On Appeal from the United States District Court for the Eastern District of Pennsylvania. D.C. Civil No. 92-06412
Before: Greenberg, Roth, and Rosenn, Circuit Judges
GREENBERG, Circuit Judge.
This matter is before the court on an appeal from orders of the district court entered on February 5, 1993, and July 6, 1993, imposing sanctions on appellants Arnold Levin and Harris J. Sklar pursuant to Fed. R. Civ. P. 11. We will set forth the background of this case in detail as the issues should be considered in the context of both this case and the related litigation we will describe. The district court's opinion concluding that there had been Rule 11 violations is published as Greenfield v. U.S. Healthcare, Inc., 146 F.R.D. 118 (E.D. Pa. 1993), and its subsequent opinion fixing the amount of the sanctions is dated July 6, 1993. Greenfield v. U.S. Healthcare, Inc., (E.D. Pa. July 6, 1993).
This action arose in the aftermath of an article in the Wall Street Journal published on November 4, 1992, entitled "U.S. Healthcare Insiders Sold Stock Before Last Week's 17% Price Decline." The article recited that U.S. Healthcare, Inc. insiders, including Leonard Abramson, its chairman and president, had been heavy sellers of its stock before a 17% two-day drop in its price in the week before publication of the article. The article indicated the drop had been precipitated by disappointing earnings.
James R. Malone, Jr., a member of the Haverford, Pennsylvania, law firm of Greenfield & Chimicles, who read the article on the morning it was published, was interested in its contents because his firm specialized in securities litigation. Indeed, in an extraordinary allegation, not denied by Malone, U.S. Healthcare in the Rule 11 proceedings charged that Greenfield & Chimicles maintained a list of corporate stockholders available to become plaintiffs in securities litigation.*fn1 Robert K. Greenfield was on that list.*fn2 It is undisputed that after Malone read the article he examined a "representative sampling of stories relating to U.S. Healthcare," as well as a report on background information on the company. He also obtained considerable other information about U.S. Healthcare, including filings it had made with the Securities and Exchange Commission.
Malone does not contend that at the time that he was doing this research he had a client who had expressed any interest in the article to him. Rather, Malone was seeking to generate a lawsuit. Thus, in the pithy words of the district court, "having a case but no client," he called Greenfield who lives in Florida to discuss the U.S. Healthcare situation. Malone described the Wall Street Journal article to Greenfield and established that he owned stock in U.S. Healthcare. Malone asked Greenfield whether he would like Greenfield & Chimicles to file a suit on his behalf if the firm believed that there had been actionable wrongdoing, and Greenfield answered affirmatively. Within hours Malone determined that a certain class of U.S. Healthcare stockholders had "a legitimate and cognizable legal claim" stemming in part from the insiders' stock sales.
Events continued to unfold rapidly on November 4, 1992, for on that day Malone prepared and filed a class action complaint on behalf of Greenfield under section 10(b) of the Securities Exchange Act of 1934. 15 U.S.C. § 78j(b). The gravamen of the complaint was that U.S. Healthcare and Abramson had issued false and misleading statements which were filed with the Securities and Exchange Commission and which caused Greenfield and the stockholder class to purchase U.S. Healthcare stock at artificially inflated prices. The complaint asserted controlling person liability against Abramson under section 20 of the Securities Exchange Act. 15 U.S.C. § 78t. In the complaint, Malone recited that Greenfield fairly and adequately could represent the interest of the class of stockholders on whose behalf the action was being brought. Inasmuch as Malone mailed the complaint to Greenfield on November 4, 1992, Malone filed it before Greenfield received it. Obviously Malone did not think it important for Greenfield to see the complaint before it was filed even though Malone regards Greenfield as a distinguished retired corporate attorney.
On November 5, 1992, Malone on behalf of Allen Strunk filed a second class action against U.S. Healthcare and Abramson. The Strunk action repeated the allegations word for word from the Greenfield case except that the name of the plaintiff and the number of shares he owned were changed. Malone filed this action after Fred Taylor Isquith, an attorney in New York, contacted him and asked him to represent Strunk.
Malone and Strunk's New York lawyers were not the only attorneys interested in the U.S. Healthcare situation. On November 4, 1992, appellant Arnold Levin of the Philadelphia firm of Levin, Fishbein, Sedran & Berman, also read the Wall Street Journal article. Levin and his firm have what he characterized as "a long-standing professional relationship" with Greenfield & Chimicles, and Levin had a high regard for Greenfield & Chimicles' ethical standards and skill in handling federal securities law suits. On November 4, 1992, after Levin had read the article, Malone called him to discuss the merits of bringing a section 10(b) action against U.S. Healthcare and Abramson. Malone mentioned the Wall Street Journal article, and said he had done research into whether a section 10b action could be brought. Malone also told Levin that he had prepared such a complaint. Levin requested that Malone fax him a copy of the complaint, and Malone promptly did so. Levin then read the Greenfield complaint and reread the Wall Street Journal article and concluded, as he set forth in his affidavit, that "based upon my experience and understanding from the two documents," and in "reliance on the integrity of the pre-filing investigation of Greenfield & Chimicles," the section 10(b) action had merit.
There was even more interest in the U.S. Healthcare situation for on November 4, 1992, appellant Harris J. Sklar, a Philadelphia attorney in individual practice, also read the article. According to his affidavit, Sklar discussed the possibility of bringing an action against U.S. Healthcare with his client Scott Garr who was a U.S. Healthcare stockholder, and Garr authorized Sklar to bring the case on a class action basis. Sklar, however, saw the need to obtain co-counsel and consequently called Levin, as he had worked with him in the past. Levin then told Sklar of his dealings with Malone, and Levin and Sklar discussed the possibility of a suit. Sklar asked Levin to fax him a copy of the Greenfield complaint and Levin did so. Sklar then reviewed the complaint and, in his words as set forth in his affidavit, "based on my understanding of the securities laws and the facts as described in the Wall Street Journal," he determined that the complaint had merit. Sklar thus again spoke to Levin and indicated that Levin could file the class action on behalf of Scott Garr and Patricia Garr, his wife. On November 6, 1992, Levin and Sklar filed that complaint which replicated the Greenfield and Strunk complaints except that the names of the plaintiffs and the number of shares they owned were changed.*fn3
There was now an extraordinary development. On November 6, 1992, the same day that Levin and Sklar filed the Garr complaint, U.S. Healthcare and Abramson moved in the district court for the imposition of sanctions pursuant to Rule 11 in the Greenfield, Strunk, and Garr actions. This motion was a formidable document, as with attachments it exceeded 100 pages. At oral argument we asked U.S. Healthcare's attorney, Alan J. Davis, how it was possible that he filed this motion on the same day the Garr complaint was filed. He explained that he had anticipated that following the filing of the Greenfield complaint there would be additional complaints and accordingly his firm had a person waiting in the clerk's office to obtain copies of them when they were filed.*fn4 He further explained that in class actions additional complaints are generated so that the original attorney will have allies when a vote is taken to determine the lead attorney. The lead attorney position is coveted as it is likely to bring its occupant the largest share of the fees generated by the litigation.
In their brief, U.S. Healthcare and Abramson explained the basis for the motion in detail. They asserted that Malone, Levin, and Sklar failed to conduct "even the most cursory factual and legal investigation" of the case and that if they had done so they would have determined that the complaints had no basis in fact or law. The brief indicated that the three complaints demonstrated the "all too familiar pattern of an instant class action lawsuit based on newspaper reports followed by a covey of cut and paste copycat complaints."
As if what we have described is not remarkable enough, there was yet an additional extraordinary development in the Greenfield case. On November 8, 1992, Robert K. Greenfield finally read the complaint, and at that time came to the realization that he had made a mistake in bringing the action because he knew of no basis for it and because his son had substantial business dealings with U.S. Healthcare. Thus, he directed Malone to withdraw the complaint. When U.S. Healthcare and Abramson learned of Robert K. Greenfield's position, they supplemented their motion for Rule 11 sanctions to ...