a c t a s a f i n d e r

. U n d e r f

e d e r a l l a w

, t h i s c o n t r a c t w a s n o t p e r

s e i l l e g a l

. S e e P a u l A n k a

, S E C N o

- A c t i o n L e t t e r

, F e d

. S e c

. L

. R e p

. ¶ 7 9

, 7 9 7 ( J u l y

2 4

, 1 9 9 1 ) ( g r a n t i n g n o a c t i o n r e l i e f t o a f i n d e r w h o w o u l d m e r e l y r e f e r a c c r e d i t e d

i n v e s t o r s t o t h e i s s u e r )

. S t a t e r e g u l a t i o n o f b r o k e r / d e a l e r s a n d f i n d e r s v a r i e s

.

T h u s

, t o s h o w a “ k n o w n ” “ u n c e r t a i n t y ” “ r e a s o n a b l y l i k e l y t o h a v e a m a t e r i a l

i m p a c t ” o n M e d i a ’ s l i q u i d i t y

, J a c o b y w o u l d h a v e h a d t o p l e a d s o m e f a c t s

i n d i c a t i n g t h a t M e d i a k n e w t h a t S u m m i t h a d b r e a c h e d i t s a g r e e m e n t a n d v i o l a t e d

f e d e r a l o r s t a t e l a w

. J a c o b y f a i l e d t o d o s o

. 8 2

I n fac t, at the time, Media would ha ve had no r eason to be lieve Summit would breach 8 2

the consulting ag ree ment and broke r a pr ivate off ering purcha se in violation of state law. This is

beca use the c ost to S ummit would have likely been pr ohibitive. Bre aching the consulting

ag ree ment in this m anner would, in addition to rendering Summi t liable to the purcha ser f or

resc ission or damag es, have exposed Media to potential civil and cr iminal liabili ty . I f Media

wer e sued by

a purc haser , the company would have de manded that Summit hold i t harmless.

122J a c o b y i d e n t i f i e d o n l y o n e p r i v a t e o f

f e r i n g t r a n s a c t i o n a l l e g e d l y b r o k e r e d b y

S u m m i t : T h o m p s o n ’ s

. T h e f a c t u a l a l l e g a t i o n s c o n c e r n i n g T h o m p s o n ’ s p u r c h a s e 8 3

f o c u s e d a l m o s t e n t i r e l y o n S u m m i t ’ s i n t e r a c t i o n w i t h T h o m p s o n r a t h e r t h a n

S u m m i t ’ s i n t e r a c t i o n w i t h M e d i a

. ( S e e

, e

. g

. , S e c o n d A m

. C o m p l

. ¶ 4 0 ( “ I n J u n e

2 0 0 5

, A l t a v i l l a b e g a n s o l i c i t i n g T h o m p s o n a n d o t h e r c l a s s m e m b e r s a n d

e n c o u r a g e d t h e m t o p u r c h a s e R e l a t i o n S e r v e [ M e d i a ] s e c u r i t i e s b y w a y o f a p r i v a t e

o f f e r i n g

. ” ) ; i d

. a t ¶ 4 1 ( “ T h o m p s o n

. . . . r e v i e w e d a l l d o c u m e n t s p r e s e n t e d b y

A l t a v i l l a

, a n d l i s t e n e d t o t h e s a l e s p i t c h o f A l t a v i l l a

. ” )

. ) I t s i m p l y d o e s n o t f o l l o w

t h a t b e c a u s e S u m m i t g a v e T h o m p s o n a s a l e s p i t c h t h a t M e d i a k n e w a b o u t t h e s a l e s

p i t c h

, m u c h l e s s t h a t i t w o u l d s u b j e c t M e d i a t o l e g a l l i a b i l i t y

.

T h e c l o s e s t J a c o b y c a m e t o a l l e g i n g M e d i a ’ s a w a r e n e s s o f S u m m i t ’ s b r e a c h

w a s

, “ A l t a v i l l a n e g o t i a t e d t h e p u r c h a s e p r i c e o f [ T h o m p s o n ’ s ] s h a r e s

, f a c i l i t a t e d

t h e w i r e t r a n s f

e r

, a n d o v e r s a w t h e d e l i v e r y o f c e r t i f i c a t e s

. ” ( I d

. a t ¶ 4 2

. ) V i e w e d

i n t h e l i g h t m o s t f

a v o r a b l e t o J a c o b y

, i t c o u l d b e i n f e r r e d t h a t A l t a v i l l a h a d s o m e

c o n t a c t w i t h s o m e o n e a t M e d i a

. I t c a n n o t b e i n f e r r e d t h a t w h o e v e r a c t e d f o r M e d i a

Depe nding on the outcome of the litigation, Summit might have had to re turn to Media the

1,050,000 share s it rece ived pursuant to the c onsulting ag ree ment, as we ll as any finder’ s fee s it

may have e arne d.

I n the first ame nded complaint, Jacoby did alleg e one othe r sale thr oug h an 8 3

unreg istered br oker to a

Stuart Fe ick. I

do not include Fe ick in this discussion because the

alleg ation was a

bandoned a

nd not pled in the second a mended c omplaint. See Part I V.B , infra.

123g l e a n e d t h a t t h e e x c h a n g e g a v e T h o m p s o n t h e a b i l i t y t o r e s c i n d h i s p u r c h a s e

, l e t

a l o n e t h a t i t w a s “ r e a s o n a b l y l i k e l y ” t h a t T h o m p s o n w o u l d s e e k r e s c i s s i o n

.

T h i s i s e s p e c i a l l y s o i n l i g h t o f I n d i a n a l a w

. T h o m p s o n ’ s t h e o r y o f l i a b i l i t y

r e l i e d o n I n d i a n a S e c u r i t i e s L a w § 8 ( b )

. S e c t i o n 8 ( b ) p r o v i d e d

, i n r e l e v a n t p a r t

,

“ [ i ] t i s u n l a w f

u l f o r a [ n ]

. . . i s s u e r t o e m p l o y a n a g e n t u n l e s s t h e a g e n t i s

r e g i s t e r e d

. ” I

. C

. § 2 3

- 2

- 1

- 8 ( b ) ( 2 0 0 5 ) ( r e p e a l e d 2 0 0 8 )

. A n “ a g e n t ” w a s d e f i n e d a s

a n “ i n d i v i d u a l

, o t h e r t h a n a b r o k e r

- d e a l e r

, w h o r e p r e s e n t s a [ n ]

. . . i s s u e r i n

e f f e c t i n g o r a t t e m p t i n g t o e f f e c t p u r c h a s e s o r s a l e s o f s e c u r i t i e s

. ” I

. C

. § 2 3

- 2

- 1

-

1 ( b ) ( 2 0 0 5 ) ( r e p e a l e d 2 0 0 8 )

. H o w e v e r

, a n a g e n t d i d n o t i n c l u d e “ a n i n d i v i d u a l

w h o r e p r e s e n t s a n i s s u e r i n :

. . . ( 2 ) e f f e c t i n g t r a n s a c t i o n s e x e m p t e d b y s e c t i o n 2 ( b )

o f t h i s c h a p t e r

. ” I d

. S e c t i o n 2 ( b ) ( 1 0 )

, i n t u r n

, e x e m p t e d t r a n s a c t i o n s w h e r e : ( A )

t h e i s s u e r r e a s o n a b l y b e l i e v e d t h e r e w e r e n o m o r e t h a n 2 0 p u r c h a s e r s i n I n d i a n a ;

( B ) t h e i s s u e r d i d n o t “ o f f e r o r s e l l

. . . s e c u r i t i e s b y m e a n s o f a f o r m o f g e n e r a l

a d v e r t i s e m e n t o r g e n e r a l s o l i c i t a t i o n ; ” ( C ) t h e i s s u e r r e a s o n a b l y b e l i e v e d t h a t e a c h

p u r c h a s e r w a s b u y i n g f

o r t h e p u r c h a s e r ’ s o w n i n v e s t m e n t a n d w a s a w a r e o f t h e

r e s t r i c t i o n s i m p o s e d o n t h e t r a n s f e r a b i l i t y o f t h e s e c u r i t i e s ; ( D )

. . . ( E )

. . . ( F )

. . . ;

( G ) “ [ t ] h e i s s u e r n e e d n o t [ h a v e ] c o m p l [ i e d ] w i t h c l a u s e ( D )

, ( E )

, o r ( F ) i f :

. . .

t h e r e [ w e r e ] n o t m o r e t h a n f i f t e e n ( 1 5 ) p u r c h a s e r s i n I n d i a n a a n d e a c h I n d i a n a

p u r c h a s e r [ w a ] s a n a c c r e d i t e d i n v e s t o r

. . . . ” I d

.

124M e d i a h a d e v e r y r e a s o n t o b e l i e v e t h a t i t c o m p l i e d w i t h t h i s e x c e p t i o n

.

M e d i a ’ s F o r m D d i s c l o s e d t h a t t h e r e w e r e o n l y f i v e ( 5 ) I n d i a n a i n v e s t o r s t o t a l

. T o

q u a l i f y f o r t h e R u l e 5 0 6 R e g u l a t i o n D e x e m p t i o n u n d e r f e d e r a l l a w

, M e d i a c o u l d

n o t h a v e o f

f e r e d o r s o l d s e c u r i t i e s b y m e a n s o f a g e n e r a l a d v e r t i s e m e n t o r

s o l i c i t a t i o n

. I n s i g n i n g t h e s u b s c r i p t i o n a g r e e m e n t

, T h o m p s o n c e r t i f i e d t h a t h e

p u r c h a s e d t h e u n i t s “ f

o r h i s

. . . o w n a c c o u n t

, f o r i n v e s t m e n t o n l y

. ” R e l a t i o n s e r v e

M e d i a I n c

. , C u r r e n t R e p o r t ( F o r m 8

- K )

, E x

. 4

. 1 ( S u b s c r i p t i o n A g r e e m e n t )

, ¶ 1

. 7

( J u n e 3 0

, 2 0 0 5 )

. A d d i t i o n a l l y

, T h o m p s o n c e r t i f i e d t h a t h e k n e w t h e s h a r e s w e r e

n o t r e g i s t e r e d u n d e r t h e 1 9 3 3 A c t a n d t h a t t h e s h a r e s c o u l d n o t b e t r a d e d u n d e r

f e d e r a l l a w “ f

o r a t l e a s t o n e ( 1 ) y e a r

. . . a n d t h e r e c a n b e n o a s s u r a n c e t h a t t h e

c o n d i t i o n s n e c e s s a r y t o p e r m i t s u c h s a l e s

. . . w i l l e v e r b e s a t i s f i e d

. ” I d

. a t ¶ 1

. 8 ;

s e e a l s o i d

. a t 1

. 2

. F i n a l l y

, T h o m p s o n c e r t i f i e d t h a t h e w a s a n a c c r e d i t e d i n v e s t o r

u n d e r I n d i a n a l a w

. C o n s e q u e n t l y

, e v e n a s s u m i n g t h a t M e d i a k n e w o f S u m m i t ’ s 8 4

Compare I .C. § 23-2-1-1( r) ( 2005) (r epea led 2008) (e quating the def inition of 8 4

“ac cre dited investor” with the de finition in t he fe dera l Securities Act) , and 17 C.F.R. 230.215(f )

(2005) ( “ac cre dited investor” include s a “na tural per son who had a n individual income in excess

of $200,000 in ea ch of the two most rece nt y ear s or joint income with that person’s spouse in

excess of $300,000 in ea ch of those y ear s and has a rea sonable e x pecta tion of rea ching the same

income leve l in the curre nt y ear .”), w ith (Defs.’ Mot. to Dismi ss, at 58, ex. F (Oc t. 20, 2006)

(ce rtify ing tha t Thompson satisfied the requir ements of 17 C.F .R. 230.215(f)) .).

125b r e a c h

, M e d i a w o u l d h a v e h a d l i t t l e r e a s o n t o s u s p e c t t h a t T h o m p s o n w o u l d h a v e

s u e d b e c a u s e h e c o u l d n o t r e c o v e r u n d e r s t a t e l a w

. 8 5

E v e n p u t t i n g t h e e x e m p t i o n a s i d e

, t h i s w o u l d s t i l l b e c o r r e c t

. I n d i a n a l a w

p r e v e n t e d p l a i n t i f

f s w h o k n o w i n g l y p a r t i c i p a t e d i n a v i o l a t i o n o f t h e s e c u r i t i e s l a w

f r o m p r e v a i l i n g

. S e e I

. C

. § 2 3

- 2

- 1

- 1 9 ( a ) ( 2 0 0 5 ) ( r e p e a l e d 2 0 0 8 ) ( “ A p e r s o n w h o

o f f e r s o r s e l l s a s e c u r i t y i n v i o l a t i o n o f t h i s c h a p t e r

. . . i s l i a b l e t o a n y o t h e r p a r t y

t o t h e t r a n s a c t i o n w h o d i d n o t k n o w i n g l y p a r t i c i p a t e i n t h e v i o l a t i o n o r w h o d i d n o t

h a v e

, a t t h e t i m e o f t h e t r a n s a c t i o n

, k n o w l e d g e o f t h e v i o l a t i o n

. . . . ” ) ( e m p h a s i s

a d d e d )

. A g a i n

, i n t h e s u b s c r i p t i o n a g r e e m e n t

, T h o m p s o n c e r t i f i e d h i s k n o w l e d g e

o f S u m m i t ’ s u n r e g i s t e r e d s t a t u s a n d t h a t h e r e l i e d o n l y o n t h e o f f e r i n g d o c u m e n t s

.

B y n o w

, i t s h o u l d b e a p p a r e n t t h a t J a c o b y d i d n o t p l e a d s u f f i c i e n t f a c t s t o

s h o w t h a t t h e a l l e g e d c o n t i n g e n t l i a b i l i t y w a s “ k n o w n

, ” m u c h l e s s “ r e a s o n a b l y

l i k e l y ” t o m a t e r i a l l y i m p a c t M e d i a ’ s l i q u i d i t y

. T h e r e f o r e

, R e g u l a t i o n S

- B i m p o s e d

n o d u t y t o r e p o r t t h e s o

- c a l l e d c o n t i n g e n t l i a b i l i t y o n M e d i a ’ s F o r m s 1 0

- Q S B o r

1 0

- K

. A f

o r t i o r i

, t h e n

, J a c o b y f

a i l e d t o a l l e g e s u f

f i c i e n t f a c t s t o t r i g g e r a r e p o r t i n g

I ndeed, a fter the district court dismissed this case, the plaintiffs pr essed Thompson’s 8 5

state cour t claims in a Florida

circ uit court. That cour

t gr anted the de fenda

nt’s motion to di smiss

in part bec ause Me dia complied with I ndiana’ s limi ted offe ring exemption, I ndiana Code § 23-2-

1-2(1) . Thompson v. Sendtec, I nc., No. 07- 17797(09), slip op. at 4–5 (F la. Cir. Ct. Aug. 6,

2007).

126o b l i g a t i o n u n d e r G A A P

. U n d e r G A A P

, b e c a u s e J a c o b y d i d n o t a l l e g e t h a t a n y

l a w s u i t h a d e v e n b e e n t h r e a t e n e d

, M e d i a h a d a d u t y t o r e p o r t t h e p u r p o r t e d l i a b i l i t y

o n l y i f i t w a s b o t h p r o b a b l e t h a t a s u i t w o u l d b e f i l e d a n d r e a s o n a b l y p o s s i b l e t h a t

M e d i a w o u l d l o s e

. I h a v e a l r e a d y e x p l a i n e d a t l e n g t h w h y M e d i a w o u l d h a v e h a d

n o r e a s o n t o b e l i e v e e i t h e r t h a t T h o m p s o n w o u l d h a v e f i l e d s u i t o r t h a t h e c o u l d

h a v e s u c c e e d

.

A l l i n a l l

, e v e n g i v i n g J a c o b y t h e b e n e f i t o f t h e d o u b t b y a s s u m i n g t h a t h e

i n v o k e d t h e f

r a u d

- o n

- t h e

- m a r k e t t h e o r y

, J a c o b y c o m p l e t e l y f a i l e d t o p o i n t o u t a n y

a c t u a l s t a t e m e n t t h a t w a s m i s l e a d i n g o n a c c o u n t o f t h e a l l e g e d o m i s s i o n o r a n y

o t h e r d u t y t o s p e a k

. E v e n f u r t h e r a s s u m i n g t h a t J a c o b y h a d p l e d a d u t y t o r e p o r t

t h e l i a b i l i t y u n d e r R e g u l a t i o n S

- B o r G A A P

, h i s c l a i m i s s t i l l f r i v o l o u s b e c a u s e h e

a l l e g e d n o f

a c t s t h a t w o u l d h a v e t r i g g e r e d a n y r e p o r t i n g r e q u i r e m e n t

. A n

a c t i o n a b l e m i s r e p r e s e n t a t i o n o r o m i s s i o n i s s t e p o n e i n a n y R u l e 1 0 b

- 5 c l a i m ;

J a c o b y f a i l e d t o t a k e t h i s f

i r s t s t e p

, a n d h i s c l a i m i s t h e r e f o r e f r i v o l o u s u n d e r a n y

r e a s o n a b l e v i e w o f t h e l a w

.

i i

. J a c o b y M a d e O n l y F r i v o l o u s S c i e n t e r A l l e g a t i o n s

J a c o b y ’ s R u l e 1 0 b

- 5 c l a i m i s a l s o l e g a l l y f r i v o l o u s b e c a u s e h e c o m p l e t e l y

f a i l e d t o p l e a d s c i e n t e r w i t h t h e s p e c i f i c i t y r e q u i r e d b y e s t a b l i s h e d l a w

. T h i s i s

e s p e c i a l l y i n e x c u s a b l e w i t h r e s p e c t t o t h e O f f i c e r s b e c a u s e t h e d i s t r i c t c o u r t

127c a u t i o n e d a g a i n s t “ j u s t a u t o m a t i c a l l y s u [ i n g ] e v e r y o n e t h a t h a p p e n s t o b e o n t h e

l i s t o f o f f i c e r s a n d d i r e c t o r s

. ” ( T e l e c o n f e r e n c e T r

. 4

, 6

– 7 ( N o v

. 3

, 2 0 0 6 )

. )

N e g l i g e n c e h a s l o n g b e e n i n s u f f i c i e n t t o t r i g g e r c i v i l l i a b i l i t y u n d e r R u l e

1 0 b

- 5

. I n E r n s t & E r n s t v

. H o c h f e l d e r

, t h e S u p r e m e C o u r t h e l d t h a t a d e f e n d a n t

m u s t a c t w i t h s c i e n t e r

, d e f i n e d a s a “ m e n t a l s t a t e e m b r a c i n g i n t e n t t o d e c e i v e

,

m a n i p u l a t e

, o r d e f

r a u d

. ” 4 2 5 U

. S

. 1 8 5

, 1 9 3 n

. 1 2

, 9 6 S

. C t

. 1 3 7 5

, 1 3 8 1 n

. 1 2

, 4 7 L

.

E d

. 2 d 6 6 8 ( 1 9 7 6 )

. I n t h i s c i r c u i t

, “ s e v e r e r e c k l e s s n e s s ” c a n a m o u n t t o s c i e n t e r

,

b u t i t i s t h e b a r e m i n i m u m

. B r y a n t v

. A v a d o B r a n d s

, I n c

. , 1 8 7 F

. 3 d 1 2 7 1

, 1 2 8 2

– 8 3

( 1 1 t h C i r

. 1 9 9 9 ) ( “ W e q u a n t i f y s c i e n t e r a s e n c o m p a s s i n g a t l e a s t a s h o w i n g o f

s e v e r e r e c k l e s s n e s s

. . . . ” )

. “ ‘ S e v e r e r e c k l e s s n e s s i s l i m i t e d t o t h o s e ‘ h i g h l y

u n r e a s o n a b l e o m i s s i o n s o r m i s r e p r e s e n t a t i o n s t h a t i n v o l v e

. . . a n e x t r e m e

d e p a r t u r e f

r o m t h e s t a n d a r d s o f o r d i n a r y c a r e

. ’ ” I d

. a t 1 2 8 2 n

. 1 8 ( q u o t i n g

M c D o n a l d v

. A l a n B u s h B r o k e r a g e C o

. , 8 6 3 F

. 2 d 8 0 9

, 8 1 4 ( 1 1 t h C i r

. 1 9 8 9 ) )

.

S i n c e 1 9 9 6

, t h e P S L R A h a s r e q u i r e d p l a i n t i f f s t o “ s t a t e w i t h p a r t i c u l a r i t y

f a c t s g i v i n g r i s e t o a s t r o n g i n f e r e n c e t h a t t h e d e f

e n d a n t a c t e d w i t h t h e r e q u i r e d

s t a t e o f m i n d

. ” 1 5 U

. S

. C

. 7 8 u

- 4 ( b ) ( 2 ) ( e m p h a s i s a d d e d )

. T h u s

, i n a s e c u r i t i e s

f r a u d c l a s s a c t i o n

, a p l a i n t i f f m a y n o l o n g e r p l e a d t h e s c i e n t e r e l e m e n t g e n e r a l l y

, a s

w a s p r e v i o u s l y p o s s i b l e u n d e r R u l e 9 ( b )

. R a t h e r

, t h e c o m p l a i n t m u s t a l l e g e f a c t s

s u p p o r t i n g a s t r o n g i n f

e r e n c e o f s c i e n t e r “ f

o r e a c h d e f

e n d a n t a n d w i t h r e s p e c t t o

128e a c h v i o l a t i o n

. ” P h i l l i p s v

. S c i e n t i f i c

- A t l a n t a

, I n c

. , 3 7 4 F

. 3 d 1 0 1 5

, 1 0 1 6 ( 1 1 t h C i r

.

2 0 0 4 )

. J a c o b y ’ s a t t o r n e y s d o n o t c o m e c l o s e t o m e e t i n g t h i s s t a n d a r d b e c a u s e t h e y

a l l e g e d o n l y c o n c l u s o r y s t a t e m e n t s

, n o t f a c t s g i v i n g r i s e t o a n i n f e r e n c e o f s c i e n t e r

.

J a c o b y ’ s b e s t a r g u m e n t i s t h a t K a r p i n t e n t i o n a l l y h i d S u m m i t ’ s i n v o l v e m e n t

i n t h e 2 0 0 5 J u n e p r i v a t e o f f e r i n g o n t h e F o r m D s h e s i g n e d a n d f i l e d w i t h t h e S E C

.

K a r p d i d n o t l i s t S u m m i t i n r e s p o n s e t o a q u e s t i o n t h a t a s k e d f o r b a s i c i n f

o r m a t i o n

a b o u t “ e a c h p e r s o n w h o h a s b e e n o r w i l l b e p a i d o r g i v e n

, d i r e c t l y o r i n d i r e c t l y

,

a n y c o m m i s s i o n o r s i m i l a r r e m u n e r a t i o n f o r s o l i c i t a t i o n o f p u r c h a s e r s i n

c o n n e c t i o n w i t h s a l e s o f s e c u r i t i e s i n t h e o f f e r i n g

. ” R e l a t i o n s e r v e M e d i a

, I n c

. ,

N o t i c e o f S a l e o f S e c u r i t i e s P u r s u a n t t o R e g u l a t i o n D ( F o r m D )

, a t 3 ( J u l y 1 6

,

2 0 0 5 )

. A t t h e t i m e

, h o w e v e r

, i t w a s u n c l e a r t h a t a f i n d e r c o n s t i t u t e d a p e r s o n

c o m p e n s a t e d f

o r “ s o l i c i t a t i o n ” o f p u r c h a s e r s

. A n e w v e r s i o n o f F o r m D

, a d o p t e d

b y t h e S E C i n 2 0 0 9

, r e q u i r e s i n f o r m a t i o n a b o u t a n y p e r s o n p a i d t r a n s a c t i o n

- b a s e d

c o m p e n s a t i o n “ i n c o n n e c t i o n w i t h ” t h e o f f e r i n g

, “ i n c l u d i n g f

i n d e r s

. ” T h u s

, i t i s

u n c l e a r t h a t K a r p e v e n k n e w t h a t s h e n e e d e d t o d i s c l o s e S u m m i t o n t h e F o r m D

,

p a r t i c u l a r l y s o b e c a u s e M e d i a h a d a l r e a d y p u b l i c l y d i s c l o s e d t h a t S u m m i t c o u l d a c t

a s a f i n d e r o n t h e J u n e 1 6

, 2 0 0 5

, c u r r e n t r e p o r t

.

129J a c o b y ’ s r e m a i n i n g s c i e n t e r a l l e g a t i o n s c a n l o o s e l y b e g r o u p e d i n t o t h r e e

c a t e g o r i e s : ( 1 ) t h e o f

f i c e r s m u s t h a v e k n o w n

, ( 2 ) t h e “ v e n a l ” c h a r a c t e r o f t h e

c o r p o r a t i o n

, a n d ( 3 ) m o t i v e a n d o p p o r t u n i t y

.

T y p i c a l o f J a c o b y ’ s “ t h e y m u s t h a v e k n o w n ” a l l e g a t i o n i s t h e f o l l o w i n g :

“ T h e o n g o i n g f

r a u d u l e n t s c h e m e a n d v i o l a t i o n o f s e c u r i t i e s l a w s d e s c r i b e d i n t h i s

C o m p l a i n t c o u l d n o t h a v e b e e n p e r p e t r a t e d o v e r a s u b s t a n t i a l p e r i o d o f t i m e

. . .

w i t h o u t t h e k n o w l e d g e a n d c o m p l i c i t y o f t h e p e r s o n n e l a t R e l a t i o n S e r v e [ M e d i a ’ s ]

h i g h e s t l e v e l

, i n c l u d i n g t h e i n d i v i d u a l D e f e n d a n t s

. ” ( S e c o n d A m

. C o m p l

. ¶ 8 1

. ) 8 6

W h e n J a c o b y f

i l e d t h e f i r s t a n d s e c o n d a m e n d e d c o m p l a i n t s

, i t w a s a b s o l u t e l y

c l e a r t h a t t h i s s o r t o f c o n c l u s o r y a l l e g a t i o n c o u l d n o t s a t i s f y t h e r e q u i r e m e n t t h a t

t h e c o m p l a i n t s t a t e “ f

a c t s ” “ w i t h p a r t i c u l a r i t y

. ” S e e

, e

. g

. , I n r e R e c o t o n C o r p

. S e c

.

(See a lso Second Am. Compl. ¶ 76 (“De fenda nts acted w ith scienter, in that 8 6

Def endants kne w RelationServe[ Media’ s] publ ic documents a nd statements issued and/or

disseminated by

or in the name of RelationServe [Media] wer e mater ially false a nd

misleading .”); id. ¶ 78 (“D efe ndants knowing ly and substantially

participa ted or a cquiesc ed in

the issuance or dissemination of such stateme nts or documents.”) ; id. ¶ 79 (“De fenda nts, by

virtue of their

rec eipt of informa tion reflec ting Rela tionServe [Media] and its busi ness pra ctices,

control over

or re ceipt of Rela tionServe [Media] materially misleading statements and/or the ir

associations with RelationServe [Media] were active a nd culpable pa

rticipants in the fra

udulent

scheme alleg ed her ein.”) ; id. ¶ 24 (“The above- listed Defe ndants, by virtue of their

high- level

positions wit h RelationServe [Media], directly participa ted in the manag ement of Rela tionServe

[Media] , wer e dire ctly

involved in RelationServe[ Media’s] day -to-day opera tions at the highe st

levels, and w ere privy

to proprietar

y information conc erning RelationServe [Media] and its

business opera tions and financia l condition as alleg ed her ein.”) ; id. ¶ 25 (“The above- listed

Def endants we re involved in the dr afting , producing , revie wing , and/or dissemination of

misleading statements and we re a war e—or r eckle ssly

disreg arde d—of the fa ct that misleading

statements wer e being issued and appr oved or r atified these statements in violation of fede ral

secur ities law.”).)

130L i t i g

. , 3 5 8 F

. S u p p

. 2 d 1 1 3 0

, 1 1 4 7 ( M

. D

. F l a

. 2 0 0 5 ) ( “ C o n c l u s o r y a l l e g a t i o n s t h a t

d o n o m o r e t h a n s t a t e t h a t [ t h e d e f e n d a n t ] ‘ w o u l d h a v e k n o w n

, ’ ‘ k n e w a n d

i g n o r e d

, ’ o r ‘ r e c k l e s s l y f a i l e d t o k n o w ’ a r e i n s u f f i c i e n t t o s t a t e a c l a i m u n d e r

P S L R A a n d 9 ( b )

. ” ) ( f

o o t n o t e s o m i t t e d )

. R a t h e r

, t h i s k i n d o f a l l e g a t i o n i s a m e r e

c o n c l u s i o n

. A n d p a r t i c u l a r l y b e c a u s e o f t h e t h e o r y o f l i a b i l i t y a s s e r t e d h e r e

—

M e d i a ’ s f

a i l u r e t o d i s c l o s e a c o n t i n g e n t l i a b i l i t y a r i s i n g f r o m S u m m i t ’ s b r e a c h o f

i t s c o n t r a c t w i t h M e d i a

— i t i s a d u b i o u s c o n c l u s i o n a t t h a t

.

T h i s c o n c l u s o r y a l l e g a t i o n t h a t “ t h e y m u s t h a v e k n o w n ” i s p a r t i c u l a r l y

d u b i o u s w h e n a p p l i e d t o c e r t a i n O f f i c e r s

. R e c a l l t h a t t h e a l l e g e d f r a u d i n v o l v e d

S u m m i t ’ s b r e a c h o f t h e c o n s u l t i n g a g r e e m e n t d u r i n g t h e J u n e p r i v a t e o f f e r i n g

.

M e d i a ’ s S E C f

i l i n g s i n d i c a t e t h a t t h e o f f e r i n g e n d e d o n J u n e 3 0

, 2 0 0 5

. O f a l l t h e

i n d i v i d u a l d e f

e n d a n t s n a m e d i n t h e c o m p l a i n t s

, o n l y K a r p

, H i r s c h

, A d l e r

, a n d

M u s s e r w o r k e d f

o r M e d i a w h e n S u m m i t a l l e g e d l y b r e a c h e d t h e a g r e e m e n t

.

M o r e o v e r

, A d l e r a n d M u s s e r d i d n o t c o m m e n c e t h e i r e m p l o y m e n t w i t h M e d i a

u n t i l J u n e 2 1

, 2 0 0 6

, o n l y n i n e d a y s p r i o r t o t h e e n d o f t h e J u n e p r i v a t e o f f e r i n g

.

A l l o f t h e o t h e r i n d i v i d u a l d e f e n d a n t s e i t h e r n e v e r w o r k e d f o r M e d i a ( Y o u n g

,

H o n i g

, a n d H i l l )

, o r b e g a n t h e i r t e n u r e a f t e r S u m m i t ’ s a l l e g e d b r e a c h c o n c l u d e d

( J e h a s s i

, W a s s e r m a n

, B r a u s e r

, M c N a m a r a

, S o l t o f f

, O b e c k

, a n d G o u l d )

. S e e T a b l e

a t 1 4 2

, i n f

r a

. A s a p p l i e d t o t h e l a t t e r g r o u p o f d e f e n d a n t s

, t h e “ t h e y m u s t h a v e

131k n o w n ” a l l e g a t i o n i s a b s u r d

. W i t h o u t m o r e

, e s p e c i a l l y a f t e r a p e r s o n a l w a r n i n g

f r o m a d i s t r i c t c o u r t n o t t o s u e o f f i c e r s j u s t b e c a u s e t h e y w e r e o f f i c e r s

, n o

r e a s o n a b l y c o m p e t e n t a t t o r n e y c o u l d h a v e s u e d t h e s e o f f i c e r s

. 8 7

P e r h a p s r e c o g n i z i n g t h e i n s u f f i c i e n c y o f t h e “ t h e y m u s t h a v e k n o w n ”

a l l e g a t i o n s

, J a c o b y ’ s c o u n s e l a l s o a l l e g e d t h a t a c c o u n t i n g i r r e g u l a r i t i e s s h o w t h a t

M e d i a h a d a v e n a l c o r p o r a t e c h a r a c t e r

. A c c o r d i n g t o J a c o b y

, a n o f f i c e r o f M e d i a

d i s c o v e r e d a m e m o r a n d u m f r o m “ R i c h a r d H i l l

. . . a f o u n d e r o f R e l a t i o n s e r v e t o

[ a n e m p l o y e e ] i n R e l a t i o n S e r v e ’ s f i n a n c e d e p a r t m e n t

. . . i n s t r u c t [ i n g t h e

e m p l o y e e ] t o r e c o g n i z e s p e c i f i c r e v e n u e i n v i o l a t i o n o f c o m p a n y o p e r a t i n g

p r o c e d u r e s

, a p p l i c a b l e l a w

, a n d g e n e r a l l y

- a c c e p t e d a c c o u n t i n g p r i n c i p l e s

. ”

( S e c o n d A m

. C o m p l

. ¶ 6 0

. ) T h i s e n t i r e a r g u m e n t i s f r i v o l o u s b e c a u s e t h e a l l e g e d

a c c o u n t i n g i r r e g u l a r i t i e s w e r e o r d e r e d b y R i c h a r d H i l l

, w h o w a s n e v e r a M e d i a

E m p l o y e e o r e v e n a d e f e n d a n t i n t h e s e c o n d a m e n d e d c o m p l a i n t

. E s p e c i a l l y 8 8

Even wor se, the plaintiffs r epled the sa me “they must have known” alleg ations in the 8 7

second a mended c omplaint after the district court had w arne d them ag ainst such re asoning in the

teleconf ere nce w hen the c ourt dismissed the first amende d complaint. The c ourt explained to the

plaintiffs that “[i] t’s not fair to throw e very defe ndant in there when we know from the f acts we

have a lleg ed in the first a mended c omplaint that some of these de fenda nts could not be held

responsible for

some pree x isting public statements.” (Hr’ g Tr. at 10, Ma r. 6, 2007.)

Plaintiffs sued Hill in the first amended c omplaint. Hill m oved to dismiss i n part 8 8

beca use he w as “ne ver a

n office r or dire ctor of Re lationserve [Media] . . . and Plaintiffs plead no

other fa cts to establish that Hill controlled corpor ate a ffa irs or policies.” ( Def . Hill’s Mot. to

Dismiss First Am. Compl . 5.) The pla intiffs did not rename H ill as a defe ndant in the sec ond

amende d complaint.

132b e c a u s e t h e a l l e g e d m i s c o n d u c t v i o l a t e d “ c o m p a n y o p e r a t i n g p r o c e d u r e s

, ” i t

c a n n o t b e i n f

e r r e d t h a t M e d i a h a d a v e n a l c o r p o r a t e c u l t u r e b a s e d o n t h e m i s d e e d s

o f a n o n

- e m p l o y e e

.

M o r e o v e r

, t h e M e d i a e m p l o y e e w h o a l l e g e d l y f o l l o w e d H i l l ’ s i n s t r u c t i o n

w a s n o t a c o r p o r a t e o f

f i c e r o r d e f

e n d a n t i n t h e s u i t a n d n e v e r s i g n e d a n S E C f i l i n g

.

I n a n y e v e n t

, f

i v e m o n t h s b e f

o r e J a c o b y f

i l e d h i s s e c o n d a m e n d e d c o m p l a i n t

, t h i s

c o u r t s q u a r e l y h e l d t h a t a c c o u n t i n g i r r e g u l a r i t i e s

, e v e n v i o l a t i o n s o f G A A P i n

S a r b a n e s

- O x l e y c e r t i f

i e d a c c o u n t i n g s t a t e m e n t s

, c a n n o t s u p p o r t a n i n f e r e n c e o f

s c i e n t e r u n l e s s t h e o f

f i c e r c e r t i f

y i n g t h e s t a t e m e n t s w a s “ s e v e r e l y r e c k l e s s

. ”

G a r f i e l d v

. N D C H e a l t h C o r p

. , 4 6 6 F

. 3 d 1 2 5 5

, 1 2 6 6 ( 1 1 t h C i r

. 2 0 0 6 )

. T h i s

s t a n d a r d i s s a t i s f

i e d i f “ t h e p e r s o n s i g n i n g t h e c e r t i f i c a t i o n h a d r e a s o n t o k n o w

, o r

s h o u l d h a v e s u s p e c t e d

, d u e t o t h e p r e s e n c e o f g l a r i n g a c c o u n t i n g i r r e g u l a r i t i e s o r

o t h e r ‘ r e d f

l a g s

, ’ t h a t t h e f

i n a n c i a l s t a t e m e n t s c o n t a i n e d m a t e r i a l m i s s t a t e m e n t s o r

o m i s s i o n s

. ” I d

. H e r e

, J a c o b y p o i n t e d t o n o g l a r i n g v i o l a t i o n s i n M e d i a ’ s 8 9

c e r t i f i e d a c c o u n t i n g s t a t e m e n t s

. T h u s

, h e b a s e d h i s v e n a l c o r p o r a t e c u l t u r e

Gar field v. NDC He alth Corp., 466 F.3d 1255 ( 11th Cir. 2006) was dec ided on 8 9

October 12, 2006; J acoby

filed his second a

mended c omplaint on March, 19, 2007. Eve n prior

to Garf ield, we ha d made c lear

that “alleg ations of violations of GAAS or GA AP, standing

alone, do not satisfy

the par ticularity require ment of Rule 9(b).” Z iemba v. Casca de I ntern., I nc.,

256 F.3d 1194, 1208–09 ( 11th Cir. 2001); see also id. at 1209 (“ [P ]l aintiffs must theref ore a lleg e

more than me re violations of a uditing standa

rds.”)

.

133a l l e g a t i o n o n t h e m i s d e e d s o f t w o i n d i v i d u a l s w h e n n e i t h e r i n d i v i d u a l w a s a

d e f e n d a n t i n t h e s e c o n d a m e n d e d c o m p l a i n t a n d b o t h a c t e d i n v i o l a t i o n o f

c o m p a n y p o l i c y

. W i t h o u t m o r e

, a l l e g i n g t h a t t h e d e f e n d a n t O f

f i c e r s o r M e d i a h a d

a “ v e n a l c h a r a c t e r ” i s u n f o u n d e d a n d i r r e s p o n s i b l e

.

F i n a l l y

, J a c o b y c l a i m e d t h a t s c i e n t e r c o u l d b e i n f e r r e d b e c a u s e “ [ t ] h e

i n d i v i d u a l D e f

e n d a n t s e n g a g e d i n t h e a b o v e

- a l l e g e d a c t i v i t i e s t o i n f l a t e t h e p r i c e o f

R e l a t i o n S e r v e [ M e d i a ] s e c u r i t i e s

, t o p r o t e c t a n d e n h a n c e t h e i r r e s p e c t i v e p o s i t i o n s

,

a n d t o e n h a n c e t h e s u b s t a n t i a l c o m p e n s a t i o n t h e y o b t a i n e d t h e r e b y

. ” ( S e c o n d A m

.

C o m p l

. ¶ 8 2

. ) I t i s i m m e d i a t e l y a p p a r e n t t h a t

, l i k e t h e o t h e r s c i e n t e r a l l e g a t i o n s

,

t h i s o n e i s c o n c l u s o r y

. N o t a b l y

, J a c o b y n e v e r a l l e g e d t h a t a n y o f f i c e r o r d i r e c t o r

d e f e n d a n t s o l d M e d i a s t o c k d u r i n g t h e c l a s s p e r i o d

, o r d i d a n y t h i n g e l s e t h a t w o u l d

s u p p o r t t h e m o t i v e a n d o p p o r t u n i t y t h e o r y

. I t s t a n d s t o r e a s o n

, o f c o u r s e

, t h a t a

c o m p a n y ’ s o f

f i c e r s a n d d i r e c t o r s h a v e a m o t i v e t o c o m m i t s e c u r i t i e s f r a u d

. B u t

t h a t c o u l d b e s a i d o f a n y p u b l i c c o m p a n y ’ s o f f i c e r s a n d d i r e c t o r s

, w h i c h i s w h y t h e

p r e c e d e n t o f t h i s c i r c u i t s q u a r e l y f o r e c l o s e s a n y a r g u m e n t t h a t s t a n d

- a l o n e

a l l e g a t i o n s o f “ m o t i v e a n d o p p o r t u n i t y ” w i l l s a t i s f y t h e P S L R A ’ s s t a n d a r d

.

B r y a n t

, 1 8 7 F

. 3 d a t 1 2 8 5

– 8 6 ( “ W h i l e a l l e g a t i o n s o f m o t i v e a n d o p p o r t u n i t y m a y

b e r e l e v a n t t o a s h o w i n g o f s e v e r e r e c k l e s s n e s s

, w e h o l d t h a t s u c h a l l e g a t i o n s

,

134w i t h o u t m o r e

, a r e n o t s u f f i c i e n t t o d e m o n s t r a t e t h e r e q u i s i t e s c i e n t e r i n o u r

C i r c u i t

. ” )

.

J a c o b y ’ s s c i e n t e r a l l e g a t i o n s b o i l d o w n t o t h r e e e m p t y c o n c l u s i o n s b o r n o f

n o f a c t s : b e c a u s e t h e d e f

e n d a n t s w e r e o f

f i c e r s o r d i r e c t o r s o f M e d i a

, ( 1 ) t h e y m u s t

h a v e k n o w n a b o u t S u m m i t ’ s b r e a c h

, ( 2 ) t h e y w e r e i m m o r a l

, a n d ( 3 ) t h e y h a d a

m o t i v e t o l i e

. T h e s e a l l e g a t i o n s p r o b a b l y f a i l u n d e r o r d i n a r y n o t i c e p l e a d i n g

s t a n d a r d s ; t h e y c e r t a i n l y f a i l u n d e r a n y r e a s o n a b l e v i e w o f t h e P S L R A ’ s 9 0

h e i g h t e n e d p l e a d i n g r e q u i r e m e n t s

. W i t h o u t m o r e

, n o r e a s o n a b l y c o m p e t e n t

a t t o r n e y c o u l d h a v e b r o u g h t J a c o b y ’ s c l a i m

.

i i i

. J a c o b y A d v a n c e d a F r i v o l o u s L o s s C a u s a t i o n A r g u m e n t

F i n a l l y

, J a c o b y ’ s R u l e 1 0 b

- 5 c l a i m i s l e g a l l y f r i v o l o u s b e c a u s e h e a d v a n c e d

a n u n t e n a b l e t h e o r y o f l o s s c a u s a t i o n

. L o s s c a u s a t i o n i s a n e s s e n t i a l e l e m e n t o f a

R u l e 1 0 b

- 5 c l a i m a n d r e q u i r e s a p l a i n t i f f t o p r o v e t h a t t h e d e f

e n d a n t ’ s f

r a u d

p r o x i m a t e l y c a u s e d t h e p l a i n t i f f ’ s l o s s

. D u r a

, 5 4 4 U

. S

. a t 3 4 6

, 1 2 5 S

. C t

. a t 1 6 3 3

.

A s e x p l a i n e d a b o v e

, J a c o b y ’ s R u l e 1 0 b

- 5 c l a i m a l l e g e d t h a t M e d i a f r a u d u l e n t l y h i d

a $ 2 m i l l i o n c o n t i n g e n t l i a b i l i t y a r i s i n g o u t o f S u m m i t ’ s w o r k i n t h e 2 0 0 5 J u n e

For the purposes of

this sanctions discussion, the law is frozen as it exis ted in 9 0

2006—as such, Ashc roft v. I qbal, ___ U.S. ___, 129 S. Ct . 1937, 173 L . Ed. 2d 868 (2009) doe s

not apply . Neve rtheless, our c ases made clea r that althoug h we a cce pt a plaintiff’s a lleg ations as

true, “ conclusory

alleg ations, unwarr anted de ductions of fa cts or leg al conc lusions masquerading

as fa cts” a

re insuff icient to avoid dismissal. S ee O x ford Asse t Mgmt., L td. v. J ahar is, 297 F.3d

1182, 1188 (11th Cir. 2002).

135p r i v a t e o f

f e r i n g

. J a c o b y ’ s t h e o r y f a i l s b e c a u s e h e b e g a n t o m e a s u r e l o s s c a u s a t i o n

o v e r t w e n t y d a y s a f

t e r t h e m a r k e t h a d l e a r n e d o f t h e a l l e g e d f r a u d

.

E v e n b e f o r e D u r a

, o u r c a s e s “ e x p l i c i t l y r e q u i r e [ d ] p r o o f o f a c a u s a l

c o n n e c t i o n b e t w e e n t h e m i s r e p r e s e n t a t i o n a n d t h e i n v e s t m e n t ’ s s u b s e q u e n t d e c l i n e

i n v a l u e

. ” R o b b i n s v

. K o g e r P r o p s

. , I n c

. , 1 1 6 F

. 3 d 1 4 4 1

, 1 4 4 8 ( 1 1 t h C i r

. 1 9 9 7 )

( c i t i n g c a s e s )

. T o p r o v e l o s s c a u s a t i o n

, a p l a i n t i f f m u s t a l l e g e t h a t t h e f

r a u d

i n d u c e d p r i c e i n f

l a t i o n w a s r e m o v e d f

r o m t h e s t o c k p r i c e a n d c a u s e d t h e p l a i n t i f f ’ s

l o s s e s

. I d

. ( g r a n t i n g j u d g m e n t a s a m a t t e r o f l a w f o r d e f e n d a n t c o m p a n y b e c a u s e

t h e r e w a s “ n o e v i d e n c e t h a t t h i s p r i c e i n f l a t i o n [ c a u s e d b y d e f

e n d a n t ’ s f

r a u d ] w a s

r e m o v e d f

r o m t h e m a r k e t p r i c e o f [ t h e ] s t o c k

. ” )

.

J a c o b y ’ s l o s s c a u s a t i o n t h e o r y b o i l s d o w n t o t h i s : M e d i a ’ s M a y 2 3

, 2 0 0 6

,

d i s c l o s u r e o f T h o m p s o n ’ s I n d i a n a l a w s u i t c o r r e c t e d M e d i a ’ s f a i l u r e t o d i s c l o s e i t s

u s e o f a n u n r e g i s t e r e d b r o k e r

- d e a l e r ; o n M a y 2 3

, M e d i a ’ s s h a r e s t r a d e d a t $ 1

. 3 5

a n d e v e n t u a l l y f

e l l t o $

. 6 3 p e r s h a r e o n J u n e 1 3

, 2 0 0 6 ; t h e M a y 2 3 d i s c l o s u r e

c a u s e d t h i s s t o c k p r i c e d r o p

. M e d i a

, h o w e v e r

, i n i t i a l l y d i s c l o s e d T h o m p s o n ’ s

I n d i a n a s u i t o n M a y 1

, 2 0 0 6

. J a c o b y ’ s l o s s c a u s a t i o n a r g u m e n t i s f r i v o l o u s

b e c a u s e t h e m a r k e t h a d a l r e a d y k n o w n a n d d i g e s t e d a l l t h e i n f o r m a t i o n s u p p o s e d l y

a d d e d b y t h e M a y 2 3 d i s c l o s u r e

.

136O n M a r c h 3

, 2 0 0 6

, T h o m p s o n f i l e d h i s I n d i a n a l a w s u i t a g a i n s t M e d i a

.

M e d i a ’ s f

i r s t d i s c l o s u r e o f t h i s l a w s u i t c a m e i n t h e M a y 1

, 2 0 0 6 a m e n d m e n t t o t h e

r e g i s t r a t i o n s t a t e m e n t t h a t w a s f i l e d o n M a r c h 2 0

. T h a t a m e n d m e n t d i s c l o s e d

, i n

p e r t i n e n t p a r t

, t h a t

O n M a r c h 3

, 2 0 0 6

, R i c h a r d F

. T h o m p s o n

, T h o m p s o n F a m i l y W e a l t h

M a n a g e m e n t

, D w i g h t T h o m p s o n

, G r e g T h o m p s o n a n d P a r a b o l i c

I n v e s t m e n t F u n d

, L

. P

. c o m m e n c e d a n a c t i o n i n t h e S t a t e C o u r t o f

I n d i a n a

, C o u n t y o f H a m i l t o n

, a g a i n s t A n t h o n y D

. A l t a v i l l a

, S u m m i t

F i n a n c i a l P a r t n e r s

, L L C

, B a r r o n P a r t n e r s

, L P

, U S M e d S y s C o r p

. a n d

R e l a t i o n S e r v e M e d i a

, I n c

. T h e p l a i n t i f f s i n t h i s a c t i o n a s s e r t a v a r i e t y

o f c l a i m s a g a i n s t n o n

- r e l a t e d d e f e n d a n t s

. A s a g a i n s t t h e C o m p a n y

,

p l a i n t i f f s s e e k r e s c i s s i o n o f t h e R S M I c o m m o n s t o c k t h e y p u r c h a s e d

i n J u l y 2 0 0 5

, a l l e g i n g t h a t t h e s h a r e s t h e y r e c e i v e d w e r e n o t r e g i s t e r e d

a s r e q u i r e d u n d e r I n d i a n a L a w

, a n d t h a t t h e C o m p a n y f a i l e d t o

d i s c l o s e a c o m m i s s i o n t o M r

. A n t h o n y A l t a v i l l a

. T h e C o m p a n y

b e l i e v e s t h i s a c t i o n i s w i t h o u t m e r i t

, a n d i n t e n d s t o v i g o r o u s l y d e f e n d

i t s e l f w i t h r e s p e c t t o t h i s m a t t e r

, h o w e v e r ; i t s o u t c o m e o r r a n g e o f

p o s s i b l e l o s s

, i f a n y

, c a n n o t b e p r e d i c t e d a t t h i s t i m e

. T h e C o m p a n y

c a n n o t p r o v i d e a n y a s s u r a n c e t h a t t h e o u t c o m e o f t h i s m a t t e r w i l l n o t

h a v e a m a t e r i a l a d v e r s e e f f e c t o n i t s f

i n a n c i a l p o s i t i o n o r r e s u l t s o f

o p e r a t i o n s

.

R e l a t i o n s e r v e M e d i a

, I n c

. , A m e n d

. N o

. 1 t o F o r m S B

- 2 R e g i s t r a t i o n S t a t e m e n t

( F o r m S B

- 2 / A )

, a t 5 3 ( M a y 1

, 2 0 0 6 )

. J a c o b y s e e m s t o h a v e a l l e g e d t h a t t h i s

d i s c l o s u r e w a s i n s u f

f i c i e n t b e c a u s e i t w a s i n c o m p l e t e

. ( S e e S e c o n d A m

. C o m p l

. ¶

7 2 ( “ O n M a y 2 3

, 2 0 0 6

, R e l a t i o n S e r v e [ M e d i a ] u p d a t e d i t s d i s c l o s u r e c o n c e r n i n g

T h o m p s o n ’ s l a w s u i t

. . . . ” )

. )

137M e d i a f i l e d a s e c o n d a m e n d m e n t t o t h e r e g i s t r a t i o n s t a t e m e n t o n M a y 2 3

,

2 0 0 6

, w h i c h a m p l i f

i e d t h e M a y 1 a m e n d m e n t

. T h i s a m e n d m e n t s t a t e d : 9 1

O n M a r c h 3

, 2 0 0 6

, R i c h a r d F

. T h o m p s o n

, T h o m p s o n F a m i l y W e a l t h

M a n a g e m e n t

, D w i g h t T h o m p s o n

, G r e g T h o m p s o n a n d P a r a b o l i c

I n v e s t m e n t F u n d

, L

. P

. c o m m e n c e d a n a c t i o n i n t h e S t a t e C o u r t o f

I n d i a n a

, C o u n t y o f H a m i l t o n

, a g a i n s t A n t h o n y D

. A l t a v i l l a

, S u m m i t

F i n a n c i a l P a r t n e r s

, L L C

, B a r r o n P a r t n e r s

, L P

, U S M e d S y s C o r p

. a n d

R e l a t i o n S e r v e M e d i a

, I n c

. T h e p l a i n t i f f s i n t h i s a c t i o n a s s e r t a v a r i e t y

o f c l a i m s a g a i n s t n o n

- r e l a t e d d e f e n d a n t s

. A s a g a i n s t t h e C o m p a n y

,

p l a i n t i f f s s e e k r e s c i s s i o n o f t h e 1 1 0

, 0 0 0 s h a r e s o f C o m p a n y [ ] c o m m o n

s t o c k t h e y p u r c h a s e d i n J u l y 2 0 0 5 ( p l a i n t i f f s a l s o r e c e i v e d w a r r a n t s

f o r 5 5

, 0 0 0 s h a r e s o f R S M I c o m m o n s t o c k )

, a l l e g i n g t h a t t h e s h a r e s

t h e y r e c e i v e d w e r e n o t r e g i s t e r e d a s r e q u i r e d u n d e r I n d i a n a L a w

, a n d

t h a t t h e C o m p a n y f

a i l e d t o d i s c l o s e a c o m m i s s i o n

. T h e C o m p a n y

i n t e n d s t o f

i l e a m o t i o n t o d i s m i s s t h i s a c t i o n b e c a u s e t h e s h a r e s d i d

n o t n e e d t o b e r e g i s t e r e d u n d e r I n d i a n a L a w

, a s t h e y w e r e e x e m p t

f r o m r e g i s t r a t i o n a s a “ f

e d e r a l c o v e r e d s e c u r i t y

. ” M r

. A l t a v i l l a d i d n o t

s e l l s h a r e s o n t h e C o m p a n y ’ s b e h a l f

. M r

. A l t a v i l l a d i d r e c e i v e

, i n

a d d i t i o n t o o t h e r c o m p e n s a t i o n

, a f i n d e r ’ s f e e i n t h e a m o u n t o f 7 % o f

t o t a l g r o s s f

u n d i n g p r o v i d e d f

o r i n t r o d u c t i o n s m a d e b y h i m t o

i n v e s t o r s n o t a l r e a d y h a v i n g a p r e e x i s t i n g r e l a t i o n s h i p w i t h t h e

C o m p a n y

.

Reca ll that Media filed this amendment a fter r ece iving a n inquiry from the SEC on 9 1

May 11, which aske d (1) whe ther the sha res sold to Thompson were reg istered unde r I ndiana

law; (2) w hether

Altavilla sold shares f

or Media a

nd rec eived c ompensation for e ach sa le; and

(3) be cause Thompson was see king r escission, the number of share s he purc hased a

nd the price

he paid.

Media did alleg e that eve n the May 23 amendment f

ailed to disclose Altavilla’s sa les in

other states a

nd the amount of Summit’s commiss ions. I assume that Jacoby still deeme d the

May 23 amendment suff

icient to g ive the mar

ket notice of

the fra ud and simply

included these

observa tions for some other pur pose. I say this for two rea sons: (1) if the May 23 amendment

did not give the marke t notice of the f raud, the n J acoby

would have no loss ca

usation arg

ument

at all, and ( 2) as a

matter of f

act, Me dia had a lrea dy

disclosed the full amount of the f inder’s f ees

it paid to Sum mit.

138R e l a t i o n s e r v e M e d i a

, I n c

. , A m e n d

. N o

. 2 t o F o r m S B

- 2 R e g i s t r a t i o n S t a t e m e n t

( F o r m S B

- 2 / A )

, a t 6 4

– 6 5 ( M a y 2 3

, 2 0 0 6 )

.

J a c o b y ’ s a r g u m e n t t h a t t h e M a y 1 a m e n d m e n t w a s i n c o m p l e t e a n d t h a t t h e

p u b l i c d i d n o t k n o w a b o u t t h e c o m p e n s a t i o n p a c k a g e S u m m i t a n d A l t a v i l l a

r e c e i v e d i s f

r i v o l o u s

. A s r e l e v a n t t o t h e u n r e g i s t e r e d

- b r o k e r t h e o r y

, t h e M a y 2 3

a m e n d m e n t a d d e d t h e n u m b e r o f s h a r e s p u r c h a s e d b y t h e p l a i n t i f f s

, a n d t h a t

S u m m i t d i d n o t s e l l s h a r e s o n M e d i a ’ s b e h a l f b u t d i d r e c e i v e a f i n d e r ’ s f e e

. T h e

m a t e r i a l a s p e c t s o f b o t h o f t h e s e a m p l i f i c a t i o n s h a d a l r e a d y b e e n d i s c l o s e d t o a n d

d i g e s t e d b y t h e m a r k e t

. T h e e f f i c i e n t m a r k e t t h e o r y

— o n w h i c h J a c o b y

r e l i e s

— p o s i t s t h a t a l l p u b l i c l y a v a i l a b l e i n f o r m a t i o n a b o u t a s e c u r i t y i s r e f l e c t e d i n

t h e m a r k e t p r i c e o f t h e s e c u r i t y

. A s o f J u l y 1 4

, 2 0 0 5

, t h e m a r k e t k n e w t h a t M e d i a

s o l d $ 3 4 0

, 0 0 0 w o r t h o f s t o c k t o f i v e I n d i a n a i n v e s t o r s

. R e l a t i o n s e r v e M e d i a

, I n c

. ,

N o t i c e o f S a l e o f S e c u r i t i e s P u r s u a n t t o R e g u l a t i o n D ( F o r m D )

, a t 7 ( J u l y 1 4

,

2 0 0 5 )

. A s o f J u n e 1 6

, 2 0 0 5

, t h e m a r k e t k n e w t h a t S u m m i t c o u l d a c t a s a f i n d e r a n d

w o u l d b e p a i d a s e v e n p e r c e n t f i n d e r ’ s f e e

. R e l a t i o n s e r v e M e d i a

, I n c

. , C u r r e n t

R e p o r t ( F o r m 8

- K )

, E x

. 2

. 6 ( J u n e 1 6

, 2 0 0 5 )

. A n d a s o f M a r c h 2 0

, 2 0 0 6

, t h e

m a r k e t k n e w t h a t M e d i a p a i d S u m m i t a t o t a l “ s u c c e s s f e e ” o f $ 2 8

, 5 0 0 i n

c o n n e c t i o n w i t h i t s p r i v a t e p l a c e m e n t o f c o m m o n s t o c k

. R e l a t i o n s e r v e M e d i a

,

I n c

. , R e g i s t r a t i o n S t a t e m e n t u n d e r t h e S e c u r i t i e s A c t o f 1 9 3 3 ( F o r m S B

- 2 )

, a t F

- 2 2

139( M a r c h 2 0

, 2 0 0 5 )

. A c c o r d i n g l y

, t h e m a r k e t h a d a b s o r b e d t h i s i n f o r m a t i o n w e l l

b e f o r e t h e M a y 2 3 a m e n d m e n t

. I f n o t

, t h o s e s h a r e s w e r e n o t b e i n g t r a d e d i n a n

“ i m p e r s o n a l

, w e l l

- d e v e l o p e d ” a n d e f f i c i e n t m a r k e t

, a s r e q u i r e d f o r t h e a p p l i c a t i o n

o f t h e f r a u d

- o n

- t h e

- m a r k e t d o c t r i n e

. B a s i c

, 4 8 5 U

. S

. a t 2 4 7

, 1 0 8 S

. C t

. a t 9 9 1

. I t

f o l l o w s t h a t t h e p r o p e r s t a r t i n g p l a c e f o r m e a s u r i n g l o s s c a u s a t i o n s h o u l d h a v e

b e e n n o l a t e r t h a n M a y 1

.

4

. T h e S e c t i o n 2 0 ( a ) C l a i m s

T h e § 2 0 ( a ) c o n t r o l

- p e r s o n c l a i m s a r e f r i v o l o u s b e y o n d d o u b t

. A s d i s c u s s e d

i n P a r t I I

. B & C

, s u p r a

, § 2 0 ( a ) i s a p a r a s i t i c f e d e r a l s e c u r i t i e s c l a i m t h a t i m p o s e s

j o i n t a n d s e v e r a l l i a b i l i t y a g a i n s t i n d i v i d u a l s “ w h o

, d i r e c t l y o r i n d i r e c t l y

, c o n t r o l [ ]

a n y p e r s o n l i a b l e u n d e r a n y p r o v i s i o n o f [ t h e 1 9 3 4 A c t ] o r o f a n y r u l e a n d

r e g u l a t i o n t h e r e u n d e r

. ” 1 5 U

. S

. C

. § 7 8 t ( a )

. I n t h i s c i r c u i t

[ A ] d e f e n d a n t i s l i a b l e a s a c o n t r o l l i n g p e r s o n u n d e r s e c t i o n 2 0 ( a ) i f

h e o r s h e “ h a d t h e p o w e r t o c o n t r o l t h e g e n e r a l a f f a i r s o f t h e e n t i t y

p r i m a r i l y l i a b l e a t t h e t i m e t h e e n t i t y v i o l a t e d t h e s e c u r i t i e s l a w s

. . . [ a n d ] h a d t h e r e q u i s i t e p o w e r t o d i r e c t l y o r i n d i r e c t l y c o n t r o l o r

i n f l u e n c e t h e s p e c i f

i c c o r p o r a t e p o l i c y w h i c h r e s u l t e d i n t h e p r i m a r y

l i a b i l i t y

. ”

B r o w n v

. E n s t a r G r o u p

, 8 4 F

. 3 d 3 9 3

, 3 9 6 ( 1 1 t h C i r

. 1 9 9 6 ) ( q u o t i n g B r o w n v

.

M e n d e l

, 8 6 4 F

. S u p p

. 1 1 3 8

, 1 1 4 5 ( M

. D

. A l a

. 1 9 9 4 ) ( a l t e r a t i o n i n o r i g i n a l ) ; s e e a l s o

T h e o h a r o u s v

. F o n g

, 2 5 6 F

. 3 d 1 2 1 9

, 1 2 2 7 ( 1 1 t h C i r

. 2 0 0 1 )

.

140H e r e

, t h e p l a i n t i f f s ’ a t t o r n e y s a l l e g e d t h a t e a c h o f t h e f o u r t e e n i n d i v i d u a l

d e f e n d a n t s i n t h e f

i r s t a m e n d e d c o m p l a i n t a n d t h e e l e v e n i n d i v i d u a l d e f e n d a n t s i n

t h e s e c o n d a m e n d e d c o m p l a i n t w e r e l i a b l e a s “ c o n t r o l p e r s o n s ” u n d e r § 2 0 ( a )

. A l l

o f t h e § 2 0 ( a ) c l a i m s a r e f r i v o l o u s b e c a u s e t h e p l a i n t i f f s n e v e r p l e d a n o n f

r i v o l o u s

p r i m a r y R u l e 1 0 b

- 5 c l a i m

. M o r e o v e r

, s o m e o f t h e d e f e n d a n t s n e v e r e v e n w o r k e d

f o r M e d i a ; t h e r e f

o r e

, a b s e n t e x t r a o r d i n a r y f a c t s n o t a l l e g e d h e r e

, t h e y c o u l d n o t 9 2

c o n c e i v a b l y h a v e h a d t h e p o w e r t o c o n t r o l e i t h e r M e d i a ’ s “ g e n e r a l a f f a i r s ” o r t o

d i r e c t l y o r i n d i r e c t l y c o n t r o l o r i n f l u e n c e t h e s p e c i f

i c “ c o r p o r a t e p o l i c y ” r e s u l t i n g

i n t h e p r i m a r y l i a b i l i t y

. T h u s

, e v e n h a d t h e p l a i n t i f f s p l e d a v a l i d R u l e 1 0 b

- 5

c l a i m

, a s a g a i n s t d e f

e n d a n t s Y o u n g

, H i l l

, a n d H o n i g

— w h o n e v e r w o r k e d f o r

M e d i a

— p l a i n t i f

f s ’ § 2 0 ( a ) c l a i m w o u l d s t i l l b e c l e a r l y f r i v o l o u s

. E i t h e r w a y

, t h e §

2 0 ( a ) c l a i m s w e r e s o f

r i v o l o u s t h a t t h e d i s t r i c t c o u r t n e c e s s a r i l y a b u s e d i t s

d i s c r e t i o n w h e n i t d e n i e d s a n c t i o n s

.

B

. R u l e 1 1 ( b ) ( 3 ) C o m p l i a n c e

I n o w r e v i e w a l l t h r e e c o m p l a i n t s f o r R u l e 1 1 ( b ) ( 3 ) c o m p l i a n c e

. R u l e

1 1 ( b ) ( 3 ) r e q u i r e s t h a t t h e f a c t u a l c o n t e n t i o n s “ h a v e e v i d e n t i a r y s u p p o r t o r

, i f

For example, the plaintiffs might ha ve an a rg ument if the non-e mploy ees ha d the 9 2

power to control the cor

porate policy

of Media by

contra ct, majority

share holder status, or

otherwise. Cf. T heohar ous v. Fong , 256 F.3d 1219, 1228 ( 11th Cir. 2001) (re jecting the

arg ument that a minority

stake g ave the § 20(a) defe ndants the powe r to control the g ener al

busines aff

airs of the company

).

141s p e c i f

i c a l l y s o i d e n t i f

i e d

, a r e l i k e l y t o h a v e e v i d e n t i a r y s u p p o r t a f t e r a r e a s o n a b l e

o p p o r t u n i t y f

o r f u r t h e r i n v e s t i g a t i o n o r d i s c o v e r y

. ” F e d

. R

. C i v

. P

. 1 1 ( b ) ( 3 )

( 2 0 0 6 )

. O r d i n a r i l y

, i t i s d i f f i c u l t f o r a c o u r t o f a p p e a l s t o c o n c l u d e t h a t a

c o m p l a i n t ’ s f

a c t u a l c o n t e n t i o n s l a c k a l l n o n

- f r i v o l o u s e v i d e n t i a r y s u p p o r t b e c a u s e

t h e r e i s n o r e q u i r e m e n t t h a t a l l e v i d e n c e b e a t t a c h e d t o t h e c o m p l a i n t

. H e r e

,

h o w e v e r

, i t i s p o s s i b l e t o c o n c l u d e t h i s w i t h r e s p e c t t o s o m e o f t h e f a c t u a l

c o n t e n t i o n s b e c a u s e t h e p l a i n t i f f s ’ a t t o r n e y s m i s r e p r e s e n t e d e a s i l y v e r i f i a b l e S E C

f i l i n g s

. A f

t e r s e t t i n g o u t t h e s e v i o l a t i o n s

, I a l s o p o i n t o u t s u s p i c i o u s f a c t u a l

c o n t e n t i o n s t o f

a c i l i t a t e t h e d i s t r i c t c o u r t ’ s r e v i e w o n r e m a n d

.

F i r s t

, t h e b l a t a n t v i o l a t i o n s

. A s d i s c u s s e d a b o v e

, i n t h e i r § 1 1 c l a i m s

, t h e

p l a i n t i f f s ’ a t t o r n e y s a l l e g e d t h a t e a c h o f t h e i n d i v i d u a l d e f e n d a n t s m e t a t l e a s t o n e

o f t h e s t a t u t o r y c o n d i t i o n s n e c e s s a r y t o t h e i r l i a b i l i t y a s i n d i v i d u a l s

. P a r a p h r a s i n g

,

t o b e l i a b l e

, a n i n d i v i d u a l m u s t h a v e e i t h e r

, ( 1 ) s i g n e d t h e r e g i s t r a t i o n s t a t e m e n t i n

s o m e c a p a c i t y

, ( 2 ) b e e n a d i r e c t o r o r n a m e d a s a b o u t t o b e c o m e a d i r e c t o r

, o r ( 3 )

b e e n a n u n d e r w r i t e r

. S e e 1 5 U

. S

. C

. § 7 7 k

. W h e n t h e p l a i n t i f f s f i l e d s u i t

, t h e t w o

r e g i s t r a t i o n s t a t e m e n t s a n d t h e S E C f i l i n g s c l e a r l y i n d i c a t e d t h a t e i g h t o f t h e n a m e d

i n d i v i d u a l d e f

e n d a n t s c o u l d n o t p o s s i b l y h a v e f i t i n t o e i t h e r o f t h e f

i r s t t w o

c a t e g o r i e s

. W i t h r e s p e c t t o t h e u n d e r w r i t e r c a t e g o r y

, w i t h o n e e x c e p t i o n

, n o n e o f

t h e s e e i g h t i n d i v i d u a l d e f e n d a n t s e v e n s o l d s h a r e s u n d e r e i t h e r r e g i s t r a t i o n

142s t a t e m e n t

. M o r e o v e r

, t h e r e i s n o a l l e g a t i o n t h a t a n y o f t h e i n d i v i d u a l d e f e n d a n t s

h a d b e e n u n d e r w r i t e r s

. A c c o r d i n g l y

, t h e p l a i n t i f f s ’ f a c t u a l c o n t e n t i o n t h a t t h e s e

i n d i v i d u a l d e f

e n d a n t s f i t i n t o § 1 1 ’ s c a t e g o r i e s o f t h o s e w h o c o u l d b e h e l d l i a b l e i s

f r i v o l o u s b e y o n d d o u b t

. S e e a l s o s u p r a p a r t I V

. A

. 1

.

M o v i n g o n

, i n a l l t h r e e c o m p l a i n t s

, t h e p l a i n t i f f s ’ a t t o r n e y s a l l e g e d t h a t

M e d i a a n d i t s O f

f i c e r s k n e w a n d f

a i l e d t o r e p o r t i n S E C f

i l i n g s t h a t S u m m i t a n d i t s

a g e n t s w e r e n o t r e g i s t e r e d w i t h t h e S E C

. ( C o m p l

. ¶ 3 3 ; F i r s t A m

. C o m p l

. ¶ 6 8 ;

S e c o n d A m

. C o m p l

. ¶ 4 5

. ) B u t a s e x p l a i n e d a b o v e

, M e d i a r e p e a t e d l y d i s c l o s e d

S u m m i t ’ s u n r e g i s t e r e d s t a t u s

. O n J u n e 1 6

, 2 0 0 5

, M e d i a m a d e i t s e n t i r e a g r e e m e n t

w i t h S u m m i t p u b l i c b y f i l i n g i t w i t h t h e S E C

. T h e a g r e e m e n t d e c l a r e d : “ I T I S

S P E C I F I C A L L Y U N D E R S T O O D T H A T [ S u m m i t ] I S N O T A N D D O E S N O T

H O L D I T S E L F O U T B E [ s i c ] A B R O K E R / D E A L E R

, B U T I S M E R E L Y A

‘ F I N D E R ’ I N R E F E R E N C E T O T H E C O M P A N Y P R O C U R I N G F I N A N C I N G

S O U R C E S A N D A C Q U I S I T I O N / M E R G E R C A N D I D A T E S

. ” R e l a t i o n s e r v e

M e d i a

, I n c

. , C u r r e n t R e p o r t ( F o r m 8

- K )

, E x

. 2

. 6 ( C o n s u l t i n g A g r e e m e n t )

, a t 6

( J u n e 1 6

, 2 0 0 5 )

. M e d i a a t t a c h e d t h e s a m e a g r e e m e n t t o i t s A u g u s t 2 0 0 5 q u a r t e r l y

r e p o r t

. S e e R e l a t i o n s e r v e M e d i a

, I n c

. , Q u a r t e r l y R e p o r t ( F o r m 1 0

- Q S B )

, a t 2 6

( A u g

. 1 5

, 2 0 0 5 ) ( i n c o r p o r a t i n g t h e a g r e e m e n t b y r e f e r e n c e )

. I n l i g h t o f t h e s e

143d i s c l o s u r e s

, n o r e a s o n a b l y c o m p e t e n t a t t o r n e y c o u l d h a v e a l l e g e d t h a t M e d i a f a i l e d

t o d i s c l o s e S u m m i t ’ s u n r e g i s t e r e d s t a t u s i n i t s S E C f i l i n g s

.

N o r c o u l d a r e a s o n a b l y c o m p e t e n t a t t o r n e y h a v e a l l e g e d

, a s p l a i n t i f f s ’

a t t o r n e y s d i d

, t h a t K a r p s i g n e d a F o r m 1 0

- Q S B o n J u n e 1 4

, 2 0 0 5

, w h i c h “ f a i l e d t o

i n d i c a t e t h a t R e l a t i o n S e r v e [ M e d i a ] h a d c o n t r a c t e d w i t h S u m m i t t o s e l l

R e l a t i o n S e r v e [ M e d i a ] s e c u r i t i e s o r a l e r t t h e i n v e s t i n g p u b l i c t o t h e c o n t i n g e n t c i v i l

a n d c r i m i n a l l i a b i l i t i e s t h a t d e r i v e f r o m t h i s a g r e e m e n t

. ” ( S e c o n d A m

. C o m p l

. ¶

3 7

. ) T h i s i s b e c a u s e K a r p n e v e r s i g n e d t h i s F o r m 1 0

- Q S B ; S c o t t Y o u n g d i d o n

b e h a l f o f t h e p r e d e c e s s o r p u b l i c c o r p o r a t i o n

, C h u b a s c o

. S e e C h u b a s c o R e s o u r c e s

C o r p

. , Q u a r t e r l y R e p o r t ( F o r m 1 0

- Q S B )

, a t 8 ( J u n e 1 4

, 2 0 0 5 ) ( s i g n e d b y S c o t t

Y o u n g

, d a t e d J u n e 1 3

, 2 0 0 5 )

. P l a i n t i f f s ’ c o u n s e l a l s o a l l e g e d t h a t K a r p s i g n e d a

“ F o r m 1 0 S B ” “ [ o ] n J u n e 3 0

, 2 0 0 5 ” ( S e c o n d A m

. C o m p l

. ¶ 4 3 ) b u t n o s u c h f i l i n g

e x i s t s ( o n l y a F o r m 8

- K w a s s i g n e d o r f i l e d o n t h a t d a t e )

. N o r e a s o n a b l y

c o m p e t e n t a t t o r n e y c o u l d h a v e c o n t e n d e d t h a t K a r p s i g n e d f o r m s t h a t w e r e n e v e r

f i l e d o r f o r m s t h a t w e r e f

i l e d b u t w i t h o u t h e r s i g n a t u r e

.

I n o w t u r n t o s o m e o f t h e q u e s t i o n a b l e f a c t u a l a s s e r t i o n s t h a t t h e d i s t r i c t

c o u r t s h o u l d e x a m i n e o n r e m a n d

. T o b e g i n

, t h e f i r s t a m e n d e d c o m p l a i n t c o n t a i n e d

a l l e g a t i o n s a n d d e f

e n d a n t s n o t r e a l l e g e d a n d r e n a m e d i n t h e s e c o n d a m e n d e d

c o m p l a i n t

. T h e f

i r s t a m e n d e d c o m p l a i n t a l l e g e d : ( 1 ) A l t a v i l l a s o l d M e d i a

144s e c u r i t i e s t o F l o r i d a r e s i d e n t S t u a r t F e i c k

, a n d ( 2 ) M e d i a r e c e i v e d i n f o r m a t i o n

a b o u t e m p l o y e e t h e f

t s a n d k i c k b a c k s i n J u l y 2 0 0 5

. ( F i r s t A m

. C o m p l

. ¶ ¶ 6 2

, 9 2

. )

N e i t h e r a l l e g a t i o n a p p e a r s i n t h e s e c o n d a m e n d e d c o m p l a i n t

. I n t h e f i r s t a m e n d e d

c o m p l a i n t

, t h e p l a i n t i f

f s n a m e d B a r r y H o n i g a n d R i c h a r d H i l l a s d e f e n d a n t s

, b u t

n o t i n t h e s e c o n d

. T o b e s u r e

, t h e r e m a y b e a c o m p l e t e l y i n n o c e n t e x p l a n a t i o n f o r

n o t r e a l l e g i n g t h e s e f

a c t s a n d r e n a m i n g t h e s e d e f e n d a n t s

, b u t t h e d i s t r i c t c o u r t m u s t

d e t e r m i n e w h a t e v i d e n t i a r y b a s i s t h e p l a i n t i f f s h a d i n t h e f

i r s t p l a c e

.

A p p e a r i n g i n b o t h t h e f i r s t a n d s e c o n d a m e n d e d c o m p l a i n t s

, a n o t h e r

q u e s t i o n a b l e f

a c t u a l c o n t e n t i o n i s t h a t M e d i a t r a d e d o n t h e N A S D A Q s t o c k

e x c h a n g e

. ( S e e F i r s t A m

. C o m p l

. ¶ 2 4 ; S e c o n d A m

. C o m p l

. ¶ 2 6

. ) M e d i a ’ s S E C

f i l i n g s i n d i c a t e t h a t i t t r a d e d o n l y o n t h e N a t i o n a l A s s o c i a t i o n o f S e c u r i t i e s

D e a l e r s ’ O v e r

- t h e

- C o u n t e r B u l l e t i n B o a r d

. T h i s s e e m s t o b e c o n f i r m e d b y t h e

O T C B B w e b s i t e

, w h i c h h a s s t o c k p r i c e s f o r M e d i a b e g i n n i n g i n J u l y 2 0 0 5 t h r o u g h

t h e f i l i n g o f t h e s e c o n d a m e n d e d c o m p l a i n t

. I f M e d i a t r a d e d o n N A S D A Q

, J a c o b y

w o u l d h a v e h a d a n e a s i e r t i m e p r o v i n g h i s R u l e 1 0 b

- 5 c l a i m s

. T h i s i s b e c a u s e

J a c o b y s e e m e d t o i n v o k e t h e f r a u d

- o n

- t h e

- m a r k e t d o c t r i n e

, w h i c h r e q u i r e s a

p l a i n t i f f t o p r o v e t h a t t h e s e c u r i t y t r a d e d o n a n e f f i c i e n t m a r k e t

. S e c u r i t i e s t r a d e d

o n N A S D A Q a r e o f

t e n p r e s u m e d t o b e t r a d e d o n a n e f f i c i e n t m a r k e t

. E

. g

. , B u r k e

v

. C h i n a A v i a t i o n O i l ( S i n g a p o r e ) C o r p

. , 4 2 1 F

. S u p p

. 2 d 6 4 9

, 6 5 3 ( S

. D

. N

. Y

.

1452 0 0 5 ) ( “ T h e N A S D A Q i s r e c o g n i z e d a s m a i n t a i n i n g a n e f f i c i e n t m a r k e t

, b u t t h e

C o u r t i s u n a w a r e o f a n y c o u r t h o l d i n g t h a t t h e O T C B B o r P i n k S h e e t s m e e t t h i s

s a m e s t a n d a r d

. ” )

. I f a n e f f i c i e n t m a r k e t c a n n o t b e p r e s u m e d

, a p l a i n t i f f m u s t p l e a d

a n d p r o v e i t s e x i s t e n c e

. E

. g

. , i d

. A l t h o u g h I c a n n o t t a k e j u d i c i a l n o t i c e t h a t M e d i a

n e v e r t r a d e d o n N A S D A Q

, t h e d i s t r i c t c o u r t s h o u l d e x p l o r e t h e b a s i s f o r t h e

p l a i n t i f f s ’ c o n t e n t i o n

.

F i n a l l y

, i n t h e i n i t i a l a n d s e c o n d a m e n d e d c o m p l a i n t s

, J a c o b y i n e f f e c t

a l l e g e d t h a t S u m m i t s o l d a l l o f t h e s e c u r i t i e s i n t h e J u n e p r i v a t e o f f e r i n g w h e r e

M e d i a g r o s s e d $ 2 m i l l i o n d o l l a r s f r o m b u y e r s i n C a l i f

o r n i a

, C o n n e c t i c u t

, F l o r i d a

,

I l l i n o i s

, I n d i a n a

, N e v a d a

, N e w J e r s e y

, N e w Y o r k

, O h i o

, a n d P e n n s y l v a n i a

.

R e l a t i o n s e r v e M e d i a

, I n c

. , N o t i c e o f S a l e s o f U n r e g i s t e r e d S e c u r i t i e s ( F o r m D )

, a t

4

, 7

– 8 ( J u l y 1 4

, 2 0 0 6 )

. T h i s a l l e g a t i o n i s i m p l i c i t b e c a u s e t h e p l a i n t i f f s r e p e a t e d l y

c l a i m e d t h a t M e d i a f

a i l e d t o r e p o r t a $ 2 m i l l i o n d o l l a r c o n t i n g e n t l i a b i l i t y a r i s i n g

o u t o f M e d i a ’ s s a l e s o f s e c u r i t i e s t h r o u g h S u m m i t

. ( S e e

, e

. g

. , S e c o n d A m

. C o m p l

.

¶ ¶ 4 4

, 4 6 ; s e e a l s o C o m p l

. ¶ 2 4 ( “ I n o r d e r t o c o m p l e t e t h e p u r c h a s e o f

R e l a t i o n S e r v e [ M e d i a ] s h a r e s b y t h e P l a i n t i f f a n d C l a s s m e m b e r s

. . . . ” )

. ) T h i s

a l l e g a t i o n i s s u s p i c i o u s f o r t w o r e a s o n s

.

F i r s t

, o t h e r t h a n T h o m p s o n

, i n t h e i n i t i a l a n d s e c o n d a m e n d e d c o m p l a i n t s

p l a i n t i f f s n e v e r p r o v i d e d s p e c i f

i c f a c t s a b o u t p r i v a t e o f

f e r i n g p u r c h a s e r s i n t h e

146o t h e r s t a t e s

. S e c o n d

, i n t h e i n i t i a l a n d s e c o n d a m e n d e d c o m p l a i n t s

, t h e p l a i n t i f f s

n e v e r a l l e g e d t h a t a n y u n r e g i s t e r e d b r o k e r p a r t i c i p a t e d i n t h e s a l e s e x c e p t f o r

S u m m i t

. T h i s l a t t e r p o i n t i s s i g n i f i c a n t b e c a u s e S u m m i t w a s e n t i t l e d t o a 7 %

f i n d e r ’ s f e e o f t h e “ t o t a l g r o s s f

u n d i n g p r o v i d e d ” b y i n v e s t o r s S u m m i t i n t r o d u c e d

t o t h e c o m p a n y

. R e l a t i o n s e r v e M e d i a

, I n c

. , C u r r e n t R e p o r t ( F o r m 8

- K )

, E x

. 2

. 6

( C o n s u l t i n g A g r e e m e n t )

, a t 6 ( J u n e 1 6

, 2 0 0 5 )

. T h e r e f o r e

, i f S u m m i t h a d b e e n

r e s p o n s i b l e f

o r a l l $ 2 m i l l i o n r a i s e d i n t h e J u n e p r i v a t e o f f e r i n g

, i t w o u l d h a v e

e a r n e d a $ 1 4 0

, 0 0 0 f

i n d e r ’ s f e e

. M e d i a ’ s S E C f

i l i n g s

, h o w e v e r

, i n d i c a t e t h a t

S u m m i t r e c e i v e d o n l y $ 2 8

, 5 0 0

. R e l a t i o n s e r v e M e d i a

, I n c

. , R e g i s t r a t i o n S t a t e m e n t

u n d e r t h e S e c u r i t i e s A c t o f 1 9 3 3 ( F o r m S B

- 2 )

, a t F

- 2 2 ( M a r c h 2 0

, 2 0 0 5 )

. T h u s

,

t h e d i s t r i c t c o u r t s h o u l d f i n d o u t w h a t e v i d e n c e t h e p l a i n t i f f s h a d t o s u p p o r t t h e i r

c l a i m t h a t S u m m i t ’ s a c t i v i t y s u b j e c t e d M e d i a t o a $ 2 m i l l i o n l i a b i l i t y

.

I c o u l d g o o n

, b u t w i l l s t o p h e r e

. T h e p l a i n t i f f s ’ a t t o r n e y s m u s t b e

s a n c t i o n e d f

o r t h e i r c l e a r v i o l a t i o n s o f R u l e 1 1 ( b ) ( 3 ) a n d t h e d i s t r i c t c o u r t s h o u l d

e x p l o r e t h e i r q u e s t i o n a b l e f a c t u a l c o n t e n t i o n s

— b o t h t h o s e I i d e n t i f i e d a n d a n y

o t h e r s

— o n r e m a n d

.

C

. R u l e 1 1 ( b ) ( 1 ) C o m p l i a n c e

R u l e 1 1 ( b ) ( 1 ) p r o h i b i t s f i l i n g p a p e r s f

o r a n i m p r o p e r p u r p o s e

. O n t h i s

r e c o r d

, w h i l e t h e r e a r e i n d i c a t i o n s t h a t t h e p l a i n t i f f s ’ a t t o r n e y s b r o u g h t t h i s a c t i o n

147f

o r a n i m p r o p e r p u r p o s e

, i t i s n o t s o c l e a r t h a t t h e d i s t r i c t c o u r t n e c e s s a r i l y a b u s e d

i t s d i s c r e t i o n i n d e n y i n g s a n c t i o n s u n d e r R u l e 1 1 ( b ) ( 1 )

.

M o s t t r o u b l i n g i s t h a t

, i n t h e f a c e o f a w a r n i n g b y t h e d i s t r i c t c o u r t

, t h e

p l a i n t i f f s ’ a t t o r n e y s s u e d m u l t i p l e o f f i c e r s w i t h o n l y t h e b a r e s t a l l e g a t i o n t h a t t h e y

h a d a n y p a r t i n

— o r e v e n k n o w l e d g e o f

— t h e a l l e g e d w r o n g d o i n g

. T h i s i s

e s p e c i a l l y s o i n l i g h t o f t h e p a r t i c u l a r O f f i c e r s t h e p l a i n t i f

f s a d d e d i n t h e f

i r s t

a m e n d e d c o m p l a i n t : n i n e o u t o f t e n o f t h e n e w d e f e n d a n t s e i t h e r n e v e r w o r k e d f o r

M e d i a o r b e g a n w o r k i n g t h e r e a f t e r ( a n d i n m o s t c a s e s l o n g a f t e r ) S u m m i t

a l l e g e d l y b r e a c h e d t h e c o n s u l t i n g a g r e e m e n t

. S e e T a b l e a t 1 4 2

, i n f r a

. A n d

,

p a r t i c u l a r l y w i t h r e s p e c t t o t h e § 1 1 c l a i m s

, t h e d e f e n d a n t s a d d e d f

o u r n e w

p l a i n t i f f s w h o c o u l d n o t p o s s i b l y b e h e l d l i a b l e u n d e r t h e s t a t u t e b r i n g i n g t h e t o t a l

n u m b e r o f s u c h d e f

e n d a n t s t o s e v e n ( e i g h t i f J e h a s s i i s i n c l u d e d f r o m t h e i n i t i a l

c o m p l a i n t )

. S u i n g i n d i v i d u a l d e f e n d a n t s w i t h o u t a n y l e g a l o r e v i d e n t i a r y b a s i s i s

s t r o n g e v i d e n c e t h a t

, a s t h e d e f e n s e c o u n s e l a r g u e d

, p l a i n t i f f s w e r e c o n d u c t i n g

s c o r c h e d e a r t h l i t i g a t i o n

. ( H r ’ g T r a n s

. 4

, N o v

. 3

, 2 0 0 6

. )

A n d i n d e e d

, i t c o u l d b e i n f e r r e d t h a t t h e p l a i n t i f

f s ’ a t t o r n e y s a t t e m p t e d t o

e x t o r t a s e t t l e m e n t b y s t r a t e g i c a l l y b r i n g i n g f r i v o l o u s c l a i m s

, a d d i n g n u m e r o u s

d e f e n d a n t s

, o v e r s t a t i n g t h e s c o p e o f t h e p l a i n t i f f s ’ i n j u r y

, a n d f

i l i n g d i f f i c u l t t o

d e c i p h e r s h o t g u n p l e a d i n g s

, a l l w h i l e c o u n t i n g o n t h e d i s t r i c t c o u r t n o t t o c l e a r t h e

148s m o k e

. I f p l a i n t i f f s ’ c o u n s e l p u r s u e t h i s s t r a t e g y l o n g e n o u g h

, d e f e n d a n t s w i l l

s e t t l e

. F u r t h e r e v i d e n c e o f t h i s c o m e s f r o m p l a i n t i f

f s ’ a t t o r n e y R i c h a r d B e l l ’ s

l e t t e r

, r e p l y i n g t o d e f

e n s e c o u n s e l ’ s w a r n i n g t h a t t h e s u i t w a s f r i v o l o u s

, t h a t “ a t

s o m e p o i n t i n t i m e b o t h o u r c l i e n t s w i l l w a n t t o r e s o l v e o r s e t t l e t h i s c a s e

. ”

O n t h e o t h e r h a n d

, t h e p l a i n t i f f s ’ a t t o r n e y s d i d v o l u n t a r i l y d r o p s o m e o f t h e

O f f i c e r d e f e n d a n t s a n d s o m e o f t h e i r f r i v o l o u s c l a i m s

. A n d a s f o r B e l l ’ s l e t t e r

,

m o s t c i v i l c a s e s s e t t l e

. A c c o r d i n g l y

, i t i s u n c l e a r w h e t h e r t h e p l a i n t i f f s ’ a t t o r n e y s

w e r e e m p l o y i n g a c a l c u l a t e d s t r a t e g y o r w e r e j u s t i n c o m p e t e n t

. A f t e r c o n s i d e r i n g 9 3

a n y n e w R u l e 1 1 ( b ) ( 2 ) a n d ( 3 ) v i o l a t i o n s

, t h e d i s t r i c t c o u r t s h o u l d e v a l u a t e t h e

e v i d e n c e a n d d e t e r m i n e w h e t h e r t h e a t t o r n e y s b r o u g h t t h i s c a s e i n b a d f a i t h o r f o r

a n i m p r o p e r p u r p o s e

.

F i n a l l y

, I n o t e t h a t t h e d i s t r i c t c o u r t m u s t d e t e r m i n e w h e t h e r J a c o b y o r

T h o m p s o n v i o l a t e d R u l e 1 1

. T h e c u r r e n t r e c o r d i s m u c h l e s s d e v e l o p e d i n t h i s 9 4

r e g a r d

, b u t t h e r e i s s t i l l o n e f a c t t h a t r a i s e s a n e y e b r o w : T h o m p s o n ’ s p u r c h a s e o n

The plaintiffs’ attorney s expressly disavowed a

ny incompetenc e in their a

rg ument to 9 3

the district court that they should be appointed c lass counsel: “The attorney s at Cohen & Malad

are highly skilled and experience d prac titioners with ex tensive experienc e in fe dera l securities

class ac tion lit igation and are throug hly committed to the vigor ous prosec ution of this action.”

(Mem. of L aw in Supp. of Pls.’ Mot. for Appointment as Co-L ead Pls. 13, Nov. 3, 2006.)

“A r epre sented pa

rty who is responsible for

a violation of Rule 11 may be sanc tioned. 9 4

Responsibili ty

for a violation will depend on the extent of the client’s involvement in the

manag ement of litig ation and the de cisions that resulted in a violation of the Rule.” J ames Wm.

Moore e t. al., Moore’ s Fe dera l Practice § 11.23[6] [c] [i ] (3d Ed. 2009).

149J u l y 1 7

, 2 0 0 6

, o f 1 0

, 0 0 0 M e d i a s h a r e s

, o n l y t o s e l l t h e m t h e n e x t d a y f o r a s m a l l

l o s s

. T h i s c o u l d i n d i c a t e t h a t T h o m p s o n p u r c h a s e d t h e s h a r e s t o e n a b l e h i m s e l f t o

a c t a s l e a d p l a i n t i f

f f o r t h e o p e n m a r k e t p u r c h a s e r s

. T h e d i s t r i c t c o u r t s h o u l d

c o n s i d e r t h i s o n r e m a n d

.

D

. T h e P l a i n t i f

f s ’ A t t o r n e y s ’ R u l e 1 1 V i o l a t i o n s T r i g g e r t h e P S L R A ’ s P r e s u m p t i v e

S a n c t i o n o f A t t o r n e y ’ s F e e s a n d O t h e r E x p e n s e s

H a v i n g i d e n t i f

i e d t h e v i o l a t i o n s o f R u l e 1 1 ( b ) t h a t c a n b e c o n c l u s i v e l y

d e t e r m i n e d f

r o m t h e r e c o r d

, a l l t h a t r e m a i n s i s t o d e t e r m i n e w h e t h e r t h e v i o l a t i o n s

a r e “ s u b s t a n t i a l

. ” T h e P S L R A c r e a t e s a p r e s u m p t i v e s a n c t i o n o f a d e f e n d a n t ’ s

a t t o r n e y s ’ f

e e s i n c u r r e d i n t h e a c t i o n f o r “ a n y c o m p l a i n t ” t h a t “ s u b s t a n t i a l l y ” f a i l s

t o c o m p l y w i t h R u l e 1 1

.

H e r e

, I w o u l d h o l d t h a t t h e p l a i n t i f f s ’ a t t o r n e y s t r i g g e r e d t h i s p r e s u m p t i o n

t h r e e s e p a r a t e t i m e s

. I n t h e i n i t i a l c o m p l a i n t

, a l l o f t h e f e d e r a l s e c u r i t i e s c l a i m s

v i o l a t e d R u l e 1 1 ( b ) ( 2 )

— t h e § 1 1 c l a i m

, t h e § 1 2 c l a i m

, a n d t h e R u l e 1 0 b

- 5 c l a i m

.

I n t h e f i r s t a m e n d e d c o m p l a i n t

, a l l o f t h e f e d e r a l s e c u r i t i e s c l a i m s v i o l a t e d R u l e

1 1 ( b ) ( 2 )

— T h o m p s o n a n d J a c o b y ’ s § 1 1 c l a i m s

, § 1 2 c l a i m s

, R u l e 1 0 b

- 5 c l a i m s

,

a n d § 2 0 ( a ) c l a i m s

. I n t h e s e c o n d a m e n d e d c o m p l a i n t

, J a c o b y r e a l l e g e d h i s

f r i v o l o u s R u l e 1 0 b

- 5 a n d § 2 0 ( a ) c l a i m s

. E v e n s e t t i n g a s i d e t h e R u l e 1 1 ( b ) ( 3 )

v i o l a t i o n s a n d t h e p o s s i b i l i t y o f 1 1 ( b ) ( 1 ) i m p r o p e r p u r p o s e v i o l a t i o n s

, i t i s c l e a r

150t h a t e a c h o f t h e t h r e e c o m p l a i n t s “ s u b s t a n t i a l [ l y ] f a i l [ e d ] ” t o c o m p l y w i t h R u l e 1 1

.

1 5 U

. S

. C

. § 7 8 u

- 4 ( c ) ( 3 ) ( A ) ( i i )

. O n r e m a n d

, t h e p l a i n t i f f s w i l l h a v e t h e 9 5

o p p o r t u n i t y t o r e b u t t h e p r e s u m p t i o n b y d e m o n s t r a t i n g t h a t t h e a w a r d o f a t t o r n e y s ’

f e e s w o u l d i m p o s e a n u n r e a s o n a b l e

, u n j u s t b u r d e n o n t h e m a n d t h a t t h e f a i l u r e t o

a w a r d f e e s w o u l d n o t i m p o s e a g r e a t e r b u r d e n o n t h e d e f e n d a n t s

. S e e 1 5 U

. S

. C

. §

7 8 u

- 4 ( c ) ( 3 ) ( B ) ( i )

.

E

. S u m m a r y

I n s u m

, w i t h r e s p e c t t o K a r p ’ s m o t i o n f o r R u l e 1 1 s a n c t i o n s u n d e r t h e

P S L R A

, I w o u l d h o l d a s f o l l o w s

. I w o u l d h o l d t h a t t h e p l a i n t i f f s ’ a t t o r n e y s

v i o l a t e d R u l e 1 1 ( b ) ( 2 ) w i t h r e s p e c t t o e v e r y f e d e r a l s e c u r i t i e s c l a i m b r o u g h t i n t h i s

c a s e

. I w o u l d h o l d t h a t t h e p l a i n t i f f s ’ a t t o r n e y s v i o l a t e d R u l e 1 1 ( b ) ( 3 ) b y a l l e g i n g

t h a t s o m e o f t h e i n d i v i d u a l d e f e n d a n t s ’ m e t § 1 1 ’ s s t a t u t o r y r e q u i r e m e n t s

, K a r p

s i g n e d a n d f

i l e d S E C f

i l i n g s t h a t s h e n e v e r s i g n e d o r f i l e d

, a n d M e d i a n e v e r

d i s c l o s e d S u m m i t ’ s u n r e g i s t e r e d s t a t u s

. F i n a l l y

, I w o u l d h o l d t h a t t h e R u l e 1 1 ( b )

v i o l a t i o n s t r i g g e r e d t h e P S L R A ’ s p r e s u m p t i v e s a n c t i o n o f t h e d e f e n d a n t ’ s

a t t o r n e y s ’ f

e e s i n c u r r e d i n t h e e n t i r e a c t i o n

. A r e m a n d w o u l d s t i l l b e n e c e s s a r y f o r

Although the Rule 11(b)(2) violations alone trig g er the PSL RA’s presumption, a 9 5

rema nd is stil l nece ssary

for f urther f indings re g arding (b)( 1) and ( 3) bec ause f urther violations

will have a be aring on the scope of the ha rm ca used to the def

endants a nd the plaintiffs’ a

bility

to rebut the pre sumption.

151f

o u r d e t e r m i n a t i o n s : ( 1 ) w h e t h e r T h o m p s o n a n d J a c o b y v i o l a t e d R u l e 1 1

, ( 2 )

w h e t h e r t h e p l a i n t i f

f s ’ a t t o r n e y s v i o l a t e d R u l e 1 1 ( b ) ( 1 ) b y f i l i n g a n y o r a l l o f t h e

c o m p l a i n t s f

o r a n i m p r o p e r p u r p o s e

, ( 3 ) w h e t h e r o t h e r R u l e 1 1 ( b ) ( 3 ) v i o l a t i o n s

e x i s t

, a n d ( 4 )

, i n a n y e v e n t

, w h e t h e r t h e p l a i n t i f f s c a n r e b u t t h e P S L R A ’ s

p r e s u m p t i v e a w a r d o f a t t o r n e y s ’ f e e s

. I w o u l d a l s o i n s t r u c t t h e d i s t r i c t c o u r t t o

c o n s i d e r w h e t h e r t h e p l a i n t i f f s s h o u l d b e s a n c t i o n e d u n d e r 2 8 U

. S

. C

. § 1 9 2 7 f o r

“ u n r e a s o n a b l y a n d v e x a t i o u s l y ” m u l t i p l y i n g t h e s e p r o c e e d i n g s

.

V

. T h e C o u r t E r r s b y I g n o r i n g K a r p ’ s C r o s s

- A p p e a l f o r R u l e 1 1 S a n c t i o n s o n t h e

S t a t e L a w C l a i m s A d v a n c e d i n t h e S e c o n d A m e n d e d C o m p l a i n t

T h e c o u r t d o e s n o t a d d r e s s K a r p ’ s c r o s s

- a p p e a l s e e k i n g n o n

- P S L R A R u l e 1 1

s a n c t i o n s a g a i n s t t h e p l a i n t i f f s ’ a t t o r n e y s f

o r f i l i n g t h e s t a t e l a w c l a i m s

. K a r p

p r o p e r l y m o v e d f

o r R u l e 1 1 s a n c t i o n s o n l y w i t h r e s p e c t t o t h e s e c o n d a m e n d e d

c o m p l a i n t

. S e e F e d

. R

. C i v

. P

. 1 1 ( c ) ( 2 ) ( r e q u i r i n g t h a t a m o t i o n f o r s a n c t i o n s b e

m a d e s e p a r a t e l y f

r o m a n y o t h e r m o t i o n a n d b e s e r v e d b u t n o t f i l e d f o r t w e n t y

- o n e

d a y s )

. T h e d i s t r i c t c o u r t d i d n o t c o n s i d e r K a r p ’ s m o t i o n s f o r s a n c t i o n s b e c a u s e i t

r e f u s e d t o e x e r c i s e i t s s u p p l e m e n t a l j u r i s d i c t i o n o v e r t h e c l a i m s a n d d i s m i s s e d

t h e m w i t h o u t p r e

j u d i c e

. S u c h a d i s m i s s a l d o e s n o t a n d s h o u l d n o t i n s u l a t e

f r i v o l o u s c l a i m s f

r o m R u l e 1 1 s c r u t i n y

. A c c o r d i n g l y

, I w o u l d v a c a t e t h e d i s t r i c t

c o u r t ’ s r e f

u s a l t o c o n s i d e r R u l e 1 1 s a n c t i o n s o n t h e s t a t e l a w c l a i m s b r o u g h t i n t h e

152s e c o n d a m e n d e d c o m p l a i n t a n d o r d e r t h e d i s t r i c t c o u r t t o d e c i d e w h e t h e r t o i m p o s e

s a n c t i o n s f

o r t h o s e c l a i m s

.

V I

. C o n c l u s i o n

C o n g r e s s e n a c t e d t h e P S L R A t o a d d r e s s t h e “ e v i l s f l o w i n g f r o m a b u s i v e

s e c u r i t i e s l i t i g a t i o n

, ” e s p e c i a l l y i n t h e c l a s s a c t i o n f o r m a t

. A s t h e S e n a t e

9 6

J u d i c i a r y C o m m i t t e e o b s e r v e d

, t h e s e e v i l s g e n e r a l l y h a v e t h e i r o n s e t w i t h “ t h e

f i l i n g o f t h e c o m p l a i n t a n d c o n t i n u e t h r o u g h t o t h e f i n a l d i s p o s i t i o n o f t h e

a c t i o n

. ” A m o n g o t h e r e v i l s

, t h e s e a c t i o n s g e n e r a t e “ a n i n t e r r o r e m e f f e c t o n 9 7

C o r p o r a t e A m e r i c a [

, ]

. . . a d d [ i n g ] s i g n i f i c a n t l y t o t h e c o s t o f r a i s i n g c a p i t a l a n d

r e p r e s e n t [ i n g ] a ‘ l i t i g a t i o n t a x ’ o n b u s i n e s s

. ” T h i s i s p r e c i s e l y w h a t h a s o c c u r r e d 9 8

i n t h i s c a s e

. I n a d d i t i o n t o i m p o s i n g a l i t i g a t i o n t a x o n M e d i a

, t h i s a c t i o n h a s

w r e a k e d h a v o c o n i n d i v i d u a l s w h o h a d a b s o l u t e l y n o t h i n g t o d o w i t h t h e i n j u r i e s

p u r p o r t e d l y s u f

f e r e d b y J a c o b y a n d T h o m p s o n a n d t h e m e m b e r s o f t h e c l a s s e s t h e y

a t t e m p t e d t o r e p r e s e n t

.

A c a r e f u l r e a d e r o f t h e o r d e r s a n d o p i n i o n s i n t h i s c a s e

— t h e d i s t r i c t c o u r t ’ s

p e r f u n c t o r y o r d e r r e f

u s i n g t o s a n c t i o n p l a i n t i f f s ’ c o u n s e l b e c a u s e

, a l t h o u g h

S. Rep. No. 104-98, at 8 (1995) , repr inted in 1995 U.S.C.C .A.N. 679, 687. 9 6

I d. As the Committ ee sa w it, “[a] complaint alleging violations of the Fe dera l 9 7

secur ities laws is easy

to cra ft and c an be f

iled with litt le or no due diligenc e.” I d.

I d. at 9, 1995 U.S.C.A.N. 688. 9 8

153p l a i n t i f

f s w e r e u n a b l e t o s t a t e a c l a i m s u f f i c i e n t t o w i t h s t a n d a R u l e 1 2 ( b ) ( 6 )

m o t i o n t o d i s m i s s

, t h e i r c l a i m s w e r e n o t f r i v o l o u s

, a n d t h i s c o u r t ’ s o p i n i o n

— m a y

c o n c l u d e t h a t C o n g r e s s w a s o u t t o l u n c h w h e n i t e n a c t e d t h e P S L R A

. F o r

, i f t h i s

c a s e i s t y p i c a l

, t h e f

e d e r a l c o u r t s c a n n o t

, a s a p r a c t i c a l m a t t e r

, e n f o r c e t h e P S L R A

.

T h a t i s

, i f a c a s e i s p l e d a s t h i s c a s e w a s

, h a n d l e d i n t h e d i s t r i c t c o u r t a s t h i s c a s e

w a s

, a n d d i s p o s e d o f o n a p p e a l a s t h i s c a s e i s

, I d o u b t t h a t t h e t i m e

, e x p e n s e

, a n d

b u r d e n o n j u d i c i a l r e s o u r c e s i n c u r r e d i n P S L R A e n f o r c e m e n t i s w o r t h t h e c a n d l e

.

T h e p o i n t i s n o t t o p i c k f a u l t w i t h C o n g r e s s f

o r p a s s i n g t h e P S L R A ; t h e p o i n t i s

t h a t t h e c o u r t s m u s t c a r r y o u t t h e P S L R A m a n d a t e b y e n f o r c i n g i t i n a m a n n e r

c o n s i s t e n t w i t h c o n g r e s s i o n a l i n t e n t

.

T h i s c a s e w a s l i t i g a t e d u n d e r t h e R u l e 1 2 ( b ) ( 6 ) u m b r e l l a

. T h e i n i t i a l a n d

t w o s u c c e e d i n g c o m p l a i n t s w e r e t y p i c a l s h o t g u n p l e a d i n g s a n d t h u s w e r e 9 9

p r a c t i c a l l y i n c a p a b l e o f p r e c i s e c o m p r e h e n s i o n b y t h e d i s t r i c t j u d g e a n d o p p o s i n g

c o u n s e l

. A f

t e r r e a d i n g t h e f

i r s t a m e n d e d c o m p l a i n t

, t h e d i s t r i c t j u d g e i n d i c a t e d a s

m u c h i n a t e l e p h o n e c o n v e r s a t i o n h e c o n d u c t e d w i t h c o u n s e l

. R e f e r r i n g t o t h e

c o m p l a i n t ’ s a l l e g a t i o n s

, h e m a d e t h e s e o b s e r v a t i o n s : “ N o t h i n g i s t i e d t o g e t h e r ; ” “ I

s e e v e r y l i t t l e c o n n e c t i n g t h e d o t s ; ” “ S e e m s t o m e t h e r e a r e s o m e r e a l g a p s t h e r e ; ”

See, e.g ., supra note 22. 9 9

154“ A g a i n

, i t ’ s k i n d o f h a r d t o f o l l o w

. I t ’ s l i k e

. . . w h o d i d w h a t ? ” T h e c o u r t 1 0 0

t h e r e f o r e g a v e p l a i n t i f

f s ’ c o u n s e l o n e m o r e c h a n c e t o f i l e a c o m p r e h e n s i b l e

p l e a d i n g t h a t w o u l d c o n n e c t t h e d o t s

, c l o s e t h e g a p s

, a n d e x p l a i n w h o d i d w h a t

.

T h e y r e s p o n d e d w i t h t h e s e c o n d a m e n d e d c o m p l a i n t

. I t d i d n o t c l e a r t h e a i r

, s o t h e

c o u r t d i s m i s s e d i t u n d e r R u l e 1 2 ( b ) ( 6 ) f o r f a i l u r e t o s a t i s f

y t h e h e i g h t e n e d p l e a d i n g

s t a n d a r d s o f R u l e 9 ( b ) a n d t h e P S L R A

.

W h e n t h e c o u r t s u b s e q u e n t l y t u r n e d t o t h e q u e s t i o n o f w h e t h e r t h e p l a i n t i f f s

a n d / o r t h e i r a t t o r n e y s s h o u l d b e s a n c t i o n e d u n d e r t h e P S L R A f o r n o n c o m p l i a n c e

w i t h t h e r e q u i r e m e n t s o f R u l e 1 1 ( b )

, i t d i d n o t p a r s e t h e a l l e g a t i o n s o f t h e

c o m p l a i n t s t h a t h a d b e e n f i l e d

, a s I h a v e d o n e h e r e

. R a t h e r

, i t p e r f u n c t o r i l y

c o n c l u d e d

— w i t h o u t r e f e r e n c e t o a n y o f t h e c o m p l a i n t s ’ a l l e g a t i o n s

— t h a t

p l a i n t i f f s ’ h a d c o m p l i e d w i t h R u l e 1 1

. T h e c o u r t s t a t e d

, “ P l a i n t i f f s ’ c l a i m s a r e n o t

f r i v o l o u s

, o r s o d e v o i d o f e v i d e n t i a r y s u p p o r t a s t o w a r r a n t s a n c t i o n s

. L i k e w i s e

,

t h e r e i s n o e v i d e n c e t h a t P l a i n t i f f s i n s t i t u t e d t h i s a c t i o n f

o r i m p r o p e r p u r p o s e s

,

s u c h a s t o h a r a s s D e f

e n d a n t s o r n e e d l e s s l y i n c r e a s e t h e c o s t o f l i t i g a t i o n

. ” ( O r d e r

o n M o t

. F o r A t t y s

. ’ F e e s a n d R u l e 1 1 S a n c t i o n s

, 1

, J u n e 1 2

, 2 0 0 7 ( i n t e r n a l

c i t a t i o n s o m i t t e d )

. )

. I a m c o n v i n c e d t h a t t h e c o u r t r u l e d i n t h i s w a y b e c a u s e i t d i d

n o t r e a l i z e j u s t h o w i n s u f f i c i e n t t h e p l e a d i n g s w e r e ; t h e c o u r t w a s t o o b u s y t o p l o w

(Hr’ g Tr. at 8, Ma

r. 6, 2007.) 1 0 0

155t h r o u g h t h e p l e a d i n g s a n d s e e t h e m f o r w h a t t h e y w e r e

— s i m p l y s m o k e a n d

m i r r o r s

.

T h i s c a s e d e m o n s t r a t e s t h a t i t i s e a s y f o r a d i s t r i c t c o u r t t o d i s m i s s a f e d e r a l

s e c u r i t i e s l a w c o m p l a i n t u n d e r R u l e 1 2 ( b ) ( 6 ) a n d R u l e 9 ( b ) w i t h o u t c a r e f u l l y

p a r s i n g i t

, i d e n t i f

y i n g w h i c h a l l e g a t i o n s p e r t a i n t o w h i c h c l a i m s

, a n d s q u e e z i n g t h e

c o n t r o v e r s y d o w n t o i t s c o r e

. T h a t a p p r o a c h

, h o w e v e r

, i s n o t c o n s i s t e n t w i t h t h e

P S L R A ’ s r e q u i r e m e n t s

. T h e P S L R A f o r c e s a d i s t r i c t c o u r t t o d e t e r m i n e w h e t h e r

t h e c o m p l a i n t

— t h r e e c o m p l a i n t s i n t h i s c a s e

— s a t i s f i e d “ e a c h r e q u i r e m e n t o f R u l e

1 1 ( b )

, ” a n d

, h a v i n g d o n e t h a t

, t o e n t e r “ i n t h e r e c o r d s p e c i f i c f i n d i n g s r e g a r d i n g

c o m p l i a n c e ” w i t h t h o s e r e q u i r e m e n t s

. T h e a p p r o a c h t h e c o u r t m u s t t a k e i s t h e 1 0 1

o n e I h a v e t a k e n h e r e : p a r s e t h e c o m p l a i n t ’ s a l l e g a t i o n s

, d e t e r m i n e w h i c h

a l l e g a t i o n s p e r t a i n t o w h i c h c l a i m s

, a n d e x a m i n e t h e c l a i m s u n d e r t h e P S L R A ’ s

l e n s

.

T h e P S L R A a n d t h e b r o a d e r i n t e r e s t s o f j u s t i c e w o u l d b e s t b e s e r v e d b y a

d i s t r i c t c o u r t l a y i n g t h e f o u n d a t i o n f

o r t h i s t a s k e a r l y o n

. H e r e

, f o r e x a m p l e

, t h e

d i s t r i c t c o u r t c o u l d h a v e d o n e s o a f t e r i t e x a m i n e d p l a i n t i f

f s ’ f i r s t a m e n d e d

c o m p l a i n t

. I t c o u l d h a v e p a r s e d t h e c o m p l a i n t

, d e t a i l e d t h e p r o b l e m s

, a n d

,

1 0 2

See 15 U.S.C. 78u-4(c )(1)

. 1 0 1

The c ourt did not read the initial complaint due to plaintiffs’ reque st for lea ve to file 1 0 2

an ame nded complaint. The court’s f irst encounter

with plaintiffs’ alleg ations came when it re ad

156p u r s u a n t t o i t s i n h e r e n t p o w e r

, o r d e r e d a r e p l e a d e r

. S u c h a n o r d e r w o u l d b e a k i n t o

a F e d e r a l R u l e o f C i v i l P r o c e d u r e 1 2 ( e ) m o t i o n f o r a m o r e d e f

i n i t e s t a t e m e n t i n

t h a t i t w o u l d “ p o i n t o u t t h e d e f e c t s ” o f t h e c o m p l a i n t a n d e x p l a i n w h a t w o u l d b e

n e c e s s a r y t o c u r e t h e m

. W e h a v e s t a t e d o n s e v e r a l o c c a s i o n s t h a t 1 0 3

T h e i m p o r t a n c e o f u s i n g t h e R u l e s t o u n c o v e r b o g u s c l a i m s a n d

d e f e n s e s

, t h e r e b y r e d u c i n g t h e p a r t i e s ’ d i s p u t e t o i t s b a r e e s s e n t i a l s

,

c a n n o t b e o v e r e m p h a s i z e d

. A s w e h a v e s t a t e d o n s e v e r a l o c c a s i o n s

. .

. i f

, i n t h e f a c e o f a s h o t g u n c o m p l a i n t

, t h e d e f e n d a n t d o e s n o t m o v e

t h e d i s t r i c t c o u r t t o r e q u i r e a m o r e d e f i n i t e s t a t e m e n t

, t h e c o u r t

, i n t h e

e x e r c i s e o f i t s i n h e r e n t p o w e r

, m u s t i n t e r v e n e s u a s p o n t e a n d o r d e r a

r e p l e a d e r

. I m p l i c i t i n s u c h i n s t r u c t i o n i s t h e n o t i o n t h a t i f t h e

1 0 4

p l a i n t i f f f a i l s t o c o m p l y w i t h t h e c o u r t ’ s o r d e r

— b y f i l i n g a r e p l e a d e r

the first ame nded complaint prior to its telephone confe renc e with the par ties’ attorne y s.

Fe dera l Rule of Civil Procedur e 12(e ) provides: 1 0 3

A [defenda

nt] may move for a

more de finite statement of a [claim] . . . which is

so vag ue or a

mbiguous that the pa

rty cannot r easona

bly prepa re a response . The

motion mus t be made be fore filing a responsive ple ading and must point out t he

defe cts complained of

and the de tails desired. I f the c ourt order s a more de finite

statement and the order

is not obey ed within 14 day s after notice of the order

or

within the time the court sets, the c ourt may strike the [claim] or iss ue any other

appropr iate orde r.

Dischar g ing this duty

ensure s that the issues g et def ined at the 1 0 4

ear liest stage s of litigation. The district court “should [strike] t he

complaint[ ] and instruct[ ] counsel to re plead the[ ] case[ ] -if

counsel c ould in good f

aith make the r epre sentations require d by

Fe d. R. Civ. P . 11(b).” Cramer v. Florida , 117 F.3d 1258, 1263

(11th Cir. 1997) citing Ebrahimi v. City of Huntsville Bd. of

Educ., 114 F .3d 162 (11th Cir. 1997) (pe r cur iam); Cesnik v.

Edg ewood B aptist Church, 88 F.3d 902, 905 ( 11th Cir. 1996);

Ander son v. Dist. Bd. of Tr ustees of Cent. F la. Communit y College , 77 F.3d 364, 366–67 ( 11th Cir. 1996); Pelletier v.

Z weife l, 921 F.2d 1465, 1517–18 (11th Cir. 1991); F ullman v.

Gra ddick, 739 F.2d 553, 557 ( 11th Cir. 1984).

157w i t h t h e s a m e d e f i c i e n c y

— t h e c o u r t s h o u l d s t r i k e h i s p l e a d i n g o r

, d e p e n d i n g o n t h e c i r c u m s t a n c e s

, d i s m i s s h i s c a s e a n d c o n s i d e r t h e

i m p o s i t i o n o f m o n e t a r y s a n c t i o n s

.

B y r n e v

. N e z h a t

, 2 6 1 F

. 3 d 1 0 7 5

, 1 1 3 2

– 3 3 ( 1 1 t h C i r

. 2 0 0 1 ) ( f o o t n o t e i n o r i g i n a l )

. 1 0 5

T h e a t t o r n e y s r e p r e s e n t i n g t h e p l a i n t i f f s i n t h i s c a s e p u r p o r t t o b e

s o p h i s t i c a t e d c l a s s a c t i o n l a w y e r s w h o s p e c i a l i z e i n f e d e r a l s e c u r i t i e s l a w c a s e s

. I

h a v e n o d o u b t t h a t f

a c e d w i t h a d e t a i l e d o r d e r r e q u i r i n g a m o r e d e f i n i t e s t a t e m e n t

“ c o n n e c t i n g t h e d o t s

, ” f i l l i n g i n t h e “ g a p s

, ” a n d i n d i c a t i n g “ w h o d i d w h a t

, ” s o t h a t

t h e a l l e g a t i o n s w o u l d n o t b e “ h a r d t o f o l l o w

, ” s o p h i s t i c a t e d s e c u r i t i e s l a w y e r s

w o u l d h a v e d o n e a b e t t e r j o b o f d r a f t i n g t h e s e c o n d a m e n d e d c o m p l a i n t

. B e t t e r

y e t

, h a d t h e c o u r t e n g a g e d c o u n s e l f a c e

- t o

- f a c e i n c h a m b e r s

, e x p l a i n e d w h a t t h e

P S L R A a n d R u l e 1 1 ( b ) d e m a n d e d

, a n d t o l d t h e m w h a t t h e y w o u l d h a v e t o a l l e g e

t o s t a y i n c o u r t

, w e p r o b a b l y w o u l d n o t b e h e r e

. C o u n s e l w o u l d h a v e d i s m i s s e d

t h e c a s e v o l u n t a r i l y u n d e r F e d e r a l R u l e o f C i v i l P r o c e d u r e 4 1 ( a ) ( 1 ) ( A )

, o r

, i f t h e y

p r o d u c e d a n a m e n d e d c o m p l a i n t t h a t s i m p l y m i m i c k e d t h e i r e a r l i e r c o m p l a i n t ( a s

t h e s e c o n d a m e n d e d c o m p l a i n t d i d )

, t h e c o u r t

, i n t h e e x e r c i s e o f i t s d i s c r e t i o n

,

w o u l d h a v e d i s m i s s e d t h e c o m p l a i n t u n d e r R u l e 4 1 ( b ) a n d i t s i n h e r e n t p o w e r f o r

Fe d. R. Civ. P . 16 provides fur ther a uthority for a district court to squeeze down the 1 0 5

case sua sponte. “A t any

pretria l confe renc e, the c ourt may consider a

nd take a ppropriate action

on the following matters: (A) formulating and simplify ing the issues, and eliminating frivolous

claims or def

enses; (B ) ame nding the pleading s if nece ssary or desire able . . . .” Fe d. R. Civ. P

. 16(c) (2)( A)–(B ).

158f

a i l u r e t o c o m p l y w i t h a c o u r t o r d e r

. H a d t h e c o u r t d e a l t w i t h p l a i n t i f f s ’ c o u n s e l 1 0 6

i n t h i s w a y

, i t w o u l d h a v e b e e n e a s i e r f o r t h e c o u r t

— r e g a r d l e s s o f t h e t a c t

p l a i n t i f f s ’ c o u n s e l m a y h a v e t a k e n i n r e s p o n d i n g t o t h e c o u r t ’ s d e m a n d f o r a m o r e

d e f i n i t e s t a t e m e n t

— t o c a r r y o u t i t s P S L R A d u t i e s a t t h e e n d o f t h e d a y

.

O f c o u r s e

, t h a t i s n o t h o w t h e d i s t r i c t c o u r t h a n d l e d t h i s c a s e

. A n d t h a t

w o u l d h a v e b e e n s a t i s f

a c t o r y h a d t h e d i s t r i c t c o u r t t a k e n u p t h e t a s k o f p a r s i n g t h e

c o m p l a i n t s a t t h e e n d o f t h e a c t i o n

. I n s t e a d

, t h e d i s t r i c t c o u r t k i c k e d t h e t a s k d o w n

t h e r o a d

. T o d a y

, t h i s c o u r t u n f o r t u n a t e l y f

o l l o w s t h e s a m e a p p r o a c h

. T h i s j u d i c i a l

a p p r o a c h t a k e s t h e t e e t h o u t o f t h e P S L R A a n d d e l a y s t h e d a y w h e n t h e p a r t i e s w i l l

h a v e r e p o s e

. M e a n w h i l e

, l i t i g a n t s i n t h e c o u r t ’ s q u e u e w a i t i n g t o h a v e t h e i r c a s e s

h e a r d w i l l h a v e t o w a i t e v e n l o n g e r

. W o r s t o f a l l

, h a n d l i n g P S L R A c a s e s i n t h i s

As we state d in State Ex ch. B ank v. Ha rtline, 1 0 6

The F eder al Rules expressly authorize a district cour

t to dism iss a claim,

including a

counter claim, or e ntire ac tion for fa ilure to prosec ute or obe y a cour t

order or fe dera l rule. F ed. R. Civ. P. 41(b)-(c) . See, e.g ., Vea zey v. Young ’s

Yac ht Sale & Ser

vice, I nc., 644 F .2d 475 (5th Cir. 1981). I n addition to the

fede ral rule , this power, as w ell as the powe r to strike a ple ading , is inherent in a

trial court’ s authority

to enforc e its order s and ensur e prompt disposition of lega l

actions. L ink v. Wabash Railroad Co., 370 U.S. 626, 630–31, 82 S. C t. 1386,

1388–89, 8 L . Ed. 2d 734 (1962); Mar shall v. Southern Fa rm Bur eau Ca sualty

Co., 353 F.2d 737, 737 (5th Cir.), c ert. de nied, 384 U.S. 910, 86 S. Ct . 1352, 16

L . Ed. 2d 363 (1966). Cf. 6 C. Wrig ht & A. Miller, F eder al Prac tice and

Procedur e § 1526 at 597 ( 1971) (de fense may be stricke n for f

ailure to provide

information re quired in pre trial order ). An a ppellate c ourt revie wing the exercise

of this power is constra ined by the abuse of discre tion standard. L ink, 370 U.S. at

633, 82 S. Ct . at 1390.

693 F.2d 1350, 1352 ( 11th Cir. 1982).

159m a n n e r d e s t r o y s c o n f i d e n c e i n t h e a b i l i t y o f t h e c o u r t s t o r e s o l v e d i s p u t e s a n d

a d m i n i s t e r c i v i l j u s t i c e

. C o n g r e s s

, t h e c o u r t s

, t h e l i t i g a n t s

, a n d t h e p u b l i c d e s e r v e

b e t t e r

.

I r e s p e c t f

u l l y d i s s e n t

.

160T a b l e 1 0 7

D e f e n d a n t C o m p l a i n t ( s ) N a m e d a s

D e f e n d a n t R e l a t i o n s e r v e M e d i a , I n c

. T e r m

o f S e r v i c e

D a n i e l l e K a r p I n i t i a l

, F i r s t A m e n d e d

,

S e c o n d A m e n d e d C E O ( 6 / 1 3 / 2 0 0 5

– 6 / 2 1 / 2 0 0 5 )

P r e s i d e n t ( 6 / 1 3 / 2 0 0 5

– 2 / 3 / 2 0 0 6 )

D i r

. ( 6 / 1 3 / 2 0 0 5

– 2 / 3 / 2 0 0 6 )

S c o t t H i r s c h F i r s t A m e n d e d

, S e c o n d

A m e n d e d C O O ( 6 / 1 3 / 2 0 0 5

– 2 / 2 / 2 0 0 6 )

M a n d e e A d l e r I n i t i a l

, F i r s t A m e n d e d

,

S e c o n d A m e n d e d C E O ( 6 / 2 1 / 2 0 0 5

– 1 1 / 1 1 / 2 0 0 5 )

D i r

. ( 6 / 3 0 / 2 0 0 5

– 1 1 / 1 1 / 2 0 0 5 )

W a r r e n M u s s e r I n i t i a l

, F i r s t A m e n d e d

,

S e c o n d A m e n d e d D i r

. ( 6 / 2 1 / 2 0 0 5

– 1 0 / 3 1 / 2 0 0 5 )

O h a d J e h a s s i I n i t i a l C O O ( 7 / 2 0 0 5

– )

A d a m

W a s s e r m a n F i r s t A m e n d e d

, S e c o n d

A m e n d e d C F O ( 8 / 9 / 2 0 0 5

– 2 / 3 / 2 0 0 6 )

E m p l o y e e ( 2 / 3 / 2 0 0 6

– 6 / 1 5 / 2 0 0 6 )

M i c h a e l

B r a u s e r F i r s t A m e n d e d

, S e c o n d

A m e n d e d C h a i r m a n ( 1 0 / 3 1 / 2 0 0 5

– 9 / 7 / 2 0 0 6 )

S h a w n

M c N a m a r a F i r s t A m e n d e d

, S e c o n d

A m e n d e d I n t e r i m C E O

( 1 1 / 3 0 / 2 0 0 5

– 2 / 3 / 2 0 0 6 )

S V P ( 1 1 / 3 0 / 2 0 0 5

– 6 / 1 5 / 2 0 0 6 )

This table is based on the a lleg ations plaintiffs made in the se cond ame nded 1 0 7

complaint, supplemented by SEC fili ng s where noted below. The abbre viations are: c hief

executive offic er ( “CEO”) , direc tor (“D ir.”), c hief ope ratingoffice r (“ COO”), c hief fina ncial

office r (“ CFO” ), assistant sec reta ry (“A ssistant S ec’ y ”); senior vice pr esident (“ SVP”).

The diff ere nce be tween the dates listed and what was pled a re a s follows: Danielle Ka rp

(the sec ond amende d complaint alleg ed only that she wa s president fr om J une 13, 2005 to

Fe bruar y 3, 2006); Mandee Heller Adler ( the CEO dates a

re the same but the sec ond amende d

complaint alleg ed only

that she ser

ved as a direc tor); Adam C. Wasserman ( the sec ond amende d

complaint alleg ed only

that he ser

ved as CF O from Aug ust 9, 2005 until Fe bruar y 3, 2006);

Shawn McNa

mara (the star t dates ar e the sa me but the sec ond amende d complaint lumped

toge ther the inter im president and SVP positions by alleg ing tha t McNama

ra se rved in both roles

for his entire time at Media).

161A s s i s t a n t S e c ’ y

( 1 1 / 3 0 / 2 0 0 5

– 6 / 1 5 / 2 0 0 6 )

P a u l S o l t o f

f F i r s t A m e n d e d

, S e c o n d

A m e n d e d C E O ( 2 / 3 / 2 0 0 6

– )

D i r

. ( 2 / 3 / 2 0 0 6

– )

E r i c O b e c k F i r s t A m e n d e d

, S e c o n d

A m e n d e d P r e s i d e n t ( 2 / 3 / 2 0 0 6

– )

D o n a l d G o u l d

,

J r

. F i r s t A m e n d e d

, S e c o n d

A m e n d e d C F O ( 2 / 3 / 2 0 0 6

– )

S c o t t Y o u n g F i r s t A m e n d e d

, S e c o n d

a m e n d e d N o n e ( r e s i g n e d o n c o n s u m m a t i o n

o f m e r g e r )

R i c h a r d H i l l F i r s t A m e n d e d N o n e

B a r r y H o n i g F i r s t A m e n d e d N o n e

162