Commercial Litigation and Arbitration

PSLRA Mandates Rule 11 Inquiry Even If Securities Litigation Dismissed on State Law Grounds — Circuit May Make Determination without Remand

From Citibank Global Markets, Inc. v. Santana, 2009 U.S. App. LEXIS 15788 (1st Cir. July 17, 2009):

The final question we must resolve is one of first impression in this circuit: whether the district court is required to make findings regarding compliance with Rule 11(b) of the Federal Rules of Civil Procedure, in a case in which a claim was made under the securities laws but where all claims were dismissed on state law grounds. The statute requiring such findings does not appear to brook any exceptions, see 15 U.S.C. § 78u4( c)(1) (requiring such findings as to any complaint, responsive pleading or, dispositive motion in any "private action" raising a claim under the securities laws), and at least one other circuit has reached that conclusion. See Morris v. Wachovia Sec., Inc., 448 F.3d 268, 276 (4th Cir. 2006) ("[T]he Rule 11(b) inquiry is mandatory even if other claims in the action arise under other laws."). Moreover, the purpose of the PSLRA similarly supports requiring district courts to undertake a Rule 11 inquiry at the conclusion of any private securities fraud action. See Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71, 81-82 (noting that Title I of the PSLRA represents "Congress' effort to curb . . . perceived abuses," by "mandat[ing] imposition of sanctions for frivolous litigation").

Whether or not a Rule 11(b) inquiry must be made into Fernandez's counterclaim, we needn't remand this case to the district court for that purpose. As noted, the PSLRA requires courts, upon final adjudication of an action, to make findings regarding parties' compliance with Rule 11(b) in private securities matters, and although it does not alter the standards used to judge compliance with Rule 11, see Dellastatious v. Williams, 242 F.3d 191, 197 n.5 (4th Cir. 2001); Simon DeBartolo Group, L.P. v. Richard E. Jones Group, Inc., 186 F.3d 157, 167 (2d Cir. 1999), the PSLRA does change the consequences for a Rule 11 violation. Specifically, if a court concludes that Rule 11 has been violated, the PSLRA provides that "the court shall impose sanctions" on the offender. 15 U.S.C. § 78u4-c)(2); Morris, 448 F.3d at 276 (noting that statute's use of the word "shall" creates an obligation "impervious to judicial discretion," and requires the district court to impose sanctions for every violation).


[N]o purpose would be served by remanding this case to the district court for Rule 11 findings. Although some courts have remanded cases in which the district court failed to make Rule 11 findings, see Rombach v. Chang, 355 F.3d 164, 178 (2d Cir. 2004), in this case we see no reason to do so. The district court has already denied Smith Barney any attorneys' fees under a standard similar to Rule 11(b) [under Puerto Rican law], and our review of the record does not suggest that Fernandez's claims were brought for an improper purpose, rose to the level of being frivolous, or made unsupportable factual allegations. Other circuits have noted that a remand for a Rule 11 determination is not necessary if the record provides no basis for awarding sanctions. See Dellastatious, 242 F.3d at 197 n.5. Because our review of the record reveals no basis for finding a Rule 11 violation, we decline to remand this case to the district court.

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