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Plaintiffs' sanction in shareholder lawsuit.

In a case affecting future shareholder actions against professionals and corporations, the U.S. District Court for the Eastern District of Pennsylvania imposed sanctions on the plaintiffs' attorney in connection with shareholder lawsuits filed against U.S. Healthcare, Inc.

The case began when the plaintiff's law firm read a Wall Street Journal article saying "insiders" of U.S. Healthcare sold company stock before announcing third-quarter losses. The firm asked a client with holdings in U.S. Healthcare to be lead plaintiff in a class action suit. Shortly after filing the lawsuit, the lead plaintiff realized he could not verify the complaint and that he had a conflict of interest. He requested that counsel withdraw the complaint. Attorneys for U.S. Healthcare filed a motion for rule 11 sanctions.

In general, rule 11 requires the attorney bringing an action to attest that the complaint is well grounded in fact, is warranted by existing law and is not brought for improper purposes such as harassment or increasing litigation costs. If the court finds a violation of rule 11, it may order the attorney bringing the action to pay the defendant's reasonable expenses in defending the suit.

U.S. Healthcare alleged that the plaintiffs failed to conduct a reasonable inquiry into the facts of the case, which would have shown the allegations in the complaint to be false.

In sanctioning the law firm, the court noted counsel never explained to the plaintiff the basis of his proposed complaint and never sent the plaintiff a proposed complaint or even a representation letter until after the complaint was filed. The court went on to say it was troubled because the law firm apparently initiated lawsuits by creating plaintiffs.

The case is significant to the accounting profession because accountants are frequent targets of such "shareholder strike suits." The ruling shows a willingness by a federal court to sanction plaintiffs for inappropriate actions, increasing the risks facing plaintiffs who do not sufficiently research actions before initiating litigation. (Greenfield v. U.S. Healthcare, U.S. District Court for the Eastern District of Pennsylvania, sanctions ordered 2/4/93)
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Title Annotation:Greenfield v. U.S. Healthcare
Publication:Journal of Accountancy
Article Type:Brief Article
Date:Jun 1, 1993
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