CASE NO.: C-04-3580-MJJsecurities.stanford.edu/.../200534_r02d_04CV3580.pdfExecuted at Santa Clara...

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BORIS FELDMAN, Boris . Feldman @wsgr.com , State Bar No . 128838LEO P . CUNNINGHAM, lcunningham@wsgr . com, State Bar No . 121605MEREDITH E . KOTLER, mkotler@wsgr . com, (application forpro hac vice admission pending)JACK I . SIEGAL, jsiegal@wsgr . com, State Bar No . 21808 8WILSON SONSINI GOODRICH & ROSATIProfessional Corporation650 Page Mill Roa dPalo Alto, CA 94304-1050Telephone : (650) 493-9300Facsimile : (650) 565-5100

Attorneys for DefendantsSYNOPSYS, INC ., AART DE GEUS,STEVEN K. SHEVICK, andVICKI ANDREWS

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

SAN FRANCISCO DIVISION

THE WU GROUP, et al .,

Plaintiff,

V .

SYNOPSYS, INC ., AART DE GEUS, STEVENK. SHEVICK, and RICHARD T. ROWLEY,

Defendants .

CASE NO . : C-04-3580-MJ J

DECLARATION OF JACK I . SIEGALIN SUPPORT OF DEFENDANTS'MOTION FOR SANCTIONSPURSUANT TO RULE 11 OF THEFEDERAL RULES OF CIVILPROCEDURE

DECLARATION OF JACK I . SIEGAL INSUPPORT OF MOTION FOR SACTIONSPURSUANT TO RULE 11 OF THE FED . R.CIV. P ., CASE NO .: C-04-3580-MJJ

C :\NrPortbl\PALIB 1 \JIS\2612606 1 .DOC

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I, JACK I. SIEGAL, declare as follows :

1 . I am an attorney duly licensed to practice before this Court and associated with

the law firm of Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel to

defendants Synopsys, Inc ., Aart de Geus, Steven Shevick, and Vicki Andrews in the matter

captioned The Wu Group, et. al. v. Synopys, Inc. et. al., Case Number 3 :04-CV-03580-MJJ (N.D .

Cal .) . I have personal knowledge of the facts set forth herein and, if called as a witness, could

and would competently testify thereto .

2. Attached as Exhibit A is the Declaration of Pazetta Jones-Allen, executed on

March 3, 2005 .

3 . Attached as Exhibit B is the Declaration of Beverly Carlson, executed o n

February 18, 2005 .

4. Attached as Exhibit C is the Declaration of Diane Moreland, executed on

February 16, 2005 .

5 . Attached as Exhibit D is a true and correct copy of Schrag v. Dinges, 73 F.3d 374

(Table), Nos. 94-3005, 94-3093, 94-3102, 1995 WL 675475 (10th Cir . Nov. 14, 1995) .

I declare under penalty of perjury that the foregoing is true and correct .

Executed at Santa Clara County, California, on March 61 , 2005

DECLARATION OF JACK I . SIEGAL INSUPPORT OF MOTION FOR SACTIONSPURSUANT TO RULE 11 OF THE FED . R .CIV. P ., CASE NO . : C-04-3580-MJJ

-1- C:\NrPortbl\PALIB NIS\2612606_l . DOC

EXHIBIT A

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BORIS FELDMAN, Boris . Feldman @wsgr . com, State Bar No . 128838LEO P . CUNNINGHAM, [email protected], State Bar No . 121605MEREDITH E. KOTLER, mkotler@wsgr . com, (application forpro hac vice admission pending)JACK I . SIEGAL, jsiegal@wsgr . com, State Bar No . 21808 8WILSON SONSINI GOODRICH & ROSATIProfessional Corporation650 Page Mill Roa dPalo Alto, CA 94304-1050Telephone : (650) 493-9300Facsimile : (650) 565-5100





THE WU GROUP, et al . ,

Plaintiff,

CASE NO . : C-04-3580-MJJ

DECLARATION OF PAZETTAJONES-ALLEN

V.

SYNOPSYS, INC., AART DE GEUS, STEVENK. SHEVICK, and RICHARD T . ROWLEY ,

Defendants .

I, PAZETTA JONES-ALLEN, declare as follows :

1 . From approximately May 13, 1996 through approximately September 2004, I was

an employee in the Mountain View, Califo rnia headquarters of Synopsys, Inc . ("Synopsys" or

the "Company") . I currently reside in Alameda County , California.

2. From May 1996 through approximately November 2000 , I worked in the

Company ' s finance organization , in positions related to operations . My primary responsibility

was to verify sales orders that had already been entered into the Company ' s computer system by

DECLARATION OF PAZETTA JONES- -1- c :\NTPortbl\PALIBivis \2 611386_I .DOcALLEN, CASE NO . : C-04-3580-MJJ

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personnel in Synopsys' Worldwide Sales organization . I had no contact with the Company' s

customers .

3 . From approximately November 2000 until approximately September 2004, I

worked in the Company's Worldwide Sales organization, in North America Sales and Customer

Support within the Sales Operations Department . For some of this time period, I held the titles

of "Supervisor 1" and "Supervisor 2 ." However, my responsibilities did not include sales .

Rather, my positions again related to operations : order entry pertaining to North America

contracts . I supervised between six and seven employees who obtained information about North

America contracts and entered those orders into the Company's computer system . I also created

an excel spreadsheet that contained certain historical data concerning North America contracts .

Starting in approximately December 2003, I reported to Becky Dunn, who in turn reported to

Angela Molzahn.

4 . In approximately November 2004, I was contacted via telephone by a woman

who claimed to be a consultant working on behalf of Synopsys shareholders . She stated that she

was calling regarding a lawsuit against Synopsys . I recall speaking with this woman via

telephone on two occasions, each time for approximately thirty minutes .

5 . I told the consultant that the Company had always met its public revenue

projections prior to FY 2004 . I also told the consultant that, to my knowledge, everyone at the

Company always believed that the Company would meet its numbers (meaning public revenu e

proj ections) .

6. I have read the Consolidated Amended Class Action Complaint for Violations o f

the Federal Securities Laws (the "Complaint"), dated January 24, 2004 and filed in this case . I

believe that I am the confidential witness identified as "Supervisor ." I am quoted or referenced

in paragraphs 37 through 45, and paragraphs 49 and 50 of the Complaint .

7. As stated below, the Complaint incorrectly attributes to me several statements ,

and inaccurately describes what I told the consultant .

8. I have reviewed paragraph 37 of the Complaint, which states :

DECLARATION OF PAZETTA JONES- -2- C:\NrPortbl\PAL1alvis\26113861 .DOC

ALLEN, CASE NO . : C-04-3580-MJJ

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According to a former Supervisor ("Supervisor") of the Company's Salesand Operations department, Defendants knew or chose to disregard thatthe Company would not meet its projections for FY 2004 and FY 2005 .From 2002 until 2004, Supervisor, who had been employed at Synopsyssince 1996, led the Sales and Operations Department, a new department asof 2002 specifically created for the purpose of monitoring sales contractsand determining when customer licenses required updating or renewal .Supervisor was responsible for building the Sales and OperationsDepartment from the ground up, the department eventually employedapproximately ten employees .

9. The first sentence of paragraph 37 is totally inaccurate and wrongly attribute s

statements to me . I did not tell the consultant that any of the defendants in this case knew or

chose to disregard that the Company would not meet its projections for FY 2004 or FY 2005. To

my knowledge, no one at the Company knew or chose to disregard that the Company would not

meet its FY 2004 or FY 2005 projections .

10. The second sentence of paragraph 37 is inaccurate . I did not tell the consultant

that I "led" the "Sales and Operations Department" at Synopsys . There is no "Sales and

Operations Department" at Synopsys . I was a supervisor in North America Sales and Custome r

Support, which was within the "Sales Operations Department . "

11 . The third sentence of paragraph 37 is inaccurate and wrongly attributes statements

to me. I did not tell the consultant that I "was responsible for building the Sales and Operation s

Department from the ground up," or that the alleged department "eventually employe d

approximately ten employees ."


Supervisor worked at Synopsys headquarters and reported toBecky Dunn ("Dunn") . Dunn in turn reported to Angela Molzahn("Molzahn"), a regional sales director . Supervisor also stated thatMolzahn reported to Brad Roberts ("Roberts"), a senior directorwho oversaw regional forecasting and booking of revenue .Roberts, in turn, reported directly to defendant Andrews .According to Supervisor, there was "a lot of interaction betweenall of these people" and they reviewed sales and revenue salesfigures collectively as a group . Dunn, Molzahn, Roberts anddefendant Andrews are all currently employed at Synopsys .

DECLARATION OF PAZETTA JONES- -3- C:\NrPottbl\PAr isivcs\261I386_1 .DOCALLEN, CASE NO . : C-04-3580-MJJ

13 . The fourth sentence of paragraph 38 wrongly attributes statements to me . I did

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not tell the consultant that "there was `a lot of interaction"' between Ms. Dunn, Ms . Molzahn ,

Mr. Roberts, and Ms . Andrews, or that these individuals reviewed sales and revenue sales figures

collectively as a group .


As soon as Supervisor was hired to run the Sales and OperationsDepartment, senior management and the witness's bossesbombarded Supervisor with questions such as, "When are wegoing to get the dollars?" and "[a]re we going to make or losemoney?"

15 . Paragraph 40 is inaccurate and wrongly attributes statements to me . I did not tell

the consultant that senior management, my bosses, or anyone else at the Company ever

bombarded me with or asked me questions such as "`When are we going to get the dollars?' and

`[a]re we going to make or lose money?"' I was never asked any questions like this in my tenure

at the Company .


Beginning in early 2003, in an effort to "streamline the process"and to generate "accurate answers" for senior managementregarding the Company's ongoing financial performance,Supervisor created a "huge spreadsheet" on the software programSAT that documented all data pertaining to North Americancontracts . The spreadsheet documented licensing dates, costs,renewal dates, products, projected revenue, contact names, and anyother relevant information pertaining to each contract .

17 . Paragraph 41 is inaccurate in several ways . First, I did not tell the consultant that

I created a spreadsheet using "SAT" software . The spreadsheet that I created used exce l

I software. Second, I did not tell the consultant that the spreadsheet documented licensing dates,

costs, or projected revenue . The spreadsheet did not document this information .

18 . I have reviewed paragraph 42 of the Complaint, which states :

Supervisor stated that Dunn, Roberts, the legal department, thefinance department, and "a lot of other people" had access to andreviewed the spreadsheet on a "regular basis." In addition, th espreadsheet was available to several departments on theCompany's shared computer network .

DECLARATION OF PAZETTA JONES- -4- C :\NrPortbl\PALIBIUIS\2611386_1 .DOC


19. The first sentence of paragraph 42 is inaccurate and wrongly attributes statement s

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to me. I did not tell the consultant that anyone - including Ms . Dunn, Mr. Roberts, the legal

department, the finance department, or anyone else - reviewed the spreadsheet that I created on a

regular basis . I do not know, and have no way of knowing, who did or did not review the

spreadsheet .


According to Supervisor, the spreadsheet indicated that Synopsyshad lost valuable contracts in late 2003 and well into 2004 . Duringthe first quarter of FY 2004, which began November 1, 2003,Supervisor informed his/her bosses about his/her concerns aboutthe material contract losses, but according to Supervisor, "theymade a choice to ignore me and the numbers ." Supervisor statedthat the spreadsheet, which was repeatedly reviewed by seniormanagement during the Class Period, made it "obvious" that theCompany could not possibly meet its lofty financial goals set forthe third quarter and FY 2004 .

21 . The first sentence of paragraph 43 is inaccurate and wrongly attributes statements

to me. I did not tell the consultant that the spreadsheet "indicated that Synopsys had lost valuabl e

contracts in late 2003 and well into 2004 ." I do not believe, and have never believed, this to b e

true. The spreadsheet did not indicate that any contracts had been lost .

22. The second sentence of paragraph 43 is inaccurate and wrongly attributes

statements to me . I did not tell the consultant that I informed anyone at the Company about

concerns over contract losses , and I did not tell the consultant that anyone at the Company "made

a choice to ignore me and the numbers ." During my tenure at the Company, I never had

concerns about contract losses , I never communicated such non-existent concerns to anyone, and

no one at the Company "ignored me and the numbers . "

23 . The third sentence of paragraph 43 is inaccurate and wrongly attributes statement s

to me. I did not tell the consultant that my spreadsheet made it "obvious" that "the Company

could not possibly meet its lofty financial goals set for the third quarter and FY 2004 ." My

spreadsheet did not indicate that the Company could not meet its financial goals for Q3 04 or FY

2004.

DECLARATION OF PAZETTA JONES- -5- C:\NrPortb1\PALIBIUIS\2611386_1 .DOC



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Beginning in 2003, and continuing throughout the Class Period,customers were becoming "angry" both with Synopsys' shiftinglicensing arrangements and its practice of "unbundling" its alreadybundled products, according to Supervisor. Defendants wereaware of these ongoing problems as early as the first quarter of FY2004, according to Supervisor.

25. The first sentence of paragraph 44 is inaccurate and wrongly attributes statement s

to me. I did not tell the consultant that customers were becoming angry with shifting licensin g

arrangements or unbundling. My contact with customers was extremely rare, and never involved

the issues of shifting licensing arrangements or unbundling .

26. The second sentence of paragraph 44 is inaccurate and wrongly attribute s

statements to me . I did not tell the consultant that defendants in this action "were aware of' an y

problems at any time .


Prior to and continuing throughout the Class Period, Synopsyscustomers grew increasingly frustrated and angry because theCompany kept changing the parameters of its licensingarrangements, according to Supervisor. While the Company'smovement from upfront licenses to time-based license madebusiness sense, according to Supervisor, the intricacies of theseagreements were confusing to customers, who viewed the changeas onerous and arbitrary . According to Supervisor, a "lack ofclarity" in how these changes were defined to customers was aserious problem for the Company beginning in calendar year 2003and continuing through the third quarter of FY 2004, and causedcustomers to take their business to Synopsys competitors .

28. Paragraph 45 is inaccurate and wrongly attributes statements to me . I did not tell

the consultant that customers grew frustrated or angry due to changing licensing arrangements,

that intricacies of licensing arrangements were confusing to customers, or that "lack of clarity"

was a problem for the Company or caused customers to leave the Company . My contact with

Synopsys customers was extremely rare, and never involved the issue of changing licensing

arrangements .

DECLARATION OF PAZETTA JONES- -6-ALLEN, CASE NO . : C-04-3580-MJJ

C :\NrPortb1\PALIB 1 \JIS\2611386_i .DOC

29. I have reviewed paragraph 49 of the Complaint, which states in part :

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In addition, Synopsys customers were frustrated by the Company'spractice of "unbundling" its previously bundled productsthroughout FY 2004, according to Supervisor . . . . In late 2003and early 2004 , customers began to learn that their previously"bundled" orders were now "unbundled ," and that service was nowsold as separate , individual licenses , according to Supervisor.

30 . Paragraph 49 is inaccurate and wrongly attributes a statement to me . I did not tel l

the consultant that the Company's customers were frustrated by unbundling . I never discussed the

issues of bundling or unbundling with the Company's customers .

31 . I have reviewed paragraph 50 of the Complaint, which states in part :

As a result of these Company practices, customers began"flocking" to competitors, especially Cadence, by the beginning ofthe Class Period, according to . . . Supervisor .

32. Paragraph 50 is inaccurate and wrongly attributes statements to me . I did not tel l

the consultant that customers began "flocking" to competitors, whether because of Compan y

practices or for any reason . I was not in a position to know whether or how many customers left

Synopsys .


A former supervisor at Synopsys reported that senior managementhad access to, and continuously reviewed, a comprehensivespreadsheet that documented all data impacting the Company'srevenue and earnings projections, including expected revenuepertaining to the Company's North American contracts, whichhistorically accounted for more than 50% of the Company's totalrevenue. According to this former employee, it was "obvious" tosenior management, by at least the first quarter of FY 2004, thatSynopsys would not achieve its lofty financial goals for FY 2004 .

34. The first sentence in paragraph 4 is inaccurate and wrongly attributes statements to

me. I did not tell the consultant that senior management had access to and reviewed a spreadsheet

that documented "all data impacting the Company's revenue and earnings projections, includin g

expected revenue pertaining to the Company's North American contracts . "

35 . The second sentence in paragraph 4 is inaccurate and wrongly attribute s

statements to me . I did not tell the consultant that it was "obvious" to senior management, at any

DECLARATION OF PAZETTA JONES- -7-ALLEN, CASE NO . : C-04-3580-MJJ

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time, that the Company would not achieve its financial goals for FY 2004 . To the contrary, I

told the consultant several times that, to my knowledge, everyone at the Company always

believed that the Company would meet its numbers (meaning public revenue projections) .


Executed at Hayward, California, on March -3 , 2005

AZETTA JONES-ALLEN

DECLARATION OF PAZETTA JONES- -$- C :1Documents and SeuingsU1P_Owner\MyALLEN, CASE NO.: C-04-3580-MJJ Doc¢ments1PALIBI 2611386_Ldoc

EXHIBIT C

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BORIS FELDMAN, Boris . Feldman@wsgr . com, State Bar No . 128838LEO P. CUNNINGHAM, lcunningham@wsgr . com, State Bar No. 121605MEREDITH E . KOTLER, [email protected], (application for pro hac vice admission pending)JACK I . SIEGAL, jsiegal@wsgr . com, State Bar No . 218088WILSON SONSINI GOODRICH & ROSATIProfessional Corporation650 Page Mill RoadPalo Alto, CA 94304-1050Telephone: (650) 493-9300Facsimile: (650) 565-5100





THE WU GROUP, et al . ,

Plaintiff,

CASE NO. : C-04-3580-MJJ

DECLARATION OF DIANEMORELAND

V.

SYNOPSYS, INC ., AART DE GEUS, STEVENK. SHEVICK, and RICHARD T. ROWLEY,

Defendants.

I, DIANE MORELAND, declare as follows :

1 . From February 2000 through approximately mid-October 2004, I was an

employee of Synopsys, Inc . ("Synopsys" or the "Company") . I worked at the Company's

Hillsboro, Oregon facility. I currently reside in Tigard, Oregon.

2. From February 2000 through approximately 2002, I was a Customer Support

Representative in the southwest sub-region of the North America West region of WorldWide

Sales at Synopsys. From approximately 2002 through approximately mid-October 2004, I was a

Sales Support Specialist in the southwest sub-region.

DECLARATION OF DIANE MORELAND -1- C:wrrortb1\PAL1swis\2604726_I .DOC

CASE NO . : C-04-3580-MJJ

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3 . The southwest sub-region, which covers southern California, New Mexico, and

Arizona, is one of five other regions within the North America West sales region . The North

America West region is one of five other regions within WorldWide Sales .

4. As a Customer Support Representative and Sales Support Specialist, I wa s

responsible for helping certain Synopsys customers renew maintenance agreements that they had

already purchased along with Synopsys licenses . I was not responsible for, or involved with,

selling licenses or initial maintenance agreements . Rather, I dealt only with customers whose

already-purchased maintenance agreements needed to be renewed .

5 . In addition, I did not deal with all Synopsys customers located within th e

southwest sub-region of the North America West sales region . Rather, I dealt with only a subset

of customers, those who had "territorial" accounts . With a few minor exceptions starting aroun d

May 2004, I did not deal with customers who had "strategic" or "global" accounts .

6 . I have no knowledge, and had no knowledge, of license sales or license sales

projections in the other sub-regions in the North America West sales region . I also have no

knowledge, and had no knowledge, of license sales or license sales projections in the othe r

regions in WorldWide Sales .

7 . In late December 2004 or early January 2005, I was contacted by telephone by a

woman who claimed to be an investigator for certain Synopsys stockholders . I spoke with this

individual, by telephone, twice .

8 . During each of these two conversations, I repeatedly told the investigator that I d o

not believe that anyone at the Company, including senior m anagement , ever deliberately or

artificially inflated sales or maintenance renewal forecasts .

9 . I have read the Consolidated Amended Class Action Complaint for Violations o f

the Federal Securities Laws (the "Complaint"), dated January 24, 2005 and filed in this case . I

believe that I am the confidential witness identified as "SA 2 ." I am quoted or referenced in

paragraphs 46, 47, 50, 55, 56, and 57 of the Complaint .

10. As stated below, the Complaint falsely attributes to me several statements, and

inaccurately describes what I told plaintiffs' investigator .

DECLARATION OF DIANE MORELAND -2- C:\NrPortbl\PALIaivis\2604726_i .DOCCASE NO . : C-04-3580-MJJ

11 . I have reviewed paragraph 46 of the Complaint, the last two sentences of whic h

2 state :

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Testimony from another former sales support administrator ("SA2") employed at the Hillsboro facility who was employed fromFebruary 2000 through October 2004, further corroborates theseproblems. SA 2 stated that the licensing models changed "all ofthe time at Synopsys" and "never stayed the same ."

12 . The first sentence quoted from paragraph 46 inaccurately describes my title . I

was a Sales Support Specialist, not a "Sales Support Administrator . "8

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13 . The second sentence quoted from paragraph 46 misconstrues my statements to the

plaintiffs' investigator . While I told the investigator that Synopsys' licensing models changed a t

times, I did not say that such change was a "problem" or negative thing . I do not believe, and

have never believed, that changing licensing models was a "problem" or negative thing .


Contributing to the problems, according to SA 2, was theCompany's indifferent attitude toward its customers and customerdefections . When a customer was upset about the Synopsyslicensing policy or about a hidden cost, the policy at the Companywas to tell the customer to "go ahead and leave," according to SA2 . Synopsys would "not budge" with customers on making morefavorable deals because it was confident that it had the bestproducts in the market, according to SA 2 . Thus, if a customerwanted to leave Synopsys for "lesser quality, that was fine withthem [Synopsys]," according to SA 2.

15 . The first sentence in paragraph 47 is inaccurate and falsely attributes statements to

me. I did not tell plaintiffs' investigator that the Company had an "indifferent attitude toward s

its customers and customer defections ." I do not believe, and have never believed, that th e

Company is or was indifferent to its customers or customer defections .

16 . The second sentence in paragraph 47 is inaccurate and falsely attribute s

statements to me . I did not tell plaintiffs' investigator that "[w]hen a customer was upset abou t

the Synopsys licensing policy or about a hidden cost, the policy at the Company was to tell th e

customer to `go ahead and leave ."' I did not discuss "licensing policy" with customers , as I was

only responsible for handling renewals of maintenance agreements . I did not discuss "hidden

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costs" with customers, as there are no "hidden costs" associated with renewing maintenanc e

agreements . In addition, I was not aware of any Company policy to "tell the customer to `go

ahead and leave,"' and I do not believe that such a policy ever existed .

17 . The third sentence in paragraph 47 is inaccurate and overstates a comment that I

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made. I told plaintiffs' investigator that the Company stood firm on pricing for renewals of

maintenance contracts . I did not tell plaintiffs' investigator, and I do not believe, that the

Company "would not budge" with customers to make more favorable deals on other types of

contracts, including license contracts . It is my understanding that the Company did negotiate the

terms of other types of contracts, including license contracts, with customers .

18. The fourth sentence in paragraph 47 is inaccurate and falsely attributes statement s

to me. I did not tell plaintiffs' investigator that "if a customer wanted to leave Synopsys fo r

`lesser quality, that was fine"' with Synopsys . I do not believe, and have never believed, this t o

be a true statement .


As a result of these Company practices, customers began"flocking" to competitors, and especially Cadence, by thebeginning of the Class Period, according to SA 1, SA 2, andSupervisor . By the time SA 2 left the Company in October 2004,Synopsys senior management internally acknowledged thedeleterious effect that their inflexibility towards customer [sic] hadon the Company's financial results and was "attempting to be morefavorable to customers . "

20. The first sentence in paragraph 50 is inaccurate and falsely attributes statements t o

me. I did not tell plaintiffs' investigator that the Company's customers began "flocking" to

competitors, for any reason or at any time . I do not believe, and have never believed, this to be a

true statement. While I told the investigator that Synopsys sometimes lost customers to

competitors, I also told the investigator that Synopsys also won customers from competitors -

because Synopsys' product is so good .

21 . The second sentence in paragraph 50 is inaccurate and falsely attributes a

statement to me . I did not tell plaintiffs' investigator that senior management was inflexibl e

toward customers, that senior management acknowledged any effect of its supposed inflexibility,

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or that senior management was "attempting to be more favorable to customers ." I do not believe,

and have never believed, that senior management is or was inflexible toward customers . In

addition, I have no knowledge of anything that senior management did, or did not, acknowledge

or do regarding customers moving to competitors .

22 . I have reviewed paragraph 55 of the complaint, which states :

SA 2 confirmed senior management's practice of artificiallyinflating sales projections during the Class Period . SA 2 workeddirectly with approximately ten sales representatives, whosecollective territories encompassed southern California, Arizona,and New Mexico . SA 2 was responsible for contacting customerswho did not sign maintenance agreements in conjunction with theirsoftware licenses and for attempting to get these customers to enterinto such agreements . In addition, SA 2 was responsible fordocumenting her maintenance agreement sales by entering theminto the Company's forecasting software called Arsenal .

23 . The first sentence in paragraph 55 is totally inaccurate and falsely attributes a

statement to me . I did not tell plaintiffs' investigator that senior management had a practice of

artificially inflating sales projections . I do not believe, and have never believed, that senior

management deliberately or artificially inflated sales forecasts. Based on the limited information

available to me as a Sales Support Specialist in one sub-region within the North America West

sales region, I believe that my own maintenance renewal forecasting information was never

artificially or improperly inflated by anyone, including senior management .

24. The third sentence in paragraph 55 inaccurately describes my responsibilities . I

was primarily responsible for the renewal of maintenance agreements into which Synopsys

customers had already entered. The only time that I would contact a customer who did not

previously sign a maintenance agreement was when Synopsys acquired a company, and that

company's customer had not signed a separate maintenance agreement .


SA 2 stated that her immediate supervisor reviewed her sale sfigures to ensure that the numbers were accurate before they weresent to senior management. Despite sending, "completely accurateand honest numbers up the pipe ," the quarterly forecasting reportsprepared by the Company' s Sales and Finance senior managementat headquarters based on these reports were "filled with mistakes"

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and were "very inaccurate and by unacceptable amounts,"according to SA 2 . SA 2 stated that the sales numbers generatedby senior management were wrong for the duration of witness'stenure at the Company: "Every quarter for four and a half years . "

26. The second sentence in paragraph 56 is inaccurate and falsely attribute s

statements to me . I did not tell plaintiffs' investigator that "the quarterly forecasting reports

prepared by the Company's Sales and Finance senior management at headquarters" based on my

sales figures "were `filled with mistakes' and were `very inaccurate and by unacceptable

amounts . "' I do not believe, and have never believed, this to be a true statement . I had no access

to the forecasting reports prepared by sales or finance senior management, and I had no way of

knowing what - if anything - senior management did once my sales figures were forwarded by

my supervisor Mindy .

27. The third and fourth sentences in paragraph 56 are inaccurate and falsely attribute

statements to me . I did not tell plaintiffs' investigator that senior management's sales numbers

were wrong at any time, much less "'[e]very quarter for four and a half years ."' I do not believe,

and have never believed, this to be a true statement . I had no access to or knowledge of forecasts

generated by senior management, and was not in a position to evaluate the accuracy of or bases

for such forecasts .


SA 2's immediate supervisor, who the witness named only as"Mindy," complained to senior management about the inflatedsales projections both verbally and in writing . According to SA 2,the Company finally began to make changes to its overlyaggressive sales forecasting practices at the end of the summer of2004 .

29. The first sentence in paragraph 57 is inaccurate . I did not tell plaintiffs '

investigator that my supervisor "complained to senior management about the inflated sale s

projections both verbally and in writing ." I have no knowledge of any such complaints by

Mindy, and I do not believe that Mindy ever made such complaints .

30. The second sentence in paragraph 57 is inaccurate and falsely attribute s

statements to me . I did not tell plaintiffs ' investigator that "the Company finally began to make

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changes to its overly aggressive sales forecasting practices at the end of the summer of 2004 ." I

do not believe, and have never believed, that the Company engaged in "overly aggressive sales

forecasting practices" at anytime.


Executed at Tigard, Oregon, on February 1 2005

DIANE MORELAND

DECLARATION OF DIANE MORELAND _7 C:1NrPortbi\PALIB111LS12604726 t .DQCCASE NO . : C-04-3580-MJJ

EXHIBIT D

West aw

73 F .3d 374 (Table )73 F .3d 374 (Table), 1995 WL 675475 (10th Cir .(Kan.)), RICO Bus . Disp . Guide 8919Unpublished Disposition(Cite as: 73 F .3d 374 , 1995 WL 675475 (10th Cir.(Kan.)) )

NNOTICE : THIS IS AN UNPUBLISHED OPINION .

(The Court's decision is referenced in a "Table ofDecisions Without Reported Opinions" appearing inthe Federal Reporter . Use FI CTA10 Rule 36 .3 forrules regarding the citation of unpublished opinions . )

United States Court of Appeals, Tenth Circuit.Galen SCHRAG; Merlin Kaufman; Michae l

Maloney; Dale Mccurry; A.J . Mccurry ;Robert Mccurry ; Odel Mccurry ; Cecil Mccurry;

James Meier ; William G .Schwartz, Plaintiffs-Appellants ,

John R. NICKELSON, individually, and in hiscapacity as Administrator of th e

Estate of Neola Nickelson, Plaintiff,James Craig DODD, Esq ., Appellant,

V.Ted DINGES, Jr . ; Gary Dinges ; Mark Youngers ;

Charles Brooks ; Jay Ewing;Robert "Bob" Simpson; Bonaventure A. Kreutzer,

Jr . ; Denis Dieker ; ValleyFederal Savings & Loan Association; Paganica, Inc . ;

Dinges International ,Inc . ; Ag-Marketing Commodities, Inc . ; Financial

Investments, Inc .,Defendants-Appellees ,

andFred SCHAFFER, Defendant .

Galen SCHRAG, Merlin Kaufman ; MichaelMaloney; Dale Mccurry ; A.J . Mccurry ;

Robert Mccurry; Odel Mccurry ; Cecil Mccurry;James Meier; William G .

Schwartz, Plaintiffs-Appellees ,John R . NICKELSON, individually, and in his

capacity as Administrator of theEstate of Neola Nickelson, Plaintiff,

V.Ted DINGES, Jr. ; Gary Dinges ; Charles Brooks ;

Jay Ewing; FredF Shaffer;Robert "Bob" Simpson; Bonaventure A. Kreutzer,

Jr. ; Denis Dieker; ValleyFederal Savings & Loan Association; Paganica, Inc . ;

Dinges International ,Inc . ; AG-Marketing Commodities, Inc. ; Financial

Investments, Inc . ,Defendants,

and

Page 1

Mark YOUNGERS, Defendant-Appellant.Galen SCHRAG ; Merlin Kaufman ; Michael

Maloney; Dale Mccurry ; A.J. Mccurry ;Robert Mccurry ; Odel Mccurry ; Cecil Mccurry;

James Meier ; William G .Schwartz, Plaintiffs-Appellees,

John R . NICKELSON, individually, and in hiscapacity as Administrator of the

Estate of Neola Nickelson, Plaintiff,V .

Ted DINGES, Jr . ; Gary Dinges ; Mark Youngers ;

Charles Brooks ; Jay Ewing ;Fred Shaffer ; Bonaventure A. Kreutzer, Jr; Denis

Dieker ; Valley FederalSavings & Loan Association; Paganica, Inc . ; Dinges

International, Inc . ; AG-Marketing Commodities, Inc . ; Financial

Investments, Inc ., Defendants ,and

Robert "Bob" SIMPSON, aka Bob Simpson,Defendant-Appellant .

Nos. 94-3005, 94-3093, 94-3102 .

Nov. 14, 1995 .

Before MOORE, BARRETT, and WEIS, [FN*lCircuit Judges .

FN* Honorable Joseph F. Weis, Jr . , SeniorCircuit Judge, United States Court ofAppeals for the Third Circuit, sitting bydesignation .

ORDER AND JUDGMENTJ FN 1

FN 1 . This order and judgment is not bindingprecedent, except under the doctrines of lawof the case, res judicata, and collateralestoppel . The court generally disfavors thecitation of orders and judgments ;nevertheless , an order and judgment may becited under the terms and conditions of thecourt's General Order fi led November 29,1993 . 151 F .R.D. 470 .

MOORE, Circuit Judge .

**1 After examining the briefs and appellate record,this panel has determined unanimously that oralargument would not materially assist the

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73 F .3d 374 (Table)73 F .3d 374 (Table), 1995 WL 675475 (10th Cir .(Kan .)), RICO Bus .Disp.Guide 8919Unpublished Disposition(Cite as: 73 F.3d 374, 1995 WL 675475 (10th Cir .(Kan.)))

determination of these appeals . See Fed. R.App. P .34 a ; 10th Cir. R. 34 .1 .9 . The cases are thereforeordered submitted without oral argument .

These three appeals arise out of the same actionbrought pursuant to the Racketeering and CorruptOrganizations Act (RICO), 18 U.S .C .1961 - 1968. InNo. 94-3005, plaintiffs appeal the district court'sorder of June 8, 1993, granting summary judgment todefendants Youngers, Shaffer, and Simpson on CountI of the third amended complaint and orderingplaintiffs to show cause why summary judgmentshould not be granted to the remaining defendants onCount I . See Schrag v. Dinges, 825 F .Supp. 954, 959(D .Kan . 1993) . Plaintiffs also appeal the court'sorder of August 13, 1993, dismissing Count I of thethird amended complaint, granting summaryjudgment to defendants Youngers and Shaffer onCounts II and III, and giving plaintiffs thirty days toshow cause why Counts II and III should not bedismissed as to all defendants on statute oflimitations grounds, see Schrag v . Dinges, 150 F .R.D .664, 684 (D.Kan.1993) . In addition, plaintiffsappeal the court's order of December 14, 1993, to theextent it granted summary judgment to thenonmoving defendants on Counts II and III based onthe statute of limitations . Finally, plaintiffs' counselappeals the district court's award of sanctions againsthim in the August 13 order . See id.

In No. 94-3093, defendant Youngers appeals thedistrict court's order of March 1 , 1994, denying hismotion for Rule 11 sanctions against plaintiffs andtheir counsel . In No. 94-3102, defendant Simpsonalso appeals the district court's March 1 order, whichdenied his motion for Rule 11 sanctions , as well. SeeSchrag v. Dinges, 153 F.R.D. 665, 667(D.Kan.1994) . fFN2 1

FN2 . We initially identified a potentialjurisdictional problem with appeal Nos . 94-3093 and 94 -3102 and asked the parties tosubmit briefs on the jurisdictional issue .Having reviewed the parties' briefs and thematerials they submitted in support, weconclude that we have jurisdiction to hearthese appeals .

No. 94-300 5The facts of the district court action are set forth indetail in the district court's opinions , and we willrefer only to those that are relevant to our dispositionof the present appeals . Plaintiffs' third amendedcomplaint , which was 105 pages long, was comprised

Page 2

of four RICO counts and one count based on statelaw. Each of the RICO counts alleged a separatefraudulent scheme perpetuated by a differentcombination of the defendants against one or more ofthe plaintiffs . All of the allegedly fraudulentschemes were perpetuated for the purpose of creatingand obtaining an interest in a real estate investmentcompany, Rexmoor Properties, Inc ., the stock of

which would be publicly traded . The effort to takeRexmoor public ultimately failed, and in February1984, Rexmoor withdrew its registration statementfrom the SEC .

Count ICount I detailed what plaintiffs called the "PaganicaSupper Club Scheme." Defendant Gary Dinges waspresident of, and a principal shareholder in, a realestate development company called Paganica, whichowned a country club and golf course within a largeresidential development known as Pinnacle Park.Through a contract with the owners of thedevelopment, Paganica was responsible for managingand developing the surrounding residential lots .Within the country club complex was a supper clubthat was leased to S & M, Inc ., a corporation inwhich plaintiffs Schwartz and Meier were two of thethree shareholders .

**2 The third amended complaint alleged that, byearly 1981, Paganica was in serious financial troubleand defendants Gary Dinges and Jay Ewing, anotherPaganica shareholder, devised a plan to retirePaganica's debt and make a profit, as well. Theydecided to start a new company (Rexmoor), refinancePaganica's debt, transfer Paganica's assets to the newcompany, and retire the newly refinanced debt ofPaganica through the sale of stock issued in the newcompany.

In the meantime, to keep Paganica afloat, the countryclub and golf course complex had to continue tooperate . On April 1, 1981, Paganica, S & M, itsthree shareholders, and several individual guarantorswho were Paganica shareholders, entered into athree-year management agreement . Pursuant to themanagement agreement, S & M was to take over theoperation of the entire country club complex and golfcourse . The agreement provided that Paganicawould acquire twenty percent of the stock of S & M,that S & M would have an option to purchase thecomplex and golf course for $1 million and that, inthe event S & M failed to exercise its option topurchase the property, the individual shareholderscould sell their remaining shares in S & M to

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73 F .3d 374 (Table )73 F .3d 374 (Table), 1995 WL 675475 (10th Cir .(Kan.)), RICO Bus . Disp .Guide 8919Unpublished Dispositio n(Cite as: 73 F .3d 374 , 1995 WL 675475 (10th Cir.(Kan.)) )

Paganica or the guarantors for the sum of $400,000 .The management agreement also contained thefollowing provision, upon which Count I of thecomplaint is based: "It is agreed that the partieshereto shall not cause additional mortgages orencumbrances to be executed nor filed against any ofthe property described herein ." App, to Br, ofAppellants (No. 94-3005), Vol . III, Ex. N at 8 . GaryDinges executed the agreement both as the presidentof Paganica and as an individual guarantor .Plaintiffs allege that Ewing also personallyguaranteed the agreement, although his signaturedoes not appear on the original agreement in therecord. See id. at 13 .

Just two weeks after the management agreement wasexecuted, Gary Dinges submitted a loan request inexcess of $1 million to defendant Valley FederalSavings & Loan Association on behalf of Paganica .When Valley Federal's board voted against makingthe loan, Gary Dinges had to fmd another way tosecure financing that would not require the board'sapproval . In November 1981, such a loan wasarranged for Paganica, allegedly through the effortsof the following defendants : Gary Dinges; Ewing ;Fred Shaffer, who was a major shareholder in Valley

Federal ; Mark Youngers, who was the chief financialofficer for Valley Federal and a director of, andshareholder in, Paganica; Charles Brooks, who wasthe chief loan officer for Valley Federal; and RobertSimpson, who was the president of Peoples StateBank of Ellinwood, Kansas (Ellinwood Bank) . Eachof these defendants allegedly either had or acquiredthrough the transactions at issue an ownershipinterest in Rexmoor and, therefore, each allegedlyhad an incentive to assist Paganica in its efforts torestructure its debt and transfer its assets to Rexmoor .

**3 As a result of these defendants ' allegednegotiations , in January 1982, Ellinwood Bankloaned Paganica $500,000 secured by a letter ofcredit issued by Valley Federal. In February, ValleyFederal loaned Paganica $360,000, and in April, itloaned Paganica an additional $1,085,000 . A portionof the proceeds from the latter loan was used to fundthe le tter of credit Valley Federal had issued toEllinwood Bank . Both of the Valley Federal loans toPaganica were secured with mortgages encumberingthe property that was subject to S & M's option underthe management agreement . Sometime in 1984,Gary Dinges informed Schwartz and Meier about themortgages .

In June 1988, plaintiffs Schwartz and Meier brought

Page 3

the present RICO claim against defendants GaryDinges, Ewing, Shaffer, Youngers, Brooks, andSimpson, alleging they had either maintained aninterest and control in, or participated in the conductof affairs of, an enterprise through a pattern ofracketeering, in violation of 18 U.S .C.1962(b),(c) .Plaintiffs' theory was that Gary Dinges and Ewingnever intended to keep the promise in themanagement agreement that the property subject to S& M's option would not be further encumbered . Theycontended that the other named defendants, all ofwhom allegedly knew about the option and thepromise not to encumber the property, ignored theseprovisions and assisted Gary Dinges and Ewing inencumbering the property because they stood to reapenormous personal gain if Rexmoor were successful .

In Count I of the third amended complaint, plaintiffsSchwartz and Meier did not mention the existence ofS & M. Rather, they purported to be the owners ofthe option to purchase under the managementagreement, as well as the owners of those assets ofthe Paganica Supper Club and the golf and countryclub that were not real property. They alleged,therefore, that defendants' racketeering activityinjured them because they "lost their investment andthe assets owned by them that comprised thePaganica Golf and Country Club and lost theopportunity to purchase the property subject to theiroption." App. to Br. of Appellants (No . 94-3005),Vol . Iat45,¶ 153 .

During the course of discovery, plaintiffs Schwartzand Meier admitted that the option to purchasebelonged to S & M, not to them, personally, and theirown documents reflected that S & M, not Schwartzand Meier individually, owned the assets of thesupper club and country club . After discovery wascompleted, defendants Youngers, Shaffer, andSimpson each moved for summary judgment,asserting, among other things, that plaintiffsSchwartz and Meier had no standing to bring theclaim asserted in Count I because that claim legallybelonged to S & M, not to Schwartz and Meier . Theundisputed evidence showed that Schwartz and Meierhad sold their entire interest in S & M in the fall of1984, and that S & M no longer existed as a

corporation at the time this action was begun.

In their response to Youngers' summary judgmentmotion, plaintiffs conceded that, generally,shareholders cannot sue directly for an injury to thecorporation. See, e.g., McDaniel v. Painter, 418 F .2d545, 547 (10th Cir .1969) . Plaintiffs argued ,

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73 F .3d 374 (Table )73 F .3d 374 (Table), 1995 WL 675475 (10th Cir .(Kan.)), RICO Bus .Disp.Guide 8919Unpublished Disposition(Cite as: 73 F.3d 374, 1995 WL 675475 (10th Cir.(Kan.)) )

however, that because they were parties to themanagement agreement as individuals and becausethe promise not to encumber the property subject to S& M's option was made by and between all theparties, defendants Gary Dinges and Ewing owedthem a special duty as individuals not to breach thatpromise. Therefore, plaintiffs contended, they couldbring the present action for alleged RICO violationsin their own right. The district court rejectedplaintiffs' position, Schrag, 825 F .Sui p . at 957-58, asdo we .

**4 Plaintiffs are correct that there is a widelyrecognized exception to the rule that a shareholdercannot bring a nonderivitive action for injuriessustained by the corporation, which states that ashareholder can bring a direct action for a violation ofa duty that was owed directly to the shareholder as anindividual. See, e.g., Crocker v . FDIC, 826 F .2d 347,349 (5th Cir .1987), cert . denied, 485 U.S. 9051(988 . Plaintiffs' claim falls on ano ther hurdle,

however .

The private right of action granted by RICO providesthat "[a]ny person injured in his business or propertyby reason of a violation of section 1962 of thischapter may sue therefor in any appropriate UnitedStates district court and shall recover threefold thedamages he sustains and the cost of the suit,including a reasonable attorney's fee ." 18U.S.C.1964(c) . Based on this language, the SupremeCourt has held that a plaintiff who asserts a violationof 18 U.S .C.1962 "only has standing if, and can onlyrecover to the extent that, he has been injured in hisbusiness or property by the conduct constituting theviolation ." Sedima, S.P.R .L . v . Imrex Co., 473 U.S .479, 496 (1985).

The injuries plaintiffs alleged in the complaint,however, were to property that actually belonged to S& M, namely, the option and the assets of the supperclub, country club and golf course . In their responseto summary judgment, plaintiffs asserted yet anotherinjury .

Schwartz and Meier are contending in their lawsuitthat they have been damaged to the extent Paganicaactually received and Valley Federal actually paidmoney pursuant to the mortgage that was filed onthe property subject to the option. In terms ofmonetary damages, Schwartz and Meier contendthat they have been damaged to the extent as of thedifference between the encumbrance on theproperty that existed on April 1, 1981, plus the$1,000,000 purchase price and the actual fair

Page 4

market value of the property itself.App. to Br. of Appellants (No . 94-3005), Vol . IV,

Ex. FFF at 1-2 . Similarly, the pretrial conferenceorder entered in January 1993 reflected that plaintiffsbased their damages claim on the value of theproperty subject to S & M's option. See App. to Br .of Appellants (No. 94-3005), Vol. VI at 29-32 .Because plaintiffs had no interest in either the optionto purchase or the property itself, however, theycannot claim an injury "in their business or property"based on the value of the property subject to theoption. Therefore, the district court properlyconcluded that plaintiffs Schwartz and Meier couldnot bring the RICO claim asserted in Count I of thethird amended complaint .

Counts II and IIICount II of the third amended complaint was brought

by Merlin Kaufmann, who, with his partner, ownedall of the property in Pinnacle Park except for thecountry club and golf course area that belonged toPaganica and the individual residential lots that werealready sold. Kaufman alleged that in September1982, defendants Youngers, Brooks and Shafferassisted defendants Gary Dinges and Ewing inobtaining for Paganica and Rexmoor a $3 .2 millionloan from First National Bank & Trust Co . ofOklahoma City that was secured by propertybelonging to Kaufman, all without Kaufman'sknowledge or approval. As a result, property ofKaufman's that had previously been free and clear ofany encumbrances became heavily mortgaged .

**5 Count III of the third amended complaintconcerned three allegedly fraudulent schemesinvolving Ted Dinges (Gary's brother) and Ag-Marketing Commodities, Inc., a commodityinvestment company owned by Ted Dinges . In thefirst scheme, Ted Dinges convinced plaintiff GalenSchrag to borrow substantial sums of money fromValley Federal and loan a portion of them to Ag-Marketing and to Dinges, International, a companyowned by Gary and Ted Dinges . Schrag alleged thatTed Dinges assured him that Ag-Marketing wouldmake all the quarterly payments on the loans fromValley Federal and that Brooks, with whom Schragmet to execute the loan papers, confirmed this fact.Based on these representations, Schrag borrowed$360,000 from Valley Federal in December 1982,$156,00 of which went to himself and the remainderof which went to Ag-Marketing and DingesInternational. He borrowed an additional $10,000from Valley Federal in February 1983, all of whichwent to Dinges International .


73 F .3d 374 (Table )73 F .3d 374 (Table), 1995 WL 675475 (10th Cir .(Kan.)), RICO Bus . Disp . Guide 8919Unpublished Disposition(Cite as: 73 F .3d 374, 1995 WL 675475 (10th Cir.(Kan.)) )

Ag-Marketing made the first payment on the loans,but failed to make any others . Schrag had to makethe other payments and, when he was unable to makethe payments, he ultimately lost the property he hadpledged as collateral for the loans, includingfarmland, equipment, and crops . Schrag allegedthat, although defendants Youngers and Shaffer knew

that Ted Dinges and Ag-Marketing were in aprecarious financial situation and that Schrag wasborrowing more money than he could possibly repayon his own, they did nothing to prevent the loansfrom going through.

In the second scheme, Ted Dinges convincedplaintiff Michael Maloney to invest $15,000 in aManaged Partnership Account (MPA) with Ag-Marketing in January 1983 . In making theinvestment, Maloney allegedly relied on Dinges'representation that he had a formula that virtuallyguaranteed success in commodities investments .Ted Dinges, however, did not have a successfulstrategy, other than to churn the accounts and earnlarge commissions for himself, while depleting thevalue of the MPAs . Maloney ultimately lost his entireinvestment .

The third scheme alleged in Count III was similar tothe second scheme, except that the victims were fivebrothers, plaintiffs Dale, A .J ., Robert, Odel, andCecil McCurry. Ted Dinges convinced the McCurrybrothers to invest $15,000 each in MPAs andguaranteed them that they would not lose theirinvestment . To back up this guarantee, he promisedto place marketable securities in escrow sufficient tocover losses between their investment amount of$75,000 and the stop loss amount of $50,000 . Basedon these representations, the McCurry brothersinvested the $75,000 in November 1982 . Thesecurities, which consisted of 4,000 shares ofRexmoor stock, were given to Valley Federal to beheld in escrow. Defendant Youngers executed adocument acknowledging receipt of the securities onbehalf of Valley Federal and conveyed it to theMcCurry brothers in December . In May 1983, theMPAs were performing so poorly that Ted Dingesreturned $25,000 to the McCurry brothers . Due tohis churning activities, however, the McCurrybrothers lost their remaining investment . BecauseRexmoor ultimately failed to go public, the 4,000shares of Rexmoor that were held in escrow to coverthe McCurrys' losses proved worthless .

**6 Both Shaffer and Youngers moved for summary

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judgment on Counts II and III of the third amendedcomplaint . The district court granted summaryjudgment to each of them, after concluding that therewas no evidence to support any of plaintiffs'allegations of racketeering activity with respect tothese two defendants . Schrag, 150 F .R.D. at 671-76 .The court then went on to address another ground forrelief that both defendants had raised: the statute oflimitations . The court concluded that all plaintiffs'claims in Counts II and III were barred by the statuteof limitations . Id. at 677- 79 ; Br. of Appellants (No .94-3005), Ex. C at 3 .

The statute of limitations for RICO actions is fouryears . Agency Holding Corp. v. Malley-Duff &Assocs ., 483 U.S. 143, 156 (1987) . We have heldthat a cause of action under RICO accrues " 'as soonas the plaintiff discovers, or reasonably should havediscovered, both the existence and source of hisinjury and that the injury is part of a pattern .' " Bathv . Bushkin, Gaims, Gaines R. Jonas, 913 F.2d 817,820 (10th Cir .1990)(quoting Bivens Gardens OfficeBldg., Inc. v. Barnett Bank of Fla ., Inc., 906 F.2d1546, 1554-55 (1 1 th Cir .1990) , cert. denied, 500 U .S .910 (1991)), overruled in part on other grounds byLampf Pleva, Lipkind, Prupis & Petigrow v .Gilbertson, 501 U .S . 350 (1991) . The district courtcarefully considered the claims of each of theplaintiffs involved in Counts II and III of the thirdamended complaint and, with respect to each,concluded that he should have discovered his injury,its source, and that it was a part of a pattern, morethan four years before the original complaint wasfiled in June 1988 . Schrag, 150 F.R.D. at 677-79 .

Plaintiffs devote only one paragraph of their fifty-page appellate brief to the issue of the statute oflimitations and advance only one argument : thedistrict court erroneously ignored their affidavitsand/or deposition testimony that "they did not know,or even suspect, that Ewing, Youngers, Brooks, andShaffer were associated in anyway [sic] with G .Dinges as co-schemers in defrauding them." WN31Br. of Appellants (No . 94-3005) at 46 . Whetherplaintiffs actually knew the identity of all the peopleinvolved in the allegedly fraudulent schemes is notthe relevant inquiry, however .

FN3 . In support of their argument, plaintiffsstate in conclusory fashion that "the relevantdocumentary evidence overwhelminglyestablished that it was reasonable to

conclude that there was no reason for thePlaintiffs/Appellants to suspect that a banke r


73 F .3d 374 (Table )73 F .3d 374 (Table), 1995 WL 675475 (10th Cir .(Kan.)), RICO Bus . Disp . Guide 8919Unpublished Dispositio n(Cite as: 73 F .3d 374, 1995 WL 675475 (10th Cir .(Kan.)))

from Ellinwood, Kansas, or a member of theValley Federal Board of Directors or a loanofficer at the local savings and loan wasinvolved in a fraudulent scheme with G .Dinges ." Br. of Appellants (No. 94-3005)at 46-47. Plaintiffs then give a citation tonumerous exhibits in the record. Weremind counsel that this is not properappellate argument , as it is neither our dutyto construct legal arguments for the litigants,see Drake v . City of Ft. Collins, 927 F.2d1156, 1159 10th Cir .1991 ) , nor our duty toreview the evidence and determine how itmight support such an argument .Further , even if plaintiffs did not suspectthat certain of the defendants were involvedwith Ga ry Dinges as "co - schemers," we failto see how this affects the application of thestatute of limitations to the claims in CountIII, as they involved Ted, rather than Gary,Dinges .

Rather, the pe rtinent question is whether plaintiffsshould have known the existence and source of theirinjury and that it was part of a patt e rn more than fouryears before the complaint was filed . Becauseplaintiffs do not challenge the district court's findingsand conclusions on this issue, we affirm the districtcourt's disposition of Counts II and III on statute oflimitations grounds . See Hein v. TecharnericaGroup, Inc ., 17 F.3d 1278, 1279 (10thCir . 1994 (holding that when a district court' s findingsare not expressly challenged on appeal, we willaccept them as undisputed) .

Counts IV and v. and Rule 11 Sanction s**7 Counts IV and V of the complaint were based

upon a fraudulent scheme allegedly perpetratedagainst John Nickelson and his wife NeolaNickelson, who is now deceased . Count IV, whichmade allegations against defendants Gary Dinges,Ted Dinges, Bonaventure Kreutzer, Jr ., and DenisDieker, was intended to plead a RICO claim. CountV of the third amended complaint alleged only a statelaw fraud claim against Kreutzer and Dieker .Counts IV and V were first added to this suit throughthe third amended complaint, which was filed inApril 1990 .

In August 1990, Kreutzer and Dieker moved todismiss Count V, arguing that the court could notassert pendent party jurisdiction FFN41 over themand citing pertinent authority in support, includingAldinger v. Howard, 427 U .S . 1 (1976) , and Finley v.

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United States, 490 U.S. 545 ( 1989) . Plaintiffsobjected to the motion to dismiss in October,contending that the motion was "frivolous." App. toBr . of Appellants (No . 94 -3005), Vol . IX, Ex. I at 1 .[FN51

FN4 . Pendent party jurisdiction is"jurisdiction over parties not named in anyclaim that is independently cognizable bythe federal cou rt." Finley v. United States,490 U .S . 545, 549 (1989)( footnote omitted) .

FN5 . Our review of this matter has beengreatly hindered by plaintiffs' failure to tellus where, in their ten volumes of appendicesfiled in appeal No . 94-3005, alone, we mightfind a copy of their response to the motionto dismiss that is at issue. Once weeventually located a copy of the response,we discovered that plaintiffs had failed toprovide us with a copy of the entiredocument and had included only the firstthree pages of the response in theirappendix .

Relying on United Mine Workers v. Gibbs, 383 U .S .715 (1966), a case involving the exercise of pendentclaim, not pendent party, jurisdiction, IFN61plaintiffs argued that "Federal Courts permitplaintiffs to bring in pendent par ty defendants understate law claims when there is a 'common nucleus ofoperative facts' between the facts that give rise to thefederal question controversy and the facts that giverise to the pendent claims ." App. to Br. ofAppellants (No. 94-3005), Vol . IX, Ex. I at 1-2 .Plaintiffs continued:

FN6 . Pendent claim jurisdiction is"jurisdiction over nonfederal claims betweenparties litigating other matters properlybefore the court." Finley, 490 U .S . at 548 .

Here, there is an exact mirrored identity betweenthe facts which give rise to the federal questioncontroversy (Count IV) and the facts that give riseto the pendent claims (Count V) .There are only two plaintiffs and three defendantsinvolved in Count IV of the Third AmendedComplaint. The plaintiffs are Nickelson and hiswife's probate estate and the defendants are GaryDinges, ("Dinges"), Dieker and Kreutzer. Theseare the same named parties to in [sic] Count V.All of the operative facts and hence operativeallegations that are necessary to state the pendent


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claims set forth in Count V were in fact stated inthe federal claim in Count IV. Count V merelyincorporated by reference the factual allegationsset forth in Count IV .

Id. at 2 . Plaintiffs ' argument ignored Aldinger andFinley, both of which held that the Gibbs analysisdoes not apply to pendent party jurisdiction.

Aldinuer, 427 U .S . at 14-16, Finley, 490 U .S . at 549-50 .

Based on plaintiffs' statement that Dieker andKreutzer were defendants in both Count IV andCount V, the district court denied the motion todismiss Count V . The court concluded that, becausethe state and federal claims shared a common nucleusof operative facts, the court could exercise pendentclaim jurisdiction over the state claim pursuant toGibbs . Schrag v. Dinges, 788 F .Supp. 1543, 1549

(D .Kan .1992).

Kreutzer's and Dieker's motions for partial summaryjudgment on the RICO claim were pending before thedistrict court at the time it denied the motion todismiss . Plaintiffs responded to the summaryjudgment motions a week later . In their response,

plaintiffs admitted that Count IV did not state a RICOclaim against either Dieker or Kreutzer, explaining asfollows :

**8 The only reason that Dieker and Kreutzer arementioned in Count IV is because they are allegedto have participated in the fraud as co-schemers .The only Count in which they are named as partydefendants is Count V. Nickelson makes no effortin the Third Amended Complaint to contend thateither Dieker or Kreutzer were engaged in a patternof racketeering activity or conducting a RICO

enterprise .App . to Br. of Appellees (Nos . 94-3093 & 94-3102),

Vol . II at 33 (emphasis added) .

In light of plaintiffs ' statement that Kreutzer andDieker were not intended to be part ies to the federalclaim in Count IV, the two defendants reurged theirmotion to dismiss Count V for lack of jurisdiction .

The district court ultimately entered summaryjudgment in favor of Dieker and Kreutzer on Count

IV and granted the motion to dismiss Count V. [FN7]The court reasoned that once plaintiffs admi tted theydid not intend to assert a federal claim against Diekerand Kreutzer, the court could not asse rt pendentclaim jurisdiction over Count V . Schrag v. Dinges,820 F .Supp . 565, 567-68 (D.Kan.1993) . The only

basis for jurisdiction would be pendent pa rtyjurisdiction, which was not available under the

rationale ofFinley . [FN8] Id.

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FN7 . Plaintiffs later settled their claimagainst the remaining defendant(s) in CountIV, and the district court entered finaljudgment in the case in March 1994 .

FN8 . In December 1990, Congressabrogated the holding in Finley by enacting28 U.S .C. 1367(a) , which gives a distr ictcourt supplemental jurisdiction over "allother claims that are so related to claims inthe action within [the court's] originaljurisdiction that they form part of the samecase or controversy under Article III of theUnited States Constitution," even if thoseother claims involve the joinder orintervention of addi tional parties . Section1367 applies only to actions commenced onor after December 1, 1990 , however, so itdid not affect the district court's exercise ofjurisdiction in this case .

After the district court granted the relief they sought,Dieker and Kreutzer moved for sanctions againstplaintiffs' counsel . They argued that because ofplaintiffs' responses to defendants' requests foradmissions [FN9] and plaintiffs' statements in theirbrief in response to the motion to dismiss, defendantswere kept in the case longer than they should havebeen and were forced to incur unnecessary expense indefending against the allegations of plaintiffs' lengthycomplaint . Defendants sought sanctions pursuant toa number of authorities, but the district court decidedto award them only on the basis of Fed .R.Civ.P . 11 .

See Schrag, 150 F .R.D. at 681 .

FN9 . In August 1990, plaintiffs had deniedeach of the following requests for admissionby Dieker, as well as identical requests madeby Kreutzer: "Do you admit that Paragraphs256 through 296 and Count IV of the ThirdAmended Complaint filed herein state noclaim against Denis Dieker [Bonaventure A.

Kreutzer, Jr.]?" "Do you admit thatdefendant Denis Dieker [Bonaventure A .Kreutzer, Jr .] did not cause any of thedamage claimed by you in Count IV of theThird Amended Petition?" App . to Br. ofAppellees (No . 94-3005), Doc . 6, Exs . A &B .

We apply an abuse of discretion standard inreviewing all aspects of the district court's decision .

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F[ N101 Cooter & Gell v . Hartmarx Corp ., 496 U.S .384, 405 ( 1990) ; McHenry v. Utah Valley Hosp ., 927F.2d 1125, 1126 (10th Cir .)("We apply an abuse ofdiscretion standard to both the violationdetermination and the imposition of sanctions underFed .R.Civ .P . 11 ."), cert. denied, 502 U.S . 894 (1991) .Rule 11 imposes an affirmative duty on an attorney"to inquire into the facts and law before filing apleading . His inquiry must be reasonable under thecircumstances ." Coffey v. Healthtrust , Inc., 1 F .3d1101, 1104 (10th Cir.1993 ) . An a ttorney's signatureon a pleading signifies that he has made a reasonableinquiry into the facts and the law, and that thepleading is "well grounded in fact, warranted byexisting law or a good faith argument for theextension, modification , or reversal of existing law,and . . . not interposed for any improper purpose ." Id.

FN10 . We note that at the time the districtcourt ruled on defendants' motion forsanctions , the 1993 amendments to Rule 11were not yet in effect. Therefore, theimposition of sanctions was mandatory oncethe district court found a Rule 11 violationhad occurred . See Griffen v. City of Okla.City, 3 F .3d 336, 342 (10th Cir .1993 )("Rule11 requires the district court to imposesanctions if a document is signed inviolation of the Rule . . . .") .

The district court determined that regardless ofwhether plaintiffs' counsel intentionally misled thecourt, or only drafted documents in a confusingmanner and failed to cite relevant Supreme Courtprecedent contrary to plaintiffs' position, "plaintiffs'opposition to the motion to dismiss was clearly notwarranted by existing law or a good faith argumentfor reversal of existing law ." Schrag, 150 F .R.D. at682. The court also found that the response to themotion to dismiss resulted in "unnecessary hardshipon the defendants and the court ." Id. The court,

therefore, imposed sanctions against plaintiffs'counsel. Id. at 683-64 .

**9 On appeal, plaintiffs' counsel does not contestthe amount of the sanctions, only the imposition ofsanctions . Counsel argues that defendants' motionfor sanctions was a "sham," Br . of Appellants (No .94-3005) at 48, and that the argument advanced bydefendants in support of their motion was and is

"concocted fiction," id. at 47. Specifically, counselcontends that on numerous occasions in 1990-93, heassured counsel for defendants Dieker and Kreutzerthat his clients did not intend to advance a RICO

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claim against these defendants . Further, counsel

contends that, "aside from one clumsy sentence, it isabsolutely and irrefutably clear from the plainlanguage in every response ever filed by Appellants'counsel in opposition to Dieker and Kreutzer'smotions to dismiss, that the only argument advancedwas that the court should exercise pendent partyjurisdiction over them." FN11 Id. at 49 .

FN11 . In addition to these two arguments,on page forty-nine of his brief, counselattempts to incorporate by reference hisresponse to the sanctions motion that hefiled in the district court. The fifty-pagelimit of Fed. R.App. P. 28(g) cannot becircumvented by incorporating by referencea brief filed in the district court. See, e.g.,Executive Leasing Corp . v. Banco Popular,48 F .3d 66, 67-68 (1st Cir.) , cert. denied, 64

U.S.L .W. 3206 (U.S. Oct. 2, 1995);Conkling v. Turner, 18 F .3d 1285, 1299 n .14 (5th Cir.1994) ; Fleming v. County ofKane, 855 F .2d 496, 498 (7th Cir .1988) .

Turning first to counsel's argument that herepeatedly told defendants' counsel that he did notintend to name their clients in a RICO claim, we

remind counsel that Rule 11 does not concern whatan attorney may have told opposing counsel to be thetruth, but what the attorney represented as the truth ina document that he signed and filed with the court .See, e.g., Griffen v. City of Okla . City, 3 F.3d 336,339 (10th Cir .1993)("[S]anctions are only appropriateif a pleading, motion, or paper is signed incontravention of the Rule ."). As to counsel'scharacterization of the response he filed in the districtcourt, we note that the district court obviously did notfind it "absolutely and irrefutably clear" that counselwas arguing that the court had jurisdiction over thestate law claims against Dieker and Kreutzer basedsolely on pendent party jurisdiction, not pendentclaim jurisdiction. Nor does our own reading of theportion of the response provided in the record revealsuch clarity . Moreover, even if counsel's argumentwas based solely on pendent party jurisdiction, Rule11 sanctions would still be appropriate, becausecounsel completely ignored controlling SupremeCourt precedent that was contrary to his position .See Szabo Food Serv., Inc. v. Canteen Coip., 823F.2d 1073, 1081-82 (7th Cir.1987) , cert. dismissed,485 U .S . 901 (1988) .

As the district court explained, "[h]ad plaintiffs andtheir counsel been candid and/or competent ,


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defendants Dieker and Kreutzer would have beendismissed from this lawsuit much earlier, and thecourt would have been spared the time and resourcesit has taken to resolve this matter ." Schrag. 150F.R.D. at 682 . We conclude the district court did notabuse its discretion in awarding sanctions againstplaintiffs' counsel pursuant to Rule 11 .Nos. 94-3093 & 94-310 2

In these two appeals, defendants Youngers andSimpson, respectively, challenge the district court'sdenial of their motions for Rule 11 sanctions .Because the two motions rested on some commongrounds and the district court disposed of them in asingle order, we will consider these appeals together .

**10 Youngers filed his sanctions motion after thedistrict court disposed of the claims in Count I of thethird amended complaint and entered summaryjudgment in his favor on Counts II and III . Youngerscontended that the allegations against him were notwell grounded in either fact or law . In support of hisargument that counsel failed to make a reasonableinquiry into the factual basis for the allegationsagainst Youngers before filing the third amendedcomplaint, Youngers provided the court with a partialtranscript of a deposition he gave plaintiffs' counselin June 1988, before the original suit was filed, aswell as a copy of the corrections he made to thedeposition when he signed it in September 1988 .

Youngers argued that Counts I through III of thethird amended complaint were not "warranted byexisting law or a good faith argument for theextension, modification, or reversal of existing law,"

Fed.R.Civ .P. 11 (1993) , because (1) Schwartz andMeier had no standing to sue for the encumbrance ofthe property subject to the option to purchase, (2) allthe claims were clearly barred by the statute oflimitations, and (3) no RICO liability could arisefrom Youngers' alleged failure to prevent the ValleyFederal loan to Schrag from going through. Inaddition, Youngers raised five challenges to thefactual allegations of Counts I through III of the thirdamended complaint and argued that plaintiffs'counsel failed to make a reasonable inquiry into thefacts before filing the complaint .

First, Youngers noted that Count I of the complaintalleged that Schwartz and Meier personally held theoption to purchase under the management agreementand that they were personally injured when theproperty subject to the option was encumbered inviolation of the management agreement. The

Page 9

statement that Schwartz and Meier owned the optionwas, undeniably, false ; the management agreementclearly showed that the option belonged only to S &M, Inc . Further, Youngers argued, the uncontrovertedevidence showed that Schwartz and Meier haddivested themselves of any interest in S & M longbefore the suit was ever filed.

Second, Youngers stated that before the suit wasfiled, he told plaintiffs' counsel that he was notinvolved in making the loans from Valley Federal toPaganica at issue in Count I, and that he did notapprove the loans as a director of Paganica. Thecorrections to the deposition that Youngers signed inSeptember 1988, long before the third amendedcomplaint was filed, also stated that Youngers wasnot even employed at Valley Federal at the timeeither of the loan commitments were made .Nonetheless, Schwartz and Meier filed a RICO claimagainst Youngers, alleging that he had participated insecuring the loans to Paganica in his capacity as anofficer of Valley Federal and that he had voted toapprove the loans in his capacity as a director ofPaganica .

Third, Youngers maintained that he told plaintiffs'counsel before suit was filed that he was notinvolved, either as an officer of Valley Federal or as amember of the Paganica board, in securing the loansfrom First National Bank of Oklahoma City toPaganica at issue in Count II of the third amended

complaint . In addition, Youngers argued, plaintiffs'counsel stipulated at Kaufman's deposition that

Kaufman had no personal knowledge of any evidenceconnecting Youngers to the loan or the mortgages .Nonetheless, Kaufman brought a RICO claim againstYoungers alleging that he had participated inobtaining the loan that resulted in the filing ofmortgages on Kaufman's property .

**11 Fourth, Youngers stated that he told plaintiffs'counsel before the third amended complaint was filedthat he did not participate in making the loan fromValley Federal to Schrag at issue in Count III andthat he was not even aware of the loan until after itwas made . Further, Schrag testified at his owndeposition that he was not aware of any evidenceconnecting Youngers with the loan . Nonetheless,Schrag attempted to hold Youngers liable forallegedly permitting the loan to go through in order toprotect his own investments in Ag-Marketing, eventhough Youngers knew that Ag-Marketing was infinancial trouble and that Schrag did not have theability to repay the loan himself.

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Finally, Youngers contended that the McCurrybrothers ' RICO claim against him was not wellgrounded in fact because, contrary to their allegation,there was no evidence that the escrow receiptYoungers signed was sent to them through the mail .The lack of a mailing also undermined the legal basisfor their claim, because without the mailing, therewould be no predicate act of racketeering to suppo rtRICO liability . See App . to Appellants ' Br. (No. 94-3005), Vol . I at 84, ¶ 246 (alleging that Youngerscommi tted mail fraud) ; 18 U.S .C .1961( 1) (includingmail fraud in the definition of "racketeeringactivity") .

Simpson also filed his sanctions motion after thecourt disposed of plaintiffs' claims in Counts I, II, andIII . He contended that Rule 11 sanctions werewarranted against plaintiffs and/or their counsel for

two reasons. First, he argued that the claim againsthim in Count I of the complaint was not wellgrounded in fact because it alleged that he knewabout the option to purchase in the managementagreement but that he ignored it because he stood toreap enormous personal gain . Simpson pointed outthat both Schwartz and Meier acknowledged in theirdepositions that they had no personal knowledge ofany facts supporting the allegation that Simpsonknew about the option. Further, in response to hismotion for summary judgment, plaintiffs were notable to produce any evidence that Simpson knewabout the option or knowingly participated in afraudulent scheme against them .

Second, Simpson argued that there was neither afactual nor a legal basis for Schwartz and Meier'sallegation in Count I that they were given the optionto purchase . The management agreement on its faceshowed that the option was given solely to S & M,and there was no legal basis upon which plaintiffscould argue that they, too, had a direct interest in theoption .

In ruling on the motions for sanctions, the districtcourt correctly noted that it should "use[ ] anobjective reasonableness test to determine whether aRule 11 violation has occurred," and that "once it isdetermined that a Rule 11 violation has occurred, theimposition of sanctions is mandatory." Schrag, 153F.R.D . at 666 . The district court then denied thesanctions motions, reasoning as follows :

**12 [A]lthough most of the plaintiffs' claims didnot survive summary judgment, the court finds thatthe bringing of those claims was objectively

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reasonable. Furthermore, plaintiffs' opposition tothe motions for summary judgment was objectivelyreasonable in light of the legal arguments plaintiffsmade . . . . [P]laintiffs' arguments on such issues asreal party in interest and statute of limitations werenot frivolous . The court simply found thatplaintiffs' position was incorrect . . . .Rule I1 also provides for sanctions when apleading or other paper is not "well grounded infact ." Although many of plaintiffs' factualallegations had insufficient support in the record tosurvive summary judgment, this alone is notsanctionable . Nor is plaintiffs' lack of compliancewith Local Rule 206(c) in formulating theirstatements of fact in response to the motions forsummary judgment .

Id. at 667 (footnote omitted) .

As we noted earlier, we apply an abuse of discretionstandard when reviewing all aspects of the districtcourt's ruling on the sanctions motions . Cooter &Gell, 496 U.S. at 405. "A district court wouldnecessarily abuse its discretion if it based its rulingon an erroneous view of the law or on a clearlyerroneous assessment of the evidence ." Id.

The district court's decision does not addresswhether plaintiffs' counsel conducted a reasonableinvestigation or acted reasonably upon the results ofthat investigation before filing the third amendedcomplaint. Instead, the district court appears to haverejected defendants' arguments about the factual basisof the third amended complaint based solely on thecourt's conclusion that the failure of plaintiffs' factualallegations to have sufficient support in the record tosurvive summary judgment "alone is notsanctionable ." Schrag, 153 F.R.D. at 667 .

If the court did not even consider whether counselconducted a reasonable inquiry and whether he actedreasonably in light of his inquiry, then the districtcourt's ruling was based on erroneous view of thelaw. If, on the other hand, the district court didconsider the evidence concerning counsel'sinvestigation before he filed the third amendedcomplaint, but determined that counsel's conduct wasreasonable under the circumstances, then the courtbased its ruling on an erroneous assessment of theevidence . Based on the evidence before the court, itwould be an abuse of discretion to find that plaintiffs'Oklahoma counsel FN121 did not commit a Rule 11violation when he filed the third amended complaint .Therefore, we must reverse the district court's denialof Rule 11 sanctions and remand the action fo r

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further proceedings .

FN12 . Both Youngers and Simpson initiallysought sanctions against plaintiffs, theirOklahoma counsel, and their local counsel .Both defendants subsequently withdrew therequests for sanctions against local counsel .The record before us does not show whatpart any of the plaintiffs may have played inthe violations of Rule 11 that we willdiscuss . Therefore, we address only theRule 11 violations committed by plaintiffs'Oklahoma counsel, James Craig Dodd, andleave a determination of the plaintiffs'individual culpability to the district court onremand. See White v . General MotorsCorp., 908 F.2d 675, 685 (10thCir .1990 ("[T]he sanctioning of a partyrequires specific findings that the party wasaware of the wrongdoing ."), cert. denied,498 U.S . 1069 (1991) .

Under Rule 11 , counsel's signature on the thirdamended complaint constituted a " 'certificate' " byhim that "to the best of [his] 'knowledge, information,and belief formed after reasonable inquiry' the [third]amended complaint is well grounded in fact ."Burkhart ex rel. Meeks v. Kinsley Bank, 852 F .2d512, 514 (10th Cir.1988) (quoting Fed .R.Civ .P . 11) .Rule 11 requires not only that an attorney make areasonable investigation into the facts before filing acomplaint, Coffey, 1 F.3d at 1104, White v. GeneralMotors Corp., 908 F.2d 675, 681 (10th Cir .1990) ,

cert. denied, 498 U.S. 1069 (1991) , but that he actreasonably given the results of his investigation,White, 908 F.2d at 682 ; Navarro-Ayala v. Nunez,968 F .2d 1421, 1426 (1st Cir .1992) ; Collins v.Walden, 834 F .2d 961, 965-66 (11th Cir.1987) . Inthis case, plaintiffs' counsel committed several Rule11 violations when he signed the third amendedcomplaint .

**13 First, the third amended complaint omitted anyreference to S & M, Inc . in Count I and, instead,substituted plaintiffs Schwartz and Meier for thecorporation. For instance, the complaint alleged that"[o]n April 1, 1981, a contract was executed betweenPaganica and Schwartz and Meier whereby Schwartzand Meier were given an option to purchase thecountry club building and the golf course acreage for

$1,000,000," App, to Br. of Appellants (No . 94-3005), Vol. I at 13, ¶ 57. The complaint alsoalleged that Schwartz and Meier, rather than S & M,owned the Paganica Golf and Supper Club and all the

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furniture, equipment, and inventory associated withthe pro shop and the country club . Id. at 14, ¶ 59 .These are only two of the numerous allegations thatshould have referred to S & M, but instead referredonly to Schwartz and Meier.

All of these factual allegations were "demonstrablyincorrect." Navarro-Ayala, 968 F .2d at 1425 . Themanagement agreement, on which the entire firstcount is based, clearly reflects that S & M, alone,owned the option to purchase. Further, documentsproduced by Schwartz and Meier themselves showedthat S & M, not the individuals, owned the assets ofthe supper club, country club, and golf coursereferred to in the complaint . See App. to Appellants'Br . (No . 94-3005), Vol . III, Ex . O .

Because Count I of the third amended complaint wasbased on the management agreement, any reasonableinvestigation of the facts supporting that countwould, necessarily, require an examination of themanagement agreement . If Teamsters Local No.579 v. B & M Transit, Inc ., 882 F.2d 274, 280 (7thCir .1989)("Rule 11 requires at a minimum that aparty read the document whose terms it iscontesting . . . .") . Therefore, counsel's signature on thethird amended complaint, which containedallegations that even a cursory reading of themanagement agreement would show to be false,reflects one of two things : either counsel failed toread the management agreement (and thereby failedto conduct a reasonable investigation), or counselread the agreement and signed the pleading anyway,knowing that it contained false allegations (andthereby failed to act reasonably in light of hisinvestigation) .

Which of these two actions counsel actually took, wedo not know. Counsel made no attempt, by affidavitor otherwise, to explain the nature of his investigationor to show that he acted reasonably based on that

investigation when he signed the third amendedcomplaint . Either act, however, is a violation ofRule 11 . See, e. g. . White, 908 F.2d at 681, 682 ;Villar v. Crowley Maritime Corp., 990 F.2d 1489,1500 (5th Cir .1993)(holding that counsel's relianceon a falsehood that should have been discovered inthe exercise of reasonable care and diligencewarranted imposition of sanctions under Rule 11 ),

cert. denied, 114 S .Ct. 690 (1994) . Likewise, theownership of the assets of the supper club, countryclub, and golf course should have been ascertained byplaintiffs' counsel in the course of any reasonableinvestigation, and his failure to discover the truth, o r

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to plead the truth once discovered, violated Rule 11 .

**14 On appeal, plaintiffs' counsel does not disputethat Count I of the third amended complaintcontained factual allegations that he knew or shouldhave known were false . Instead, he argues only that,because defendants also had a copy of themanagement agreement and his clients acknowledgedin their June 1991 depositions that the optionbelonged only to S & M, his own conduct does notwarrant the imposition of sanctions . Essentially,counsel is arguing "no harm, no foul . "

Once again, counsel fails to understand the centralthrust of Rule 11 , which is directed at representationsof fact and law that an a ttorney makes in documentsfiled with the court. Even if opposing counsel knowsthe truth, an atto rney cannot sign and file a documentwith the court that contains false statements of fact ofwhich the attorney knew or should have known,

without being subject to Rule 11 sanctions . The

extent of the harm caused by counsel' s conduct hasno bearing on whether counsel ' s conduct violatedRule 11 in the first instance . Rather, the extent ofthe harm is relevant to the determination of theamount of sanctions that should be imposed for theRule 11 violation . Cf. White. 908 F.2d at 683 (notingthat one of the purposes of Rule 11 sanctions is to"compensat[e] victims of litigation abuse"). Weconclude the district court abused its discretion whenit failed to find that plaintiffs counsel violated Rule11 by signing a pleading that he knew or should haveknown contained false statements of fact about hisclient's rights and interests .

The evidence before the district court alsodemonstrated conclusively that counsel violated Rule11 when he signed the complaint that containedallegations against Youngers that counsel hadpreviously been told were false . The record showsthat plaintiffs' counsel deposed Youngers before hefiled the initial complaint in June 1988 . Whatcounsel learned as a result of that deposition, and thecorrections to the deposition that Youngers signed inSeptember 1988, was that Youngers was not involvedin making any of the loans at issue in the thirdamended complaint or in obtaining or approvingthose loans on behalf of Paganica . In fact, Youngerstestified that he was not even aware of either the loanto Paganica from First National Bank at issue inCount II, or the loan from Valley Federal to Schrag atissue in Count III, until after the loans were made .

In response to Youngers' motion for sanctions,

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plaintiffs ' counsel chose not to submit an affidavitexplaining what investigation he made of the facts

before filing suit . FN13 The present record doesnot reflect that counsel made any furtherinvestigation of the facts related to him by Youngersbefore he filed the initial complaint . The record doesreflect that after he filed the initial complaint, counselmade some further investigation before he filed thethird amended complaint . Specifically, the recordcontains excerpts from various depositions that

plaintiffs ' counsel participated in after litigationbegan, but before he filed the third amendedcomplaint . IFN14] These deposition excerpts,however, do not contradict the relevant statementsthat Youngers made to plaintiffs ' counsel in his initialdeposition . Moreover , after discovery wascompleted, the district court concluded that plaintiffshad failed to produce any competent evidenceestablishing Youngers ' involvement , either from thelending side or from the borrowing side, in the loansat issue in Counts I, II, and III of the third amendedcomplaint. See Schrag , 150 F .R.D. at 671-72 .

FN13 . In response to Youngers' contentionthat plaintiffs' counsel failed to conduct areasonable inquiry or to act reasonably uponthe inquiry he did conduct, plaintiffs'counsel merely argued that the districtcourt's order of August 13, 1993, grantingsummary judgment to Youngers was wrong .See App. to Br . of Appellant Mark Youngers(No. 94-3093) at 110 .

FN14 . Although the record also contains avariety of other documents, it does notreveal which documents, if any, plaintiffs'counsel discovered before he filed the thirdamended complaint .

**15 We agree with the district court that "sanctionsare not appropriate in every case in which summaryjudgment is granted," Schraz 153 F .R.D. at 667, andthat the failure of a plaintiffs factual allegations tofind sufficient support in the record to survivesummary judgment is not, in and of itself,sanctionable, id. This case, however, involves morethan the mere failure of plaintiffs' allegations tosurvive summary judgment. Counsel wasspecifically told, before he initially filed suit andbefore he signed the third amended complaint, thatthe material facts upon which plaintiffs' claimsagainst Youngers were based were false .

Rule 11 requires that an attorney act reasonably


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based on the information he learns from a prefilinginvestigation into the facts . See White, 908 F.2d at682, Navarro-Ayala, 968 F.2d at 1426 . If, afterinquiry, the facts do not support the claims, counselshould not sign the complaint . Collins . 834 F .2d at965-66. If he does so, he violates Rule 11 . Id. at966 .

Counsel's inability, even after five years of litigation,to produce any concrete evidence FN 151 contrary toYoungers' statements in 1988 that he was notinvolved with the loans at issue, demonstrates thatcounsel "failed to act reasonably given the results of[his] inquiries," White, 908 F.2d at 682, when hesigned the third amended complaint . Under thecircumstances, the district court abused its discretionin failing to find that plaintiffs' counsel violated Rule11 when he signed the third amended complaintcontaining factual allegations about defendantYoungers that counsel's prefiling investigation hadshown to be false .

FN 15 . Plaintiffs contend that they produced"overwhelming evidence of Youngers'involvement in the alleged fraudulentschemes," Br . of Appellees (Nos . 94-3093 &94-3102) at 4 . The district court concluded,however, that much of this "evidence" waseither speculation and conjecture or amisrepresentation of the evidence . Schrag,150 F.R.D. at 671-72. Based upon ourreview of plaintiffs' appellate briefs and therecord, we agree with the district court'scharacterization of plaintiffs' "evidence . "

The district court's decision does not addressSimpson's arguments that the allegations against himin Count I of the third amended complaint were notwell grounded in fact and were not a product ofreasonable inquiry. We have previously held that ,

[w]hen faced with a serious Rule l l motion, . . . adistrict court must make findings or give anexplanation for its denial of the motion . Suchfindings or explanations must be 'detailed enoughto assist in appellate review, help assure thelitigants that the decision was the product ofthoughtful deliberation, and enhance the deterrenteffect of the ruling . '

Griffon, 3 F.3d at 340 (quoting White . 908 F.2d at68 1) (citations omitted) . Simpson's argumentsappear colorable, and it is not obvious from therecord why Rule 11 sanctions would not bewarranted . See id. We note that it is quite possible

Page 1 3

that the district court did not even consider Simpson'sarguments, because the record before us iscompletely silent about what investigation, if any,counsel conducted into the facts supporting theallegations against Simpson in Count I, and, in itsoriginal disposition of Count I, the district court didnot reach the issue of whether there was a factualbasis for plaintiffs' claim against Simpson . Underthe circumstances, we must remand this matter to thedistrict court for further findings and a furtherdevelopment of the record, if necessary . See id.

**16 Conclusion

In No. 94-3005, we conclude that the district courtproperly entered judgment against all plaintiffs onCounts I, II, and III of the third amended complaint.We further conclude that the court properly assessedRule 11 sanctions against plaintiffs' Oklahomacounsel in connection with the claims againstdefendants Kreutzer and Dicker in Counts IV and V .

In Nos. 94-3039 and 3102, we conclude that thedistrict court abused its discretion in denying themotions for Rule 11 sanctions filed by defendantsYoungers and Simpson in two respects . The courterred in failing to find that plaintiffs' Oklahomacounsel violated Rule 11 by signing the thirdamended complaint, which (1) contained factualallegations about his clients' rights and interests inCount I that counsel knew or should have knownwere false and (2) contained factual allegationsagainst defendant Youngers that counsel's prefilinginvestigation had shown to be false . On remand, thedistrict court should determine the amount ofsanctions to be awarded for these Rule 11 violations .The district court did not make sufficient findingsabout the factual basis for plaintiffs' claim againstSimpson or about counsel's prefiling inquiry, if any,for us to review the district court's decision not togrant Simpson's motion for sanctions on this issue .On remand, the district court should develop therecord further, if necessary, and make the necessaryfindings to support its decision.

The judgment of the United States District Court forthe District of Kansas is AFFIRMED in part,REVERSED in part, and REMANDED for furtherproceedings consistent with this order and judgment .

73 F.3d 374 (Table), 1995 WL 675475 (10thCir .(Kan.)), RICO Bus .Disp .Guide 8919 UnpublishedDispositio n

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