Court Refuses To Vacate Sanctions Order For Frivolous Short Selling Claim
The Second Circuit handed down another opinion in ATSI Communications, Inc., v. The Shaar Fund, Ltd., Case No. 08-1815 (2nd Cir. Oct. 20, 2008), perhaps finally brining this case to an end. This opinion concerned a request as part of a settlement to vacate a sanctions order issued under the PSLRA and Rule 11 against plaintiff for filing a baseless compliant. The court refused.
The claims in the underlying litigation might sound familiar given the recent controversy over the SEC’s new short selling rules and the role some believe that such trading had in the demise of Bear Stearns. The suit was brought by ATSI, the issuer of “floorless preferred,” against the purchasers who acquired the shares in a private placement. Essentially, ATSI claimed that defendant purchasers manipulated the stock by selling short. Those sales, according to plaintiffs, drove the stock into a “death spiral.”
In the initial appeal, plaintiff sought reversal of an order dismissing its third amended complaint. In affirming Judge Kaplan’s ruling, the Circuit Court concluded that the theory of the complaint was not “plausible” under Bell Atlantic Corp., v. Twombly, 137 S. Ct. 1955 (2007). The court also held that plaintiff failed to adequately plead scienter as required by Section 21D(b)(2) and Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S.Ct. 2499 (2007). ATSI Communications, Inc. v. The Shaar Fund, Ltd., 493 F.3d 87 (2nd Cir. 2007).
Subsequently, ATSI settled with each defendant except Knight Capital Markets LLC. Rather than settle, Knight brought filed a motion against ATSI under the PSLRA and Fed. R. Civ. P. 11 for sanctions. The district court granted the motion, concluding that ATSI “lacked any reasonable factual basis …” for the claims it asserted. The court ordered plaintiff to pay Knight’s costs in defending the case which were in excess of $64,000.
During the second appeal, ATSI and Knight settled. The settlement is, however, conditioned on obtaining an order vacating the district court sanction order. Accordingly, the parties jointly requested that the Second Circuit vacate that order.
The Circuit Court began its analysis by acknowledging that under 28 U.S.C. § 2106, a court of appeals has the power to vacate a judgment brought before it for review. However, the Supreme Court’s decision in U.S. Bancorp Mortgage Co. v. Bonner Mall Partnership, 513 U.S. 18 (1994) limits the court’s discretion, requiring that when a party who does not prevail appeals, and then settles, it is not entitled to an order vacating the lower court decision absent a showing of equitable entitlement. In addition, it is in the public interest to permit judicial precedent to stand absent an extraordinary showing by the requesting party according to the Court.
In this case, there are no exceptional circumstances justifying the extraordinary remedy sought here. Accordingly, the district court’s decision, concluding that the “death spiral” claim lacked any factual foundation and its sanction order, will stand and not be vacated.