Judge Shira A. Scheindlin (S.D.N.Y.) has stymied Defendants’ request for PSLRA and Rule 11 sanctions in one of the consolidated cases related to the In re IPO Litigation actions. Although the case was included in the coordinated In re Initial Public Offering Securities Litigation proceedings, it arose from a very different set of allegations. Essentially, Plaintiffs alleged that Defendants, an investment bank (CSFB) and several issuers of securities (Efficient Networks, eMachines, Lightspan Partnership, Tanning Technology, and Tumbleweed Communications -- all of which, except for Tumbleweed, have since been acquired) that went public during the technology boom of the late 1990s, defrauded investors by setting their earnings estimates below their true estimates, and thereby created excitement in the marketplace when the stocks at issue beat estimate after estimate, conditioning the market to expect superior performance from those stocks and artificially inflating their prices. Nice try, but Judge Scheindlin dismissed the investors’ claims in an order issued a few months ago (See 2005 U.S. Dist. LEXIS 5339).
After the dismissal, Judge Scheindlin was faced with Defendants’ sanctions request, which argued that "Plaintiffs' claims rested on factual assertions the falsity of which was evident from publicly available information -- namely, the stock prices of the relevant issuers -- and Plaintiffs' hypothesized securities fraud scheme, even if true, would have benefited, not harmed, the named Plaintiffs." In denying the request, the judge found that "Plaintiffs alleged a complicated scheme," and "though ultimately deficient, plaintiffs' claims were not frivolous." She also said that Plaintiffs argument "rested on the nonfrivolous argument that victims of securities fraud should be entitled to all damages attributable to alleged artificial inflation, even if those victims sold securities for a profit."
You can read the decision, issued July 28, 2005, at 2005 U.S. Dist. LEXIS 15162.
Nugget: "There is no evidence of any improper purpose or conduct on the part of plaintiffs' counsel in pursuing novel theories that were ultimately rejected."