New York, Philadelphia firms sanctioned for frivolous suit

The sudden rise in class actions over the boom and bust of so many stock offerings has produced its first backlash.

A federal appeals court this month upheld a decision by a federal judge in Manhattan to fine law firms in New York and Philadelphia a combined $84,153 over a “frivolous” lawsuit involving an initial public offering.

The case appears to be the first to result in sanctions under a rule enacted as part of a 1995 law, a database search indicates.

The rule was designed to make it harder for shareholders to file class actions concerning securities issues against companies.

But whether the case signals a new, get-tough attitude toward law firms is a matter of debate.

“There are probably some cases that don’t have merit, and sanctions are justifiable for those. It’s a pretty tough rule and has stiff pleading standards,” says Lawrence Deutsch, a partner at Berger & Montague PC, the Philadelphia firm involved.

Joel H. Bernstein, a senior partner at Goodkind Labaton Rudoff & Sucharow LLP in New York, thinks it is too early to declare a trend.

“The court really found that in this case there was a problem,” says Mr. Bernstein. “I don’t think it means there will be more frivolous cases found to exist. Judges are doing what the law requires them to do.

“If every now and then it happens, that is not a trend to me,” adds Mr. Bernstein, whose firm handles class actions.

Wit lashed

Judge Shira A. Scheindlin, who sits on the U.S. District Court for the Southern District of New York, declined to comment on the case.

She is known, however, for incisive, witty opinions and for taking bold stands. She has wide-ranging experience with corporate cases, from insider trading to deciding whether Nabisco cribbed the distinctive fish shape of Pepperidge Farm’s popular Goldfish crackers for its own Cheese Nips brand.

She tweaked Fidel Castro in a case involving Cuban rum, and she even told outspoken New York Mayor Rudolph Giuliani to lighten up when he sued New York magazine over an advertisement. Her opinion opened with the line: “Who would have dreamed the mayor would object to more publicity?”

But in one of her higher-profile cases, the 2nd U.S. Circuit Court of Appeals in New York reversed her decision ordering United Way of America to award a $2.2 million pension to its former president, William Aramony, who had been convicted of fraud while in office.

In the case at hand, Polar International Brokerage Corp. sought a class action in 1998, claiming that a tender offer for stock by an insurance company violated securities laws.

Schoengold & Sporn of New York was the lead counsel for the plaintiff, and Berger & Montague joined the case a year later when the initial complaint was amended.

Judge Scheindlin based her decision last August in part on the fact that Schoengold & Sporn signed off on a settlement agreement that would have left the plaintiffs with no money, while the firm would have collected $200,000 in fees.

She cited rule 11(b) of the Private Securities Litigation Reform Act, which requires sanctions when a suit is filed that has no chance of success or any chance of modifying existing law.

“Lead counsel was either pursuing meritless litigation in order to force a settlement with respect to attorney’s fees – precisely the behavior the securities laws abhor – or equally abhorrent, lead counsel was willing to jettison meritorious claims of its clients in order to obtain attorney’s fees,” the judge ruled.

A study conducted a year ago by PricewaterhouseCoopers showed that filings jumped to 201 in 2000, from 147 in 1996. With 154 suits filed in the first six months, this year might prove to be the busiest for securities class actions.

Since the 1995 law was enacted, one-quarter of the class-action cases filed have been settled. More than $6.6 billion has been paid to the plaintiffs, and almost 50% of settled cases resulted in a payment of more than $5 million, the study found.

Mr. Deutsch and Samuel Sporn, a partner in Schoengold & Sporn, say they may ask for an appeals court panel to reconsider the matter.

“Not having had this bad experience under sanction ever it’s very disappointing,” says Mr. Sporn. “I am very chagrined about it. I intend to petition for a panel rehearing.”