IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF NEW YORK
JAY DEES, INC., PHILLIP MARKS, :
and STEPHEN KEVELSON, :
:
Plaintiff, :
v. : 05 cv 6954 (TMZ)
: ECF Case
DEFENSE TECHNOLOGY :
SYSTEMS, INC., JOHN BRADY, :
and DANIEL McPHEE, :
:
Defendants. :
:
BRIEF OF DEFENDANT JOHN BRADY IN SUPPORT
OF RULE 11 FINDINGS AGAINST PLAINTIFF JOHN SCOTTO AND HIS COUNSEL
Defendant John Brady submits this memorandum to assist the Court in making the Rule 11 findings required under the Private Securities Litigation Reform Act (“PSLRA”).
INTRODUCTION
Plaintiff John Scotto brought this federal securities action although he suffered no loss. The records produced during discovery show that he actually had a $608,317.04 gain trading DFTS stock. In the Complaints, Scotto alleged that he lost money trading DFTS stock. This alone warrants a Rule 11 finding against Scotto. But Scotto’s misconduct did not end there.
During discovery, Scotto produced two bogus documents to bolster his self-serving testimony that he suffered a loss. He first produced a Schedule D purportedly from his 2004 tax return which showed a $636,201 loss in trades he made through a broker First Providence. His actual 2004 tax return filed three months after this action started showed a gain.[1] Scotto did not realize that First Providence closed its doors before the so-called trades happened. When confronted with this fact and the tax return he actually filed, Scotto recanted and said it must have been a work sheet. He then identified LH Ross as where he made the trades.
LH Ross had been in business when the trades occurred but was now closed down. As it was closed, LH Ross could not be subpoenaed. But records from LH Ross’s clearing house showed no trades by Scotto.
Facing an imminent summary judgment on the loss issue, Scotto belatedly produced an alleged statement from LH Ross. Scotto claimed he found it in a ski bag. The so-called statement is not believable on its face. The document does not even contain the correct business name or street address for LH Ross. Moreover, the statement uses Scotto’s social security number as his account number (a highly suspect practice) and it gives a yearly summary running from October to October. The district court correctly disregarded this inherently unreliable “statement” and granted summary judgment against Scotto.
Scotto then had the audacity to appeal the grant of summary judgment. Once again, Scotto relied on the phony LH Ross statement, his self-serving statements and his amended tax return. The Second Circuit rejected his appeal and remanded this matter to make Rule 11 findings required by the PSLRA. Scotto v. Brady, 2010 U.S. App. LEXIS 24660 (2d Cir. Dec. 2, 2010).
Bringing unfounded claims and then supporting them with phony documents is the epitome of Rule 11 conduct. This Court should find Scotto and his counsel violated Rule 11, sanction them and award fees and costs to defendant John Brady.
FACTUAL BACKGROUND
I. Scotto Alleges He Suffered A Loss Trading DFTS Stock.
The Complaint was filed in August 2005, which was followed with an Amended Complaint. Complaint [Docket No. 1]; Amended Complaint [Docket No. 9]. Scotto was a plaintiff claiming that he suffered a loss trading in DFTS stock. Complaint ¶ 7; Amended Complaint ¶ 6. More specifically, Scotto alleged:
Each of the plaintiffs has been damaged by defendants’ wrongful conduct, which caused each of them to purchase and hold shares in the Company at inflated values and to retain those shares until each lost a substantial portion of his investment in these funds.
Complaint ¶ 46; accord Amended Complaint ¶ 71.
After the Court granted Brady’s motion to dismiss [Docket No. 27], plaintiffs – including Scotto – filed a Second Amended Complaint on January 30, 2006 [Docket No. 29]. Once again, Scotto claimed he suffered a loss trading in DFTS securities. Second Amended Complaint ¶¶ 14, 17. The court subsequently denied a renewed motion to dismiss, and discovery commenced. Catton v. Defense Technology Systems, 2006 U.S. Dist. LEXIS 41855 (S.D.N.Y. June 20, 2006) [Docket No. 45].
A Third Amended Complaint was filed in November 2007. [Docket No. 88]. Scotto was again named as a plaintiff claiming he suffered a loss trading in DFTS stock. Third Amended Complaint ¶¶ 14, 118. More specifically, Scotto claimed that “[b]ased on defendants’ scheme to defraud, Scotto sold stock at a significant loss of approximately $500,000.00.” Third Amended Complaint ¶ 14.
II. Scotto Causes Defendants To Expend Substantial Efforts In Discovery To Counter Scotto’s False Claims Of Loss And Faulty And Fraudulent Documents.
The parties conducted substantial discovery on Scotto’s purchase and sale of Defense Technology Systems, Inc. (“DFTS”) stock.[2] Hutner Aff. ¶ 3. During discovery, Scotto produced the brokerage records in his possession pertaining to the purchase and sale of DFTS stock. Hutner Aff. ¶ 3. ). Defendants’ counsel served subpoenas on Charles Schwab, Smith Barney, E-Trade, Deutsche Bank Alex Brown, Oppenheimer & Co., LH Ross and Sterne Agee (the clearing firm for LH Ross) -- everywhere Scotto claimed he had accounts. Hutner Aff. ¶ 3. The documents produced showed that Scotto had generated a profit of $608,317.04 from his purchase, ownership and sale of DFTS stock. Hutner Aff. ¶ 9. In other words, all of the records show that Scotto not only did not suffer any investment loss, but that he incurred a substantial gain. Id.
A. Tax Documents And Returns
Scotto tried to give the appearance of loss through the production of his alleged tax returns. The circumstances surrounding the production of Scotto’s tax returns and schedules shows the great lengths Scotto was willing to go to create a fictional loss on DFTS stock.
Scotto initially produced in discovery a Schedule D (Capital Gains and Losses) which he claimed was from his 2004 federal tax return. Hutner Aff. ¶ 13(c). This document identified First Providence as a firm where Scotto incurred a huge loss in DFTS stock in 2004. Hutner Aff. ¶ 14. There were a number of problems with this document. Scotto testified it was part of an actual tax return filed with the IRS. Scotto Dep. I at 114:9-115:10. But this document was later shown to be not part of any return produced by the IRS, so Scotto recanted his testimony and said the document was possibly a “work sheet.” Scotto Dep. III at 129:9-130:2; Hutner Aff. ¶ 13(c).
Moreover, the trades could not have occurred at First Providence as it was closed when the so-called trades occurred. Counsel expended substantial resources trying to track down First Providence records to substantiate the Schedule D since Scotto did not produce any First Providence records, but counsel learned during this investigation that First Providence closed in 2002 and was expelled from the NASD in 2003.[3] Hutner Aff. ¶ 14. In other words, the 2004 trades could not have possibly occurred at First Providence. Scotto admitted for the first time at his December 2006 deposition that the reference to First Providence was a mistake, an error that also was not disclosed by Scotto’s counsel prior to the deposition, thus causing counsel to have gone on a wild goose chase. Hutner Aff. ¶ 14. At the deposition, Scotto claimed that he actually made the trades at LH Ross, which was open at the time of the alleged trades but had been closed down by NASD. Scotto Dep. __.
Scotto’s original 2004 federal tax return, filed in November 2005 (three months after he filed this case), showed he had $17,051 in capital gains from DFTS stock.. Hutner Aff, Exh. J (DX-83). So Scotto amended his 2004 federal tax return in October 2006 to show a large loss. DX-85.[4] The claimed stock loss, of course, is utterly inconsistent with Scotto’s brokerage records which indicate an enormous profit from trading DFTS stock. Hutner Aff. ¶ __.
Problems with Scotto’s tax returns carry over to tax year 2005, as Scotto’s 2005 tax return failed to report the $114,000 that Scotto received from the sale of DFTS stock at Wakefield Capital. Hunter Aff., Ex. J, pp. 11-14 (2005 tax return); Hunter Affidavit ¶ 8(g).
During the course of discovery, upon hearing the discrepancies between the Scotto brokerage records and tax returns, Judge Scheindlin referred the matter to the U.S. Attorney for review of Scotto’s possible tax fraud. Hunter Aff. ¶ 14 (citing Transcript of Conference, June 15, 2007, at 7 [Docket No. __]).
Although Scotto was affirmatively using tax records to support his claims, he did not willingly give defendants access to his actual, filed returns. It took the issuance of Orders filed by the Court on November 13 2007 [Docket No. 84], November 26, 2007 [Docket No. 87] and December 19, 2007 [Docket No. 89] directing Mr. Scotto to produce his tax returns and facilitate defendants’ efforts to obtain them.
B. LH Ross “Statement”
Well past the 11th hour in this case, and after all of the brokerage records had been obtained and analyzed, John Scotto produced a document that purports to be an “LH Ross Portfolio Summary,” LH Ross being the brokerage firm that Scotto identified at his December 2006 deposition as the true firm where he incurred a $636,201 loss trading in DFTS stock in 2004. Scotto produced no other documents from LH Ross even though he allegedly trades hundreds of thousands of dollars with them.
Counsel for all of the defendants had gone to great lengths to try to track down LH Ross documents, and when they learned that the firm had been shut down by regulators in January 2005, were unable to locate the firm let alone issue a subpoena to it. Hutner Aff. ¶ 10. However, counsel did learn that LH Ross utilized the services of a clearing firm, Sterne Agee, to handle all of its trade processing and record-keeping, a common practice in the brokerage industry. Id. In response to a subpoena, Sterne Agee confirmed that it was the clearing firm for LH Ross (even producing the clearing agreement), a fact confirmed by public records, yet stated that it had no record of any account in the name of John Scotto (after searching by name, address and social security number). Id.[5]
At a November 13, 2007 conference with the Court, Brady’s counsel questioned whether Scotto had any evidence of loss to get beyond the imminent summary judgment motions. Nov. 13, 2007 Hearing Tr. at 5-7. In response, Scotto’s counsel had to rely on Scotto’s tax returns and Scotto’s own self-serving testimony. Id. at 7.
After the conference, Scotto magically “found” a so-called LH Ross statement in a ski bag that was used to move some of his possessions when he moved from one residence to another, having been stuffed in there by his wife or a member of his household staff.[6] The “Portfolio Evaluation” was the only LH Ross document he ever “discovered” among the cache of documents, and is the only LH Ross document he ever located, though he purportedly traded hundreds of thousands of dollars of multiple stocks in 2003-2004 at that firm. Scotto Dep. III at 135:6-138:19 (Hutner Aff. Ex. B at 5-6).[7]
The alleged LH Ross statement is questionable on its face. It uses Scotto’s nine-digit social security number as his account number, which was hardly a common practice among financial institutions (Sterne Agee used eight digit account numbers). AA387; AA1396 (clearer copy of statement); AA443 (Stern Agee letter). It contained an October 31 year-over-year account analysis, though such analyses are typically done at year end, not at the end of October. Id.
The LH Ross did not even contain the correct name of the company or its correct address. The company was known as and referred to itself as “LH Ross & Co., Inc.” AA-450.[8] The “statement” produced by Scotto identifies the company as “LH Ross & Co.” AA387; AA1396 (clearer copy of statement). LH Ross was located at “2255 Glades Road, Suite 425W, Boca Raton, FL 33431”. AA-450.[9] The “statement” produced by Scotto has the address as “2225 Glades Road, Suite 425”. AA-387, A1396.
The Court order a third day of Scotto’s deposition just to question Scotto on his tax returns and some trading records. 2008 Dep. at 18.
III. The District Court Grants Summary Judgment Against Scotto Based On No Evidence Of Any Trading Loss.
Defendant Brady moved for summary judgment based on, among other things, Scotto’s failure to suffer any loss. On September 29, 2008, the district court granted summary judgment against Scotto based on his failure to produce competent evidence that he suffered a loss. Jay Dees Inc. v. Defense Technology Systems, Inc., No. 05 Civ. 6954 (SAS), 2008 U.S. Dist. LEXIS 104438 (S.D.N.Y. Sept. 29, 2008).
The court found that Scotto was a major investor and substantial participant in Defense Technologies Systems, Inc. (“DFTS”). Scotto was a plaintiff in this lawsuit seeking damages for amounts he allegedly lost trading DFTS stock. In order to determine Scotto’s loss, the defendants conducted extensive discovery related to Scotto’s brokerage records and tax returns. The subpoenaed brokerage records indicated Scotto had “an investment of $134,460.02 in Defense Tech stock and a total return of $742,777.06, yielding a profit of $608,317.04.” Id. at *7.
Not deterred by the actual brokerage records, Scotto claimed he suffered a substantial loss in an account with the now-defunct brokerage LH Ross. Id. at *8. Scotto submitted an alleged LH Ross trading summary indicating an investment of $731,552 and a return of $95,321, yielding a net loss in this account of $636,201. Id. In responding to summary judgment motions, the only evidence offered by Scotto of the LH Ross statement’s authenticity was an attestation from Scotto’s attorney saying the document “is … John Scotto’s LH Ross statement….” Id. (citing Barabro Cert. at 2). Scotto claimed to have discovered the statement “in a ski bag years after this litigation began and has been unable to locate any other document concerning his LH Ross account, despite claims that he traded hundreds of thousands of dollars with that brokerage.” Id. “Sterne Agee – the clearing firm for LH Ross – has no record of an account in the name of John Scotto.” Id. If the LH Ross statement were authentic, Scotto’s overall loss would by $27,883.96. Id.
The district court found that Scotto had failed to authenticate the LH Ross statement. “The origins of the LH Ross statement are murky at best, and plaintiff’s counsel is not a ‘witness with knowledge’ who can authenticate a business record.” Id. at *28. The court also found that authentication was not supported by circumstantial evidence.
The document was produced by Scotto to promote his own case at the eleventh hour, and the content of the document – an annual trading summary that begins on November 1 rather than January 1 and uses Scotto’s social security number as an account number – does not suggest reliability.
Id. at *28. The court went on to hold that without this account statement, “Scotto’s statements at his deposition and in his affidavit concerning the purported loss from his purported LH Ross account is inherently unreliable because some activities – such as the filing of a tax return, an application for a passport, or a trade through a brokerage account – require documentation.” Id. at *29.
With no competent evidence of Scotto’s loss, the district court entered summary judgment against Scotto. Id. at *30. The case proceeded to trial, and other plaintiffs obtained a verdict against defendants.
III. The Second Circuit Affirms The Finding Of No Loss And Remands The Case For The District Court To Make Rule 11 Findings.
Scotto appealed from the grant of summary judgment against him, and Brady appealed the verdict against him and the district court’s failure to make Rule 11 findings against Scotto. The Second Circuit affirmed summary judgment on Scotto’s claim as Scotto suffered no loss. Scotto v. Brady, 2010 U.S. App. LEXIS 24660 (2d Cir. Dec. 2, 2010). The Court found that “Scotto failed to establish the authenticity of the LH Ross trading summary”, Scotto could not meet his burden of proving economic loss merely through his own testimony that he lost money, and the tax returns were inadmissible hearsay. 2010 U.S. App. LEXIS 24660, at *13. As the district court failed to make required Rule 11 findings, the Second Circuit held the case must be “remand[ed] to the district court for the purpose of entering the specific findings regarding Rule 11 compliance that are required by the PSLRA.” Id. at *15.
ARGUMENT
I. There Was A Substantial Violation Of Rule 11.
Scotto committed a substantial Rule 11 violation. Scotto made hundreds of thousands of dollars trading DFTS stock. In the Complaints filed in this action, Scotto alleged he lost money. Scotto then sought to bolster his unfounded claim with phony documents, including an alleged “statement” from LH Ross, which did not even have the company’s correct name or address. This is textbook Rule 11 conduct.
“The [PSLRA] requires district courts, at the conclusion of private actions arising under the federal securities laws, to make Rule 11 findings as to each party and each attorney, 15 U.S.C. § 78u-4(c)(1)….” ASTI Communications, Inc. v. The Shaar Fund, Ltd., 579 F.3d 143, 152 (2d Cir. 2009) (emphasis in original).[10] “[A]nd if a Rule 11 violation is found, the statute requires courts to impose sanctions, 15 U.S.C. § 78u-4(c)(2).”[11] Id. (emphasis in original). Congress intended that courts award sanctions for frivolous claims:
The express congressional purpose of the PSLRA provision was to increase the frequency of Rule 11 sanctions in the securities context, and thus tilt the “balance” toward greater deterrence of frivolous securities claims. “Recognizing what it termed ‘the need to reduce significantly the filing of meritless securities lawsuits without hindering claims,’ and commenting that the ‘[e]xisting Rule 11 has not deterred abusive securities litigation,’ the 104th Congress included in the [PSLRA] a measure intended to put ‘teeth’ in Rule 11.”
Id. (quoting Simon DeBartlo Group, L.P. v. Richard E. Jacobs Group, Inc., 186 F.3d 157, 167 (2d Cir. 1999)).
A party – like Scotto – may be liable for Rule 11 violations even though he did not sign the complaints. See Byrne v. Nezhat, 261 F.3d 1075, 1117-18 (11th Cir. 2001) (“A client may be sanctioned under Rule 11 even if the client did not sign the friviolous pleading.”). Both a represented party and his attorney may be sanctioned under Rule 11(b)(3) for the factual insufficiency of a complaint. Chien v. Skystar Bio Pharm. Co., 256 F.R.D. 67, 72 (D. Ct. 2009), aff’d mem., 2010 U.S. App. LEXIS 10698 (2d Cir. Conn., May 26, 2010); see Oliveri v. Thompson, 803 F.2d 1265, 1274 (2d Cir. 1986) ("[A] sanction for attorneys' fees may be imposed either on the attorney who signs a paper, or on the party he represents, or on both."); Simpson v. Putnam County Nat'l Bank, 112 F. Supp. 2d 284, 291 (S.D.N.Y. 2000) (same). “Typically, sanctions are levied against a client when he misrepresents facts in the pleadings.” Byrne, 261 F.3d at 1118; see Schrag v. Simpson, 141 F.3d 1185 (10th Cir. 1998) (“A knowing factual misrepresentation warrants sanction.”).
The Court may also find a Rule 11 violation on the attorneys who represented Scotto. Any party who “present[s]” a pleading to the Court, “whether by signing, filing, submitting, or later advocating it,” may be held liable for a violation contained therein. Fed. R. Civ. P. 11(b). In re Australia and New Zealand Banking Group Ltd. Securities Litigation, 712 F. Supp. 2d 255, 270 (S.D.N.Y. 2010). Rule 11(c) further requires that “[a]bsent exceptional circumstances, a law firm must be held jointly responsible for a violation committed by its partner, associate, or employee.” Fed. R. Civ. P. 11(c). “Where multiple parties or attorneys are responsible for Rule 11 violations, those parties may be held jointly and severally liable in the court’s discretion.” Australia, 712 F. Supp. 2d at 271.
The Complaints contained a substantial Rule 11 violation by alleging that Scotto lost money trading in DFTS stock. Loss is not a collateral or trivial fact; Scotto’s claim depended on it. An essential element of Scotto’s claim is damage or loss.[12] See Commercial Union Assurance Co. v. Milken, 17 F.3d 608, 613 (2d Cir. 1994) (“Damage is an element of a 10b-5 cause of action that seeks a monetary award.”); accord JSMS Rural LP v. GMG Capital Partners III, LP, No. 04 Civ. 8591 (SAS), 2006 U.S. Dist. LEXIS 46080, at *12-13 (S.D.N.Y. July 6, 2006).[13] Scotto was acutely aware of this misrepresentation. Little more than three months after filing the initial complaint, Scotto filed and signed tax returns showing that he had a gain – not a loss. [cite]. His attorney’s failed to reasonably examine Scotto’s bogus claim of a loss.
But the Rule 11 violations are not limited to the pleading. Knowing he had not suffered any loss, Scotto tried to create the illusion of a loss by creating self-serving and fraudulent documents. Rule 11 sanctions are particularly appropriate where a litigant bases his claim on fraudulent documents. See Pope v. Federal Express Corp., 49 F.3d 1327, __ (8th Cir. 1995) (Rule 11 sanctions appropriate where plaintiff knowingly offered falsified documents into evidence); Jimenez v. Madison Area Tech. College, 321 F.3d 652, __ (7th Cir. 2003) (plaintiff sanctioned for reliance on falsified documents to support claims); Bout v. Bolden, 22 F. Supp. 2d 653, __ (E.D. Mich. 1998) (inmate sanctioned under Rule 11 where inmate based his case on fraudulent, forged documents which constituted a fraud on the court). Scotto violated Rule 11 by producing and vouching for the Schedule D with the erroneous First Providence entry and later the so-called LH Ross statement. His lawyers are equally guilty as, in the case of the LH Ross statement, the document was not credible on its face.
As there were substantial Rule 11 violations, the Court must impose sanctions. 15 U.S.C. § 78u-4(c)(2).
II. Defendant Brady Is Entitled To An Award Of Attorneys’ Fees And Costs.
Defendant Brady is entitled to his fees and costs to defend this action. 15 U.S.C. § 78u-4(c)(2). And Brady is also entitled to his costs in addressing Scotto’s appeal and the costs to brief the Rule 11 sanction issue. Id.
Defendant Brady is entitled to his fees and costs to defend this action. 15 U.S.C. § 78u-4(c)(2). And Brady is also entitled to his costs in addressing Scotto’s appeal and the costs to brief the Rule 11 sanction issue. Id.
There is a rebuttable presumption under the PSLRA that an appropriate sanction for the failure of a complaint to comply with Rule 11 is an award to the opposing party of the reasonable attorney’s fees and other incurred in the action. ASTI, 579 F.3d at 154 (quoting 15 U.S.C. § 78u-4(c)(3)(A)(ii)).[14] The award is not limited to the fees incurred defending the original action. The award should also include the fees and expenses incurred in pursing the PSLRA sanctions. Gurary v. Nu-Tech Bio-Med, Inc., 303 F.3d 212, (2d Cir. 2002) (citing 15 U.S.C. § 78u-4(c)(3)(A)(ii)). The Second Circuit has noted that the award may also include the costs of defending the appeal of a wholly frivolous claim:
The strict statutory presumption against plaintiffs is limited to those securities fraud case that are unfounded and abusive. Once the presumption is triggered and is not rebutted, however, it seems most likely that Congress meant for the defendant to receive fees and costs incurred in seeking sanctions pursuant to § 78u-4(c)(3)(A)(ii), including all reasonable expenses related to appellate proceedings.
Gurary, 303 F.3d at 225-26 (emphasis added). There is no question that Scotto’s claims were unfounded and the presumption applies here.
Defendant Brady is entitled to an award of his fees and costs in defending this matter. Defendant Brady has submitted the bills from Hutner & Klarish LLP – the firm that defended him in the trial court – and from Obermayer Rebmann Maxwell & Hippel LLP – the firm that handled the appeal. Ferrara Cert., Exhibits __ and __. Brady requests that he be permitted to submit the bills for the Rule 11 proceedings in this Court at the conclusion of those proceedings.
CONCLUSION
For the foregoing reasons, defendant John Brady respectfully submits that this Court should find that Scotto violated Rule 11 and impose sanctions against Scotto, including an award of Brady’s fees and costs in defending the action, responding to Scotto’s appeal and participating in the Rule 11 proceeding.
OBERMAYER REBMANN MAXWELL & HIPPEL LLP
s/ Ralph Ferrara
By:
Ralph Ferrara, Esquire
Ralph.ferrara@obermayer.com
Woodland Falls Corporate Park
200 Lake Drive East – Suite 110
Cherry Hill, NJ 08002
[1] About a year later, Scotto amended his tax return so he could show a loss. Judge Scheindlin referred the matter of Scotto’s brokerage statements and his tax returns to the U.S. Attorney.
[2] Prior to mid-2004, the Company’s name was DataWorld Solutions, Inc.
[3] http://www.finra.org/web/groups/industry/@ip/@enf/@da/documents/disciplinaryactions/p007437.pdf
[4] Scotto did not produce his Amended 2004 Tax Return at or before his December 5, 2006 deposition even though he had filed it just two months earlier (more than a year after the case had been filed). The deposition occurred five weeks after the Court ordered plaintiffs to produce all responsive documents. Scotto testified on December 6, 2006 that he had not filed his 2005 tax return (Scotto Dep. I at 19:3-4), but the copy of that return obtained from the IRS showed it was filed a few weeks earlier. Hutner Aff. ¶ 14.
[5] The public NASD/FINRA documents show Stern Agee and its related company were the only clearing house for LH Ross. AA454-AA455. Scotto has never identified any other potential clearing house for LH Ross.
[6] Scotto has been disbarred in California, New York and New Jersey. He pled guilty to possession of a forged instrument and spent 16 months in prison. After being released from prison, he bribed a state liquor official, pled nolo contendere, and spent another 16 months in prison. AA76-79 (Scotto Deposition).
[7] Furthermore, Scotto’s testimony about his relationship and dealings with his alleged brokers from LH Ross is extraordinarily vague. He could not recall their names, but did recall that they were customers who came into his restaurant and after that he opened up an account with them (Scotto Dep. I at 133:14-135:25). Scotto has also admitted that he is a disbarred attorney, having been disbarred in California, New York and New Jersey, and that he was convicted of felonies at least twice (once for extortion), and has served two 16 month prison sentences. Scotto Dep. I at 61:11-65:23, 76:20-79:21 (Hunter Aff. Exh. B at 10-13).
[8] See also LH Ross & Co., Inc.’s Form D filed with the United States Securities and Exchange Commission on May 11, 2004 <<available at http://www.sec.gov/Archives/edgar/vprr/04/9999999997-04-022392>> (company identified as “LH Ross & Co., Inc.”).
[9] See also LH Ross & Co., Inc.’s Form D filed with the United States Securities and Exchange Commission on May 11, 2004 <<available at http://www.sec.gov/Archives/edgar/vprr/04/9999999997-04-022392>> (identifying company’s address as “2255 Glades Road, Suite 425W, Boca Raton, FL 33431”).
[10] 15 U.S.C. § 78u-4(c)(1) provides:
Mandatory review by court. In any private action arising under this title [15 USCS §§ 78a et seq.], upon final adjudication of the action, the court shall include in the record specific findings regarding compliance by each party and each attorney representing any party with each requirement of Rule 11(b) of the Federal Rules of Civil Procedure as to any complaint, responsive pleading, or dispositive motion.
[11] Rule 11(b) of the Federal Rules of Civil Procedure states:
(b) Representations to the Court. By presenting to the court a pleading, written motion, or other paper--whether by signing, filing, submitting, or later advocating it--an attorney or unrepresented party certifies that to the best of the person's knowledge, information, and belief, formed after an inquiry reasonable under the circumstances:
(1) it is not being presented for any improper purpose, such as to harass, cause unnecessary delay, or needlessly increase the cost of litigation;
(2) the claims, defenses, and other legal contentions are warranted by existing law or by a nonfrivolous argument for extending, modifying, or reversing existing law or for establishing new law;
(3) the factual contentions have evidentiary support or, if specifically so identified, will likely have evidentiary support after a reasonable opportunity for further investigation or discovery; and
(4) the denials of factual contentions are warranted on the evidence or, if specifically so identified, are reasonably based on belief or a lack of information.
Fed. R. Civ. P. 11(b); see Fed. R. Civ. P. 11(c)(5)A) (represented party cannot be liable for sanctions under only Rule 11(b)(2)).
[12] Loss causation is another element of a 10b-5 claim, see Dura Pharms. v. Broudo, 544 U.S. 336, 342 (2005). Without evidence of loss, Scotto could not prove loss causation. Lentell v. Merrill Lynch & Co., 396 F.3d 161, 173 (2d Cir. 2005).
[13] In Commercial Union Assurance Co. v. Milken, this Court found that the 10b-5 plaintiffs who had recovered more than 100% of their investment were held not entitled to any additional damages as a matter of law pursuant to alternate theories of damages such as “benefit-of-the bargain” because they had suffered no out-of-pocket losses.
[14] “If the Rule 11 violation is contained in a responsive pleading or dispositive motion, instead of a complaint, the rebuttable presumption is that an appropriate sanction is “an award to the opposing party of the reasonable attorney’s fees and other expenses incurred as a result of the violation.” ASTI, 579 F.3d at 154 n.12 (quoting 15 U.S.C. § 78u-4(c)(3)(A)(i)).
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