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From Securities Regulation Daily, March 27, 2013

Court Upholds Dismissal, Remands for Decision on Rule 11 Sanctions

By Anne Sherry, J.D.

The Seventh Circuit affirmed the district court’s dismissal with prejudice of a suit against The Boeing Company, but remanded to the district court for consideration of whether to impose sanctions for violating Federal Rule of Civil Procedure 11 and, if so, in what amount. The PSLRA requires that the court include Rule 11 findings upon final adjudication of the case, even in the absence of a motion for sanctions (City of Livonia Employees’ Retirement System v. The Boeing Company, March 26, 2013, Posner, R.).

Background. The plaintiffs brought a class action against Boeing for alleged violations of Exchange Act Section 10(b) and Rule 10b-5 in connection with statements that a new model of aircraft would make its first flight when, in testing, its wings had failed stress tests. The U.S. District Court for the Northern District of Illinois dismissed the action with leave to amend and a second time with prejudice. On cross-appeals, the plaintiffs challenged the dismissal and the defendants challenged the failure of the district court to impose sanctions on the plaintiffs’ lawyers for violating Rule 11.

Alleged misstatements. Boeing was testing a new airliner whose first flight was scheduled for June 30, 2009. The plane failed stress tests in April and May, but the company and individual defendants made several statements indicating that the plane was on track for its first flight in June. On June 23, however, Boeing announced the cancellation of the June first flight and a delay in the delivery of the plane, which many airlines had already ordered. Boeing’s stock price dropped by more than 10 percent in the next two days.

District court proceedings. The district court dismissed the first amended complaint without prejudice for failure to create a strong inference of scienter. The plaintiffs filed a second amended complaint that included particulars about the plaintiffs’ confidential source. This source was later revealed to be an engineer named Bishnujee Singh who did not see the complaint before it was filed; some of its allegations were clearly false, and Singh refuted others when the defendants deposed him. The district judge dismissed the second amended complaint with prejudice, noting that the plaintiffs’ lawyers had not met with or talked to Singh until six months after filing the second amended complaint and positing that their failure to verify the complaint’s allegations amounted to a fraud on the court.

Appeal. The Seventh Circuit affirmed the dismissal, noting that the plaintiffs’ lawyers conceded at oral argument that they would not be relying on Singh going forward and did not ask for leave to conduct further discovery. On considering the defendants’ cross-appeal, the court noted that the PSLRA requires that a court, on final adjudication of an action, make specific findings regarding compliance by each party with each requirement of Rule 11 and impose sanctions if a violation is identified, even if no one asked for sanctions.

While finding that the Rule 11 matter would be best left to the district court, Judge Posner hinted that the panel thought that sanctions may be warranted. The district judge had expressed qualms about the confidential source that should have been a red flag to the plaintiffs’ lawyers, whose failure to inquire further reminded the judge of "ostrich tactics." Furthermore, the court cited three reported cases in which the plaintffs’ firm, Robbins Geller Rudman & Dowd LLP, was described as having engaged in similar misconduct.

The case is Nos. 12-1899 and 12-2009.

Attorneys: Michael J. Dowd (Robbins Geller Rudman & Dowd, LLP) and Marvin A. Miller (Miller Law, LLC) for City of Livonia Employees’ Retirement System and Local 295/Local 851 1BT Employer Group Welfare Fund. Kathleen M. O'Sullivan (Perkins Coie, LLP) for Boeing Co., W. James McNerney, Jr., and Scott E. Carson.

Companies: Boeing Co.

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