Scott v. Vantage Corp, No. 21-2647 (3d Cir. 2023)
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Askew formed Vantage to trade securities. He recruited investors, including the plaintiffs. Vantage filed a Securities and Exchange Commission (SEC) Form D to sell unregistered securities in a 2016 SEC Rule 506(b) stock offering. The plaintiffs became concerned because Askew was not providing sufficient information but they had no right, based on their stock agreements, to rescind those investments. They decided to threaten litigation and to report Vantage to the SEC to pressure Askew and Vantage to return their investments. Before filing suit, the plaintiffs engaged an independent accountant who reviewed some of Vantage’s financial documents and concluded that he could not say “whether anything nefarious is going" on but that the “‘smell factor’ is definitely present.”
The Third Circuit affirmed summary judgment for the defendants in subsequent litigation. The district court then conducted an inquiry mandated by the Private Securities Litigation Reform Act (PSLRA) and determined that the plaintiffs violated FRCP 11 but chose not to impose any sanctions. The Third Circuit affirmed that the plaintiffs violated Rule 11 in bringing their federal securities claims for an improper purpose (to force a settlement). The plaintiffs’ Unregistered Securities and Misrepresentation Claims lacked factual support. Askew was not entitled to attorney’s fees because the violations were not substantial. The PSLRA, however, mandates the imposition of some form of sanctions when parties violate Rule 11 so the court remanded for the imposition of “some form of Rule 11 sanctions.”
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