The plaintiffs’ counsel in In re Connetics Corp. Secs. Litig., 2008 U.S. Dist. LEXIS 9634 (N.D. Cal. Jan. 28, 2008), a securities class action, allegedly took several paragraphs from a complaint filed by the SEC and inserted them in the class action complaint. Certain defendants moved to strike on the ground that “lifting allegations from an SEC complaint does not constitute the reasonable investigation required by Federal Rule of Civil Procedure 11.” The District Court agreed, reasoning that Rule 11 imposed a non-delegable duty of inquiry which is not satisfied by excising and repeating allegations from an SEC complaint. (I understand from plaintiffs’ counsel that this is not factually correct, that substantial other investigation was performed, and that the issue will be back before the District Court (who granted leave to replead) in due course.)

There is precedent for finding a Rule 11 violation where, for example, in pre-PSLRA days, after an initial class action complaint was filed, a second set of plaintiffs' lawyers filed a copycat securities fraud class action complaint and performed no inquiry other than to read a Wall Street Journal article and the complaint that they copied. See Garr v. U.S. Healthcare, Inc., 22 F.3d 1274, 1279–80 (3d Cir. 1994) (indirect reliance on the lawyer who filed the original complaint was inadequate and not excused by the argument that speed was essential solely in order to obtain a leg up in the race to become lead counsel for the class; held, a lawyer “making an inadequate inquiry into the sufficiency of the facts and law underlying a document will not be saved from a Rule 11 sanction by the stroke of luck that the document happened to be justified. ‘A shot in the dark is a sanctionable event, even if it somehow hits the mark.’”). Reliance on a complaint filed by the SEC, however, is quite different. An SEC complaint is based on the investigation and analysis of government professionals, and it has been approved by the Commission, the agency charged with guarding the integrity of the U.S. markets. Tellingly, if the plaintiffs’ lawyers had access to the staff’s memorandum to the Commission setting forth their investigation and conclusions, that memo would be admissible in evidence under Fed.R.Evid. 803(8). The fact that only the resulting work product (the SEC complaint) is available to class action counsel does not diminish the reliability of the document on which plaintiffs’ counsel relied. I see no purpose in requiring plaintiffs' counsel to wait until the SEC's evidence has become public, as through a trial or summary judgment filing, before the SEC's work may be relied on. In my judgment, Rule 11 was not violated, even on the assumption that the SEC complaint was the sole basis for certain allegations. However, Connetics came to the opposite conclusion, and it should be borne in mind by practitioners relying on government pleadings in drafting private complaints.