Rosenfarb v. AOL, Inc. et al
Filing
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OPINION AND ORDER. The Court therefore finds that counsel has violated Rule 11 by making factual allegations that are utterly lacking in support, Kiobel, 592 F.3d at 81, and that sanctions must be imposed. 15 U.S.C. § 78u-4(c)(2). A separate Order will address the process for setting the amount of the sanctions that will be imposed. (Signed by Judge Denise L. Cote on 12/5/2013) (gr)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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IN RE AOL, INC. REPURCHASE OFFER
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LITIGATION
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12 Civ. 3497 (DLC)
OPINION AND ORDER
APPEARANCES:
For defendants:
Jonathan M. Moses
Adam M. Gogolak
Michael J. McDuffie
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, NY 10019
For plaintiff:
Peter C. Harrar
Beth A. Landes
Wolf Haldenstein Adler Freeman & Herz LLP
270 Madison Avenue
New York, NY 10016
DENISE COTE, District Judge:
In an Opinion and Order of August 19, 2013, the Court
granted defendants’ motion to dismiss this case and directed the
Clerk of Court to enter judgment for the defendants.
In re AOL,
Inc. Repurchase Offer Litig., --- F. Supp. 2d ---, 2013 WL
4441516 (S.D.N.Y. 2013).
Under the Private Securities
Litigation Reform Act of 1995 (the “PSLRA”), courts are required
to make specific findings as to the compliance by all parties
and attorneys with Rule 11(b), Fed. R. Civ. P., at the
conclusion of all private actions arising under the Securities
Exchange Act of 1934, as does this one.
15 U.S.C. § 78u-4(c);
ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 579 F.3d 143, 152 (2d
Cir. 2009).
This Opinion concludes that plaintiff’s counsel
must be sanctioned for filing a frivolous complaint.
BACKGROUND
On April 9, 2012, AOL announced the sale of a patent
portfolio to Microsoft for $1.056 billion in cash.
News of the
sale caused the price of AOL’s stock to jump 43% in a single
day.
Less than a month later, on May 3, the Rosenfarb Law Firm
filed this action.
At a conference on August 10, 2012, Barbara
Keeling was appointed Lead Plaintiff of the putative class and
Wolf Haldenstein was selected as Lead Counsel.
Wolf Haldenstein
filed a consolidated complaint on September 28.
In contrast to the original complaint, which made vague and
conclusory allegations about an effort by AOL to sell its
portfolio of patents, this new consolidated complaint introduced
a clear theory of fraud.
It claimed, in essence, that AOL had
conducted a sham auction of the patent portfolio to disguise the
fact that it had months earlier agreed to sell the patents to
Microsoft.
The consolidated complaint alleged that the purpose
of this dissimulating was to keep AOL’s stock price depressed
while the company completed a repurchase program under which it
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acquired approximately 14.8 million shares of its own stock,
stock that became much more valuable when the news of the patent
sale was revealed.
The principal source for this theory was a blog post
written by Mark Stephens under the pen name Robert X. Cringely.
Among the allegations in the pleading was the assertion that
“during the fall”, before the spring sale of the portfolio,
AOL's Armstrong had called Microsoft's CEO Steve Ballmer “to
spur Microsoft's long-held interest in acquiring the Patent
Portfolio and to close the deal”.
Similar allegations were
sprinkled through the pleading.
On October 26, 2012, the defendants moved to dismiss the
consolidated complaint.
They complained about the
implausibility of the complaint’s theory and the lack of support
for it, as well as its reliance on the blog post.
While the
plaintiff's opposition to the motion reiterated support for the
“secret deal” theory, the plaintiff did not provide any source
for the allegation that Armstrong and Ballmer closed the deal in
a telephone call months before the auction.
Instead, plaintiff
insisted that the complaint “does not rely on Stephens’ blog for
its factual allegation that a secret deal was reached with
Microsoft,” and instead argued that the secret deal theory was
“a fair inference.”
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An Order of January 4, 2013, gave the plaintiff a final
opportunity to amend her complaint, of which the plaintiff took
advantage.
On January 18, the plaintiff filed an amended
consolidated complaint (the “Amended Complaint”).
The Amended
Complaint continued to rely on the blog and to press the theory
of a secret, undisclosed deal between AOL and Microsoft.
It
alleged that AOL had selected Microsoft to buy the portfolio
“well before” the beginning of the auction process, and that
AOL’s Armstrong had contacted Microsoft’s Ballmer during the
fall of 2011 “to close out” AOL’s expectation that Microsoft
would acquire the portfolio and to “close the deal.”
The defendants renewed their motion to dismiss on February
1, noting again that the plaintiff still identified no support
for the allegation that Armstrong and Ballmer had reached a
secret deal by telephone.
In opposing the motion, the plaintiff
disclosed for the first time that the source for this allegation
was an April 9, 2012 news report from Reuters.
The Reuters story did not provide support for the
allegations about the telephone call or the secret deal.
It
generally described the sales process as a genuine auction and
reported that bids had been received from Amazon, eBay, Google,
and Facebook, with the final buyer selected “late on April 5.”
The article’s only mention of the telephone call was its
statement that “Armstrong said he made a call to [Ballmer]
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alerting him of the decision to sell the patents.”
The Reuters
story thus fell far short of supporting an allegation that the
conversation had occurred in the fall, that is, months before
the auction, or that the men had closed any deal during the
conversation.
In fact, the article directly contradicts such an
account, as it indicates only that Armstrong told Ballmer that
AOL had decided to sell the patents.
The article also described
a vigorous auction process with a final buyer selected on April
5.
Defendants’ motion to dismiss was granted in an Opinion &
Order of August 19.
In the Opinion & Order, the Court found
that the “allegation that Armstrong placed one telephone call to
Ballmer to ‘close the deal’ is recklessly made without any
factual support.”
2013 WL 4441516, at *7.
It added that “[n]o
fair reading of the article suggests that a call was made to
‘close’ a secret deal in advance of the auction.”
n.3.
Id. at *7
An Order issued that day required the plaintiff to address
whether sanctions should not be imposed pursuant to the PSLRA.
DISCUSSION
Rule 11(b), Fed. R. Civ. P., provides that
[b]y presenting to the court a pleading . . . an
attorney . . . certifies that to the best of [her]
knowledge, information, and belief, formed after an
inquiry reasonable under the circumstances, . . . the
factual contentions have evidentiary support or, if
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specifically so identified, will likely have
evidentiary support after a reasonable opportunity for
further investigation or discovery . . . .
Rule 11 thus imposes on attorneys “an affirmative duty to
conduct a reasonable inquiry into the facts and the law.”
Bus.
Guides, Inc. v. Chromatic Commc’ns Enters., Inc., 498 U.S. 533,
551 (1991).
“Since the inquiry must be ‘reasonable under the
circumstances,’ liability for Rule 11 violations requires only a
showing of objective unreasonableness on the part of the
attorney or client signing the papers.”
(citation omitted).
ATSI, 579 F.3d at 150
The “PSLRA obviates the need to find bad
faith prior to the imposition of sanctions,” id. at 152, and
indeed reflects a desire by Congress to “punish abusive
litigation severely.”
Gurary v. Nu-Tech Bio-Med, Inc., 303 F.3d
212, 222 (2d Cir. 2002).
Nevertheless, courts must “ensure that
any sanctions decision is made with restraint,” Storey v. Cello
Holdings, LLC, 347 F.3d 370, 387 (2d Cir. 2003) (citation
omitted), as “Rule 11 sanctions are a coercive mechanism,
available to trial court judges, to enforce ethical standards
upon attorneys appearing before them, while being careful not to
rein in zealous advocacy.”
Kiobel v. Millson, 592 F.3d 78, 83
(2d Cir. 2010) (citation omitted).
Rule 11(b)(3), which requires that all “factual contentions
have evidentiary support,” is violated where “after reasonable
inquiry, a competent attorney could not form a reasonable belief
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that the pleading is well grounded in fact.”
Kropelnicki v.
Siegel, 290 F.3d 118, 131 (2d Cir. 2002) (citation omitted).
“Rule 11 neither penalizes overstatement nor authorizes an
overly literal reading of each factual statement,” Kiobel, 592
F.3d at 83, and an erroneous statement of fact in a pleading
“can give rise to the imposition of sanctions only when the
particular allegation is utterly lacking in support.”
Id. at 81
(citation omitted).
In its opening submission addressed to the issue of
sanctions, which is presented in the form of proposed findings
of fact and conclusions of law, the plaintiff largely ignores
the core issues here.
It does not directly address the source
of the conspiracy theory, the reliance on the blog, or the
infirmities of the allegations regarding the call between
Armstrong and Ballmer.
It provides essentially no basis to find
that sanctions should not be imposed.
In an accompanying
declaration, Peter Harrar, who signed the consolidated
complaint, states that he did not “intend to imply that the
terms of the deal were finally set in that call.”
Harrar
stresses that the word “close” was intended to “show efforts to
move to a close of Microsoft’s plan to purchase the Patent
Portfolio, or to close AOL’s plan to monetize the intrinsic
value of the Patent Portfolio, rather than the transaction’s
actual closing at a finally determined price.”
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In his reply, plaintiff’s counsel contends that the use of
the phrase to “close the deal” was only intended to convey that
the call to Ballmer was made “to bring the plan into fruition,”
that is, a plan to monetize AOL's patent portfolio.
Plaintiff’s
counsel admits that this was “perhaps a broad interpretation” of
the Reuters news article, but one that fell within the bounds of
vigorous advocacy.
Counsel also asserts that his pleading was
not actually that the auction was a sham: “It is not strictly
what Plaintiff was arguing.”
Counsel explains that they were
only seeking to allege that AOL designed an auction process to
favor Microsoft and its superior knowledge of the patent
portfolio.
Neither of these arguments has merit.
This interpretation of the phrase “close the deal” is
belied by both the overall theory and particular language of the
Amended Complaint, the thrust of which is unmistakably that AOL
and Microsoft reached a deal that AOL kept secret in order to
repurchase its stock at an artificially deflated price and later
covered up with a sham auction.
Indeed, the Amended Complaint
alleges that “AOL had already committed to a plan to sell its
Patent Portfolio to Microsoft, and was actively bringing to
fruition the sale in secret, while benefitting from the
artificially low price of AOL stock.”
The Amended Complaint
elsewhere alleges that “defendants had already committed to a
plan to sell AOL’s valuable Patent Portfolio and had selected
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Microsoft as purchaser” and that “Armstrong had called [Ballmer]
to close out Microsoft’s long-anticipated plan to acquire the
Patent Portfolio.”
(Emphasis added).
These allegations appear
throughout the Amended Complaint in similar language.
It is not possible to square the allegations that the
purpose of the call was to “close out” Microsoft’s plan to
acquire the patents, or that Microsoft was the “inevitable
purchaser,” or that defendants “had selected Microsoft as
purchaser,” with counsel’s current insistence that the Amended
Complaint was “not about an undisclosed deal” but rather only
“an undisclosed expectation.”
The secret deal theory, including
the allegation concerning the telephone call, was plainly at the
heart of the plaintiff’s case, and the recent submissions by
counsel demonstrate that this theory was “utterly lacking in
support.”
Kiobel, 592 F.3d at 81.
Notably, counsel has not
cited any evidence that this telephone call even occurred in the
fall, let alone that it resulted in a secret determination that
Microsoft would purchase the patents.
Indeed, the only factual
support for the mere existence of the telephone call blatantly
contradicts any such suggestion, as it reports that the purpose
of the call was to “alert[] [Ballmer] of the decision to sell
the patents.”
Counsel also attempts to downplay the allegations regarding
the auction, insisting that the word “sham” was never used and
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that the Amended Complaint alleged only that the auction “was
designed to favor Microsoft” and that Microsoft was merely “the
advantaged bidder and expected winner.”
mischaracterizes its own complaint.
Again counsel
It is true that the Amended
Complaint stops short of using the word “sham.”
It does,
however, repeatedly refer to the auction as a “putative” auction
and allege that it “strains credulity” to suggest “that this was
a full-fledged open auction.”
The Amended Complaint also
suggests that Goldman Sachs placed a bid for the patents (an
allegation drawn solely from the Cringely blog post) and then
argues that Goldman Sachs was “a strategic partner of Microsoft,
acting to portray a private transaction as a public auction.”
This allegation, that an auction in which several major tech
companies were widely reported to have placed bids was actually
a “private transaction” with a “designated buyer” is also
utterly lacking in factual support.
Counsel also argues that the unsupported allegations
regarding the telephone call between Armstrong and Ballmer and
the auction were “de minimis” and that a complaint is not “fully
sanctionable” under the PSLRA unless it contains a “substantial
failure to comply with . . . Rule 11(b).”
215 (citation omitted).
Gurary, 303 F.3d at
To the extent counsel relies on Gurary
to argue against the imposition of sanctions rather than to
dispute their magnitude, it relies on a misreading of that case,
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which addressed only the proper amount of sanctions that should
be imposed and not whether sanctions were appropriate.
219.
Id. at
Indeed, the PSLRA provides that “‘for substantial failure
of any complaint to comply with any requirement’ of Rule 11(b),
the award shall be the full amount of the reasonable attorneys’
fees and costs.”
4(c)(3)(A)).
Id. at 215 (quoting 15 U.S.C. § 78u-
Indeed, the relevant subsection of the PSLRA reads
“mandatory sanctions:
If the court makes a finding . . . that a
party or attorney violated any requirement of Rule 11(b) . . .
the court shall impose sanctions.”
15 U.S.C. § 78u-4(c)(2).
At
any rate, counsel’s suggestion that the violations here were de
minimis is entirely unconvincing.
As discussed above, the
unsupported factual allegations lay at the heart of the Amended
Complaint.
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CONCLUSION
The Court therefore finds that counsel has violated Rule 11
by making factual allegations that are “utterly lacking in
support,” Kiobel, 592 F.3d at 81, and that sanctions must be
imposed.
15 U.S.C. § 78u-4(c)(2).
A separate Order will
address the process for setting the amount of the sanctions that
will be imposed.
SO ORDERED:
Dated:
New York, New York
December 5, 2013
____________________________
DENISE COTE
United States District Judge
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