Unpublished Dispositiondonna G. Carlton, Joan P. Lynch, Don Lynch, John Harrison,mary Harrison, William Keane, Stephanie Keane, Williamhughes, Helen Hughes, Leonard Lynch, Barbara Lynch, E.george Middleton, Jr., G.e. Schaubach, Carolyn Schaubach,moses Todd, Harold B. Kellam, Jr., H. Gordon Huey, Donald E.bleau, E. Thomas Newbill, Stanley R. Ford, Connell Jestonblankenbeckler, Tommy G. Perry, Alvin T. Kline, Jr., W. Dukegrkovic, Millard D. Ashley, Thomas B. Whitmore, Jr.,plaintiffs-appellants,andenglish & Ward Investment Company, Plaintiff, v. Wayne D. Franklin, William J. Irvin, Daniel A. Gecker,defendants-appellees,andlamar M. Jolly, Jolly Properties, Inc., Jolly & Company,inc., Deloitte, Haskins & Sells, R. Kent Wood, Defendants.in Re W. Duke Grkovic, Thomas M. Wolf, Timothy M. Kaine, Appellants,donna G. Carlton, Joan P. Lynch, Don Lynch, John Harrison,mary Harrison, William Keane, Stephanie Keane, Williamhughes, Helen Hughes, Leonard Lynch, Barbara Lynch, E.george Middleton, Jr., G.e. Schaubach, Carolyn Schaubach,moses Todd, Harold B. Kellam, Jr., H. Gordon Huey, Donald E.bleau, E. Thomas Newbill, Stanley R. Ford, Connell Jestonblankenbeckler, Tommy G. Perry, Alvin T. Kline, Jr., English& Ward Investment Co., Millard D. Ashley, Thomas B.whitmore, Jr., Plaintiffs, v. William J. Irvin, Daniel A. Gecker, Wayne D. Franklin,defendants-appellees,andlamar M. Jolly, Jolly Properties, Inc., Jolly & Company,inc., Deloitte, Haskins & Sells, R. Kent Wood, Defendants.w. Duke Grkovic, Plaintiff-appellee,anddonna G. Carlton, Joan P. Lynch, Don Lynch, John Harrison,mary Harrison, William Keane, Stephanie Keane, Williamhughes, Helen Hughes, Leonard Lynch, Barbara Lynch, E.george Middleton, Jr., G.e. Schaubach, Carolyn Schaubach,moses Todd, Harold B. Kellam, Jr., H. Gordon Huey, Donald E.bleau, E. Thomas Newbill, Stanley R. Ford, Connell Jestonblankenbeckler, Tommy G. Perry, Alvin T. Kline, Jr., English& Ward Investment Co., Millard D. Ashley, Thomas B.whitmore, Jr., Plaintiffs, v. William J. Irvin, Daniel A. Gecker, Defendants-appellants,timothy M. Kaine, Thomas M. Wolf, Appellees,andwayne D. Franklin, Lamar M. Jolly, Jolly Properties, Inc.,jolly & Company, Inc., Deloitte, Haskins & Sells,r. Kent Wood, Defendants.w. Duke Grkovic, Plaintiff-appellee,anddonna G. Carlton, Joan P. Lynch, Don Lynch, John Harrison,mary Harrison, William Keane, Stephanie Keane, Williamhughes, Helen Hughes, Leonard Lynch, Barbara Lynch, E.george Middleton, Jr., G.e. Schaubach, Carolyn Schaubach,moses Todd, Harold B. Kellam, Jr., H. Gordon Huey, Donald E.bleau, E. Thomas Newbill, Stanley R. Ford, Connell Jestonblankenbeckler, Tommy G. Perry, Alvin T. Kline, Jr., English& Ward Investment Co., Millard D. Ashley, Thomas B.whitmore, Jr., Plaintiffs, v. Wayne D. Franklin, Defendant-appellant,timothy M. Kaine, Thomas A. Wolf, Appellees,andlamar M. Jolly, William J. Irvin, Daniel A. Gecker, Jollyproperties, Inc., Jolly & Company, Inc., Deloitte,haskins & Sells; R. Kent Wood, Defendants, 911 F.2d 721 (4th Cir. 1990)

We are here confronted with a case charging securities fraud instituted by investors who lost money after they purchased limited partnership units in the Commonwealth Hotel, Williamsburg, Virginia. They claimed in the district court that the private placement memorandum accompanying the offering contained material misrepresentations and omissions that proximately caused their loss. The district court dismissed some of the plaintiffs' claims and the jury returned a verdict for the defendants on the others. The appeal has been taken on numerous issues. Furthermore, both sides have appealed from the district court's imposition of Rule 11 sanctions, the defendants arguing for more and the plaintiffs arguing for less.

In June 1985, Wayne D. Franklin and Lamar M. Jolly formed a partnership to acquire and operate the Commonwealth Hotel, a property in Williamsburg, Virginia. In August 1985, Jolly decided to syndicate the partnership. Jolly retained a Richmond law firm, Irvin & Gecker, to draft the private placement memorandum, and hired in that connection the accounting firm of Deloitte, Haskins & Sells ("DHS"). Jolly contracted with ManEquity, a broker-dealer, to market the syndication. In October 1985, the partnership syndicated, selling limited partnership units to investors for $30,000 per unit. All partnership units were purchased through ManEquity. The purchasers participating in the present case invested a principal amount of $530,000. Franklin recouped his investment and then withdrew from the partnership; Jolly remained as the managing general partner of the Commonwealth Hotel partnership.

The Commonwealth syndication was the second syndication involving the defendants. The first syndication was Orlando West Investors in the Spring of 1985. An investigation of Jolly conducted by lawyer William J. Irvin in preparation for the Orlando West syndication revealed that Jolly had filed for bankruptcy in 1982. The investigation also revealed that an allegation of fraud had been made against Jolly in the bankruptcy proceeding by one of his creditors. The fraud claim was settled by Jolly.

In June 1986, a ManEquity vice-president became concerned about the performance of the Commonwealth partnership, went to see Jolly, and found the financial records in disarray. The limited partners of the partnership also became concerned and selected a committee to investigate the status of their investment. Performance of the hotel was far below projected levels. The hotel was foreclosed in August 1987; the limited partnership units became worthless.

On October 2, 1987, the investors filed suit against Franklin, Jolly, Irvin, Daniel A. Gecker, and DHS in the United States District Court for the Eastern District of Virginia. They alleged violations of RICO, Secs. 12(2) & 17(a) of the 1933 Securities Act, Sec. 10(b) of the 1934 Securities Exchange Act and Rule 10b-5, and the Virginia Securities Act, Va. Code Ann. Secs. 13.1-501 et seq. Also added were charges of common law fraud, negligence, breach of fiduciary duty, conspiracy, breach of contract, and negligent misrepresentation. The basic theory of the suit was that the private placement memorandum upon which the investors had relied contained numerous material misrepresentations and omissions. These alleged shortcomings included unreasonable financial projections, a misstatement of Jolly's relevant management experience, failure to mention the untrustworthiness of Jolly--as the allegation of fraud in the 1982 bankruptcy proceeding was not mentioned, the omission of poor performance statistics of the Orlando property, and misstatements as to Jolly's and Franklin's net worth.

On January 12, 1988, the plaintiffs obtained a default judgment against Jolly & Co. and Jolly Properties, Inc., two organizations who had failed to enter an appearance in the action. The plaintiffs later voluntarily dismissed the Sec. 17(a), breach of fiduciary duty, breach of contract, and negligence counts. The plaintiffs also dismissed DHS, the accounting firm, as a defendant. The court dismissed the plaintiffs' RICO count against Franklin as they failed adequately to plead an "enterprise."

Shortly before trial, the district court granted summary judgment for the defendants on the common law fraud and negligent misrepresentation claims, as they were filed after the applicable one-year statute of limitations had expired. The district court also granted Irvin's and Gecker's summary judgment motion on the Sec. 522(a) Virginia Securities Act claim, and held that neither Irvin, Gecker nor Franklin could be a "seller" under the Act. The day before trial, Jolly declared bankruptcy, so the case proceeded to trial on the remaining counts only against Franklin, Irvin, and Gecker.

Trial began on January 19, 1989. At the conclusion of the plaintiffs' case, the district court granted a directed verdict for the defendants on the conspiracy count. At the close of the defendants' case, the court granted a directed verdict for defendant Gecker on all counts, holding that there was insufficient evidence of his involvement with the private placement memorandum. A directed verdict was also granted for Franklin on the 10b-5 claim and for Irvin on most of the allegations behind the 10b-5 claim. The jury returned a verdict for the defendants on all remaining counts. On May 2, 1989, the district court imposed Rule 11 sanctions against the plaintiffs' lawyers and plaintiff W. Duke Grkovic for including counts on which the limitations period had expired and Rule 37 sanctions on Grkovic for his false claim of attorney-client privilege.

The plaintiffs base their appeal on five issues relating to the merits of the case. Both the plaintiffs and the defendants, as cross-appellants, have appealed from the district court's order imposing sanctions.

The plaintiffs argue that the district court erred when it sua sponte concluded that Franklin was not a "seller" under Sec. 522(a) of the Virginia Securities Act. The plaintiffs have not appealed the district court's determination that Irvin and Gecker were not "sellers." They have appealed the district court's ruling only as to Franklin.

The plaintiffs advance two arguments as to why the district court erred. First, they argue that the record establishes that Franklin did "sell" a security. Even though he did not pass title, one of the purposes of the syndication was to allow Franklin to dispose of his interest. Second, they argue, the district court violated Rule 56 by sua sponte granting summary judgment for Franklin on the "seller" claim.

Franklin makes three responses to the plaintiffs' arguments. First, he points out that the plaintiffs never properly pleaded a claim against Franklin as a "seller" of the securities, thereby making the court's decision proper. Second, Franklin argues, he did not "sell" a security. The partnership itself and Jolly were the "sellers"; he never had contact with any of the plaintiffs. The plaintiffs, for some unknown reason, never brought suit against the Commonwealth partnership itself. Finally, Franklin argues that since the case against him did go to the jury on a Sec. 522(b) claim ("aiding and abetting" liability), under which the jury found for him, retrial under Sec. 522(a) would be superfluous because both sections embody the same standard of care.

The defendants' argument that the plaintiffs never pleaded a claim against Franklin under Sec. 522(a) suffices. The plaintiffs failed to denominate Franklin as a "seller" in the complaint, nor did they seek to amend the complaint after the issue had emerged. It would have been simple so to amend. The factual portion of the complaint identified only Jolly as a "seller."

In addition, we do not need to reach the merits of the "seller" issue because of the jury's verdict in favor of Franklin on the Sec. 522(b) claim. Section 522(b) provides liability for "aiding and abetting" the seller, while Sec. 522(a) provides similar liability for the seller himself. The standard of care required under both subsections is the same. A Virginia Securities Act claim against Franklin was submitted to the jury under Sec. 522(b). Because the jury returned a verdict for him under Sec. 522(b), Franklin sustained his burden of proof under Sec. 522 and any error in the trial court's refusal to send Sec. 522(a) to the jury was harmless.

The plaintiffs reply that the district court's ruling deprived the plaintiffs of a defendant against whom to assert principal liability, which thereby jeopardized their ability to impose "aiding and abetting" liability against "material participants." But Jolly & Co. and Jolly Properties, Inc., were available as defendants and principal liability could have been asserted against them except that the plaintiffs did not seek to keep the case alive against those defaulting parties.

The plaintiffs contend that the district court improperly limited their Rule 10b-5 claim. At the close of trial, the defendants moved for a directed verdict on the plaintiffs' Rule 10b-5 claim, arguing that the plaintiffs had failed to prove "loss causation." The district court agreed with the defendants on all of the specific alleged misrepresentations in the placement memorandum except for the memorandum's misrepresentation concerning Jolly's prior management experience. Thus, the court allowed the plaintiffs' Rule 10b-5 claim to go to the jury on the allegation that the defendants misrepresented Jolly's management experience. The district court concluded that, with respect to that misrepresentation, the plaintiffs had offered no proof that Franklin possessed the requisite scienter. Therefore, the Rule 10b-5 claim proceeded only against Irvin.

Loss causation is a required element of a Rule 10b-5 claim. It is to be distinguished from "transaction causation." Transaction causation is proof that a particular misstatement or omission induced the plaintiffs to enter into the particular transaction. Currie v. Cayman Resources Corp., 835 F.2d 780, 785 (11th Cir. 1988). In other words, transaction causation requires the plaintiffs to show that they "relied" on the misstatements or omissions. Loss causation, on the other hand, is proof that the matter misrepresented or omitted proximately caused the damage that the plaintiffs suffered. Bennett v. U.S. Trust Co., 770 F.2d 308, 313 (2d Cir. 1985), cert. denied, 474 U.S. 1058 (1986). In other words, the misstatement must, in some proximate way, be the cause of the investor's loss. The reasoning behind the requirement of loss causation is that, otherwise, the federal securities laws would establish an insurance program for every security purchased in reliance on a misstatement, even if the misstatement bears no relation to the reason for the decline in the security's value.

The standard of what shows loss causation has been formulated in numerous ways; however, all the standards boil down to this: The material misrepresentation and omission must be the "proximate reason" for the plaintiffs' pecuniary loss. Huddleston v. Herman & MacLean, 640 F.2d 534, 549 (5th Cir. Unit A 1981), aff'd in part, rev'd on other grounds, 459 U.S. 375 (1983). In other words, the relevant inquiry is whether the misstatement, in some reasonably direct way, "touches upon" the reason for the investment's decline in value.

The plaintiffs point to three alleged misrepresentations that they say were erroneously withheld from the jury on the Rule 10b-5 claim: (1) the nondisclosure of the poor performance of Jolly's Orlando West syndication; (2) the fraud claim made in the 1982 bankruptcy proceeding filed against Jolly; and (3) the inaccurate expense projections of the Commonwealth's operation. They contend that the district court's exclusion of those misrepresentations as bases for their Rule 10b-5 claim was error and, therefore, they should be afforded a new trial. Essentially, the plaintiffs contend that all three misrepresentations "touched upon" the reason for the Hotel's failure: mismanagement.

Yet the record does not contain evidence sufficient to draw an inference of proximate relation between the misstatements and the Hotel's decline in value. For instance, absolutely no evidence was introduced demonstrating that the Orlando West syndication's poor performance was due to mismanagement. Unrebutted testimony offered by the defendants explains Orlando West's troubles on the foreign-exchange strength of the dollar and severe winter weather, both of which kept away tourists. The plaintiffs would ask the jury to infer mismanagement exclusively from the Orlando operation's poor performance. But some evidence would have had to have been introduced to show that Orlando West's troubles stemmed from mismanagement.

Similarly, the record contains insufficient evidence to infer that the allegation of fraud against Jolly in the 1982 bankruptcy proceeding, which eventually was settled, bears any proximate relation to the decline in the plaintiffs' investment. The plaintiffs argue that testimony showed that when the limited partners did investigate the Commonwealth, the financial records, as maintained by Jolly, were in disarray. Thus, the contention goes, the fraud allegation, which relates to Jolly's untrustworthiness in handling finances, could have been considered to bear a proximate relation to the loss in the plaintiffs' investment. But there has been no showing of a connection of the alleged disarray of the financial records with the failure of the Commonwealth. No evidence has connected the Hotel's failure to financial mismanagement. Indeed, the record shows that, as a result of Jolly's financial dealings, he actually transferred $100,000 into the Commonwealth to support the partnership.

Finally, the plaintiffs' allegation that the expense projections of the Commonwealth contained in the placement memorandum were misrepresented bears no proximate relation to their loss since no evidence was introduced showing that unreasonably high operating expenses contributed to the failure of the Commonwealth.

Next, we must investigate whether, as the plaintiffs contend, the district court erroneously granted a directed verdict for defendant Gecker on all counts. There is a sparsity of evidence in the record to demonstrate a connection between Gecker and the preparation of the private placement memorandum. The only testimony relevant to the issue was that of Irvin, Gecker's partner, who said he might have talked with Gecker about certain disclosures in the memorandum. He also said that almost everything of major importance is subject to a full and thorough discussion among all the lawyers at his firm. There was no evidence at all to show that Gecker reviewed any parts of the private placement memorandum or knew of Jolly's bankruptcy or the operating results of the Orlando West syndication. The district court's directed verdict was entirely proper.

That is, unless still another argument advanced on behalf of the plaintiffs has merit. That argument seeks to assert vicarious partner liability. Partner liability is where the wrongful acts of one partner are chargeable to another. See Weaver v. Marcus, 165 F.2d 862, 865 (4th Cir. 1948). The plaintiffs point to previous Fourth Circuit holdings applying common law vicarious liability concepts to claims under the federal securities laws. See, e.g., Carras v. Burns, 516 F.2d 251, 259 (4th Cir. 1975). Thus, they argue that, although partnership liability is somewhat different from vicarious liability, the same result of applying common law principles to securities laws should be reached.

However, as the defendants correctly have pointed out, the plaintiffs did not plead such a theory of partnership liability in the district court. The plaintiffs did not put Gecker on notice that he faced potential liability simply as a result of his partnership with Irvin. Also, the plaintiffs failed to allege that the law partnership committed any wrongful acts. The most liberal reading of the complaint appears to be that it proceeds against both Gecker and Irvin solely in their individual capacities. Thus, we do not reach whether a vicarious partnership liability theory might be applicable under the federal securities laws because the issue has not been presented as it was not pleaded by the plaintiffs in the court below.

The plaintiffs argue that the district court erred by instructing the jury on affirmative defenses, such as waiver, estoppel, and ratification, that were not pleaded. In their reply brief, however, the plaintiffs concede that the issue is controlled by a Fourth Circuit case that goes against their position. In Occidental Life Ins. Co. v. Pat Ryan & Assocs., 496 F.2d 1255 (4th Cir.), cert. denied, 419 U.S. 1023 (1974), the Fourth Circuit held that, in actions under Sec. 12(2) and Sec. 10(b), the defendant is not required to plead estoppel or waiver as an affirmative defense. Id. at 1268. The plaintiffs now only argue that the controlling Fourth Circuit case is incorrect. As a panel, we have no authority to overrule a prior published panel decision and, therefore, consider the plaintiffs' argument to be without merit.

The plaintiffs assert that the district court erred when it dismissed the RICO claim as against Franklin. The court reasoned that the plaintiffs had failed to allege an "enterprise" separate and distinct from the group of defendants themselves, relying on our prior decisions in United States v. Computer Sciences Corp., 689 F.2d 1181, 1190-91 (4th Cir. 1982), cert. denied, 459 U.S. 1105 (1983), and Entre Computer Centers, Inc. v. FMG, Inc., 819 F.2d 1279, 1287 (4th Cir. 1987). But those cases were recently overruled by our Court en banc as to civil RICO claims brought under 18 U.S.C. § 1962(a). Busby v. Crown Supply, Inc., 896 F.2d 833, 840-42 (4th Cir. 1990) (en banc) . The Busby decision, therefore, puts the propriety of the district court's dismissal of the RICO claims, brought under Secs. 1962(a) & (c), in considerable doubt.

Nevertheless, without ruling on the correctness of the district court's reasoning, we affirm the dismissal of the plaintiffs' RICO claim against Franklin because the plaintiffs failed to show that Franklin engaged in any predicate acts with the requisite scienter. The predicate acts that Franklin allegedly committed were the securities violations that the plaintiffs alleged under Sec. 12(2) of the 1933 Securities Act, Sec. 10(b) of the 1934 Securities Exchange Act and Rule 10b-5. The district court directed a verdict in favor of Franklin on the Sec. 10(b) and Rule 10b-5 claims, reasoning that no evidence was presented of Franklin's scienter. The jury returned a verdict in favor of Franklin on the Sec. 12(2) claim. The plaintiffs have not appealed either of those rulings. The plaintiffs failed to prove that Franklin engaged in a predicate act and, therefore, we affirm the district court's dismissal of the plaintiffs' RICO claim as against Franklin.

As a final action requiring review by us, we come to appeals in both directions from the awards of Rule 11 and Rule 37 sanctions. See Fed. R. Civ. P. 11 & 37. On May 2, 1989, Judge Richard L. Williams, before whom the case came for trial in the United States District Court for the Eastern District of Virginia, imposed sanctions. Although he rejected much of the defendants' request, he imposed Rule 11 sanctions against plaintiffs' counsel, Thomas Wolf and Timothy Kaine, also holding plaintiff Duke Grkovic jointly and severally liable. Judge Williams also imposed a Rule 37 sanction against Grkovic. Both parties have appealed from the order imposing sanctions--the plaintiffs contend that the court's sanctions were improperly imposed while the defendants assert that the court erred by not imposing more.

In a well-reasoned memorandum opinion, Judge Williams addressed the basis for many of the claims included in the plaintiffs' complaint. First, he concluded that the following claims were non-sanctionable because they were sufficiently well-grounded in fact and warranted by existing law: RICO; conspiracy; the breach of contract claim against Irvin and Gecker; and the Sec. 12(2) of the 1933 Securities Act, Sec. 10(b) of the 1934 Securities Exchange Act, and Virginia Securities Act counts against Gecker.

The district court judge considered the RICO claim to be nonsanctionable, despite his dismissal of it, because it was supported by law in other circuits and thus constituted "a good-faith argument for the reversal of existing law." He also rejected the defendants' proffer of evidence that the RICO claim was filed for an improper purpose as irrelevant. Allegations of an improper purpose "do not serve to make a legally and factually acceptable pleading sanctionable."

The district court found support for the conspiracy claim as there was evidence that Franklin had worked with Jolly on other syndications, in which Irvin and Gecker had also participated. The district court also found that the plaintiffs' breach of contract claim was not sanctionable because the Virginia Supreme Court had not ruled on whether a person outside of the attorney-client relationship may be a third-party beneficiary to a contract between an attorney and a client. The district court refused to sanction the plaintiffs for bringing securities fraud claims against Gecker. Although the court noted that the plaintiffs sloppily failed to introduce any evidence of Gecker's involvement at trial, the court recognized that facts uncovered during counsel's initial investigation suggested that Gecker was involved in drafting the private placement memorandum.

The district court did, however, find that four of the plaintiffs' claims were sanctionable: common law fraud; negligent misrepresentation; negligence; and breach of fiduciary duty. The court noted that the statute of limitations period applicable to the fraud and misrepresentation claims was one year. Because there was powerful evidence showing that the plaintiffs discovered the alleged fraud before October 2, 1986, the plaintiffs' filing of the claims on October 2, 1987, was not well-grounded in fact. Among other things, notes of Grkovic from August 22, 1986, were found to contain a specific reference to fraud; the plaintiffs and their attorneys had access to those notes prior to the filing of the suit.

The district court also held that the negligence and breach of fiduciary duty claims brought against Irvin and Gecker, predicated on the existence of a duty owed by Irvin and Gecker to the limited partners, were objectively frivolous. The court found that the claims were frivolous because Virginia law clearly requires privity between a lawyer and his client in order for any duty to arise. See Ayyildiz v. Kidd, 220 Va. 1080, 266 S.E.2d 108 (1980). Irvin and Gecker did not represent the limited partners.

Because of the four sanctionable claims, the court imposed Rule 11 sanctions in the amount of $12,500. The court imposed the sanctions on the lawyers, but made plaintiff Grkovic jointly and severally liable for the sanctions because the court found, as a factual matter, that Grkovic's motivation in filing the lawsuit was to force a quick settlement and to improve relations with his clients. Many of his clients had invested in the failed partnership.

The court also imposed Rule 37 sanctions in the amount of $2,400 against Grkovic for his failure to produce his handwritten notes that had been the subject of a motion to compel. Grkovic opposed the motion on grounds of attorney-client privilege but the court ordered production of the notes. The plaintiffs then moved to modify the court's order, and submitted an affidavit, sworn by Grkovic, that he had never disclosed the contents of the notes to anyone outside the scope of the privilege. The court denied the motion. Later, it became apparent to the court that Grkovic's affidavit was false as the notes recorded discussions he had had with defendant Irvin. Because, if it did not amount to perjury, at least Grkovic should have known of the affidavit's falsity, the court sanctioned Grkovic for the delay in the production of his notes.

The plaintiffs have appealed the district court's imposition of sanctions arguing that the court should not have sanctioned a "judgment call" made by the plaintiffs' lawyers. They argue that the common law fraud and misrepresentation claims were not barred by the statute of limitations because the district court misinterpreted the portion of Grkovic's notes to which it referred when holding that the plaintiffs discovered the "fraud" more than one year before filing suit. In that connection, they have pointed out that the district court found that the securities claims were not sanctionable for being filed after the same limitations period. However, the district court's findings of fact in this regard are supported by evidence and plaintiffs make no showing that they are clearly erroneous. Similarly, the plaintiffs' attempts to prove the district court wrong as to its conclusion that under Virginia law a lawyer only owes a duty of care to his client are unconvincing in light of Ayyildiz, 266 S.E.2d at 112-13.

Furthermore, the plaintiffs argue that the court should not have imposed sanctions on Grkovic for having an improper purpose because Rule 11 only allows sanctions if the client's lawyer also had an improper purpose. The plaintiffs reason that it is only when a pleading is signed in violation of Rule 11 that sanctions may be imposed. However, the argument is flawed. The court only held Grkovic jointly liable for sanctions already imposed for four "objectively frivolous" claims. Thus, the attorneys did sign the pleading in violation of Rule 11. Furthermore, Rule 11 explicitly allows sanctions to be imposed on represented parties as well as lawyers. And nothing in the rule limits the "improper purpose" prohibition to lawyers only. Because sanctions were imposed on Grkovic for an improper motivation only as to claims considered objectively frivolous, the policy argument that settlement negotiations will be inhibited has no merit; the sanctioning of Grkovic only resulted here due to the filing of four objectively frivolous claims.

The plaintiffs also argue that sanctions were improperly imposed on plaintiffs' attorney, Timothy Kaine, because he had no notice that he might be liable for such sanctions and had he received such notice he would have presented evidence of his lack of involvement in the frivolous claims. But Kaine did receive such notice: notice was given to the law firm where he worked of motions for sanctions for counts contained in pleadings which he signed. As one district court recently held, " [c]ommon sense and the realities of practice mandate that service on one counsel at the firm ... suffices to notice all in the firm." Harris v. Marsh, 123 F.R.D. 204, 213 (E.D.N.C. 1988), appeal pending, No. 88-1380 (4th Cir. argued Mar. 6, 1990). Notice of Rule 11 sanctions for frivolous claims mailed to a law firm constitutes notice to all those who signed the pleadings that they might be sanctioned. Kaine's argument on appeal that he was insufficiently involved is not convincing.

Finally, the plaintiffs argue that Grkovic should not have been sanctioned under Rule 37. But sufficient evidence supports the district court's conclusion that Grkovic unreasonably delayed the production of discoverable documents.

The defendants, on the other hand, have appealed the district court's refusal to impose additional sanctions. The defendants contend that sanctions should have been imposed based on the inclusion of a RICO count against Franklin. They claim that plaintiffs had no evidence of the criminal intent of the alleged predicate acts necessary to make out a RICO claim. But the court's conclusion that the making of the RICO claim did not warrant sanctions is not an "abuse of discretion." See Introcaso v. Cunningham, 857 F.2d 965, 969 (4th Cir. 1988) (appellate review of Rule 11 sanctions limited to "abuse of discretion"). All in all, Judge Williams' memorandum opinion concerning the imposition of sanctions is thoughtful and well reasoned.

For the reasons stated above, the judgment of the district court is

AFFIRMED.