Cross-posted at WLF’s Forbes.com contributor site
Federal Rule of Civil Procedure 11, which in part authorizes the imposition of sanctions on attorneys who sign frivolous pleadings in federal court, is not used nearly as much as it should be. But that may be changing a little, at least in the U.S. Court of Appeals for the Seventh Circuit.
In a recently issued 18-page ruling, Judge Richard Posner authored a unanimous panel opinion reversing an Illinois district judge’s failure to impose Rule 11 sanctions on attorneys with the firm Robbins Geller Rudman & Dowd. The factual background reads like a scenario plucked directly from a law school ethics exam.
Seeking hundreds of millions of dollars in damages, plaintiffs filed a putative class action alleging that Boeing Company, along with its CEO and the head of its commercial aircraft division, committed securities fraud in violation of federal law. The district judge dismissed the complaint for failing to allege sufficient facts to properly plead the requisite scienter for fraud. Not to be deterred, plaintiffs promptly filed an amended complaint, but this time with detailed bombshell revelations from a confidential source. Ultimately, however, the allegations in the amended complaint could not withstand even the slightest scrutiny.
As Posner describes it:
The plaintiffs’ lawyers had made confident assurances in their complaint about a confidential source—their only barrier to dismissal of their suit—even though none of the lawyers had spoken to the source and their investigator acknowledged that she couldn’t verify what (according to her) he had told her.
Their failure to inquire further puts one in mind of ostrich tactics—of failing to inquire for fear that the inquiry might reveal stronger evidence of their scienter regarding the authenticity of the confidential source than the flimsy evidence of scienter they were able to marshal against Boeing.
Noting that the same law firm had been accused of “similar conduct” in three other reported cases, Posner remanded the matter back to the district judge, who would be in a better position to calculate a dollar amount for Rule 11 sanctions.