Wisconsin Federal Court Sanctions Law Firm for Filing Baseless Securities Class Action

A Wisconsin federal court recently sanctioned a plaintiff’s law firm for filing a securities class-action complaint that failed to plead specific facts showing that the defendants allegedly had made false or misleading statements with scienter. The decision in Toft v. Harbor Diversified, Inc. (E.D. Wis. Dec. 3, 2025) turned on the provision of the Private Securities Litigation Reform Act of 1995 (the “PSLRA”) requiring courts to make findings as to whether the parties complied with Federal Rule of Civil Procedure 11, which requires that court filings be nonfrivolous.

The Toft decision is interesting for at least two reasons. First, the court imposed sanctions on the law firm that filed the original complaint even though, under the PSLRA, the original complaint is almost always superseded by an amended complaint once the court appoints lead plaintiff and lead counsel, who might not be the original plaintiff and counsel. Second, the court awarded attorneys’ fees to defendants for moving to dismiss the original complaint even though defendants likely could have obtained an extension of the deadline to respond until after the filing of the amended complaint. The Toft ruling thus might cause securities plaintiffs and defendants to reconsider what seems to have become standard operating procedure in securities class actions. 

The PSLRA

Congress enacted the PSLRA in 1995, over President Clinton’s veto, to regulate and strengthen the requirements for securities class actions. Among the PSLRA’s numerous provisions are the following:

First, the PSLRA prescribes a lead-plaintiff procedure to eliminate the “race to the courthouse” advantage for first filers and to encourage the appointment of sophisticated investors as lead plaintiffs. Under the PSLRA, the filing of the original complaint starts a 60-day period during which any putative class member can move to be appointed as lead plaintiff and to have his, her, or its chosen attorney appointed as lead counsel. The PSLRA instructs that the applicant with the largest financial loss (often an institutional investor) should presumptively be appointed as lead plaintiff if he, she, or it is adequate and suitable to represent the class. Once the lead plaintiff and lead counsel have been appointed, they usually file an amended or consolidated complaint, which is always more detailed than the original one. Parties therefore have tended to regard the original complaint as having little practical purpose other than to start the clock on the 60-day PSLRA appointment process, and they usually stipulate that the defendant need not respond to the original complaint.

Second, the PSLRA heightens the pleading requirements for securities-fraud complaints. The statute requires such complaints to specify each allegedly false or misleading statement, explain why it is misleading, state facts supporting any allegations pled “on information and belief,” and plead facts creating a “strong inference” of scienter.

Third, the PSLRA requires that, “upon final adjudication of the action, the court shall include in the record specific findings regarding compliance by each party and each attorney representing any party with each requirement of Rule 11(b) . . . as to any complaint, responsive pleading, or dispositive motion.” A court therefore must determine whether to impose Rule 11 sanctions even if no party has asked it to do so. Rule 11, in turn, requires that all court filings be presented for a proper purpose, be “warranted by existing law or by a nonfrivolous argument for extending, modifying, or reversing existing law,” and have evidentiary support for factual contentions or, “if specifically so identified, . . . likely have evidentiary support after a reasonable opportunity for further investigation or discovery.”

Factual Background of Toft Case

The Rosen Law Firm, P.A. (“RLF”), as counsel for plaintiff Kothari, filed the original complaint here against defendants. One month later, before the 60-day lead-plaintiff process had concluded, defendants moved to dismiss the original complaint for failure to state a claim. A month later, Kothari and another applicant, Toft, moved for appointment as lead plaintiff under the PSLRA. The court then appointed Toft as lead plaintiff and Toft’s law firm (Pomerantz LLP) as lead counsel. The court also suspended for 60 days all briefing deadlines on Kothari’s motion to dismiss the original complaint so that Toft could file an amended complaint.

Nevertheless, the next day, despite the suspension of the briefing schedule, Kothari voluntarily filed a reply brief on his motion to dismiss, thereby completing the briefing on that motion. Two months later, Toft filed his amended complaint. Defendants then moved to dismiss that pleading, and the court granted the motion, holding that the amended complaint failed to plead a strong inference of scienter. After Toft informed the court that he would appeal instead of filing a second amended complaint, defendants moved for sanctions against both RLF and Pomerantz under Rule 11 and the PSLRA, and Kothari and Toft cross-moved for sanctions.

Court’s Decision

The court granted sanctions against RLF for the original complaint, holding that “the PSLRA mandates that a court impose sanctions for any violation of Rule 11(b).” The court ruled that the original complaint “was so cursory in alleging scienter that no reasonable lawyer could have believed that the original complaint satisfied the PSLRA’s heightened pleading standards.” The pleading’s “conclusory allegations concerning scienter” failed “to plead with any specificity facts that would reasonably lead one to believe that Defendants knew or were reckless in not knowing the financial statements issued were materially false or misleading.” Accordingly, “RLF failed to conduct an adequate pre-suit investigation, resulting in an original complaint that was frivolous.”

However, the court declined to impose sanctions on Pomerantz even though the court had dismissed the amended complaint. The court concluded that Pomerantz’s legal theory was “not frivolous” even though the pleading ultimately failed to state a claim.

The court also denied Toft’s motion to sanction defendants for moving to dismiss the original complaint. The court recognized that the defendants’ decision to move to dismiss before the court appointed lead plaintiff and lead counsel “contravened PSLRA litigation norms adhered to in this circuit and nationwide” but held that nothing in the PSLRA “prevents a defendant from filing a motion to dismiss prior to the selection of lead plaintiff.” “To the contrary, the PSLRA contemplates that a defendant will file a motion to dismiss when it believes the complaint fails to sufficiently allege that the defendant made misleading statements with the requisite state of mind. . . . That is exactly what Defendants did here.”

Implications

The court’s imposition of sanctions for the filing of a “frivolous” original complaint in a PSLRA case could cause plaintiffs’ and defendants’ firms to reconsider certain customary practices in securities class-action litigation.

First, the Toft ruling might make plaintiffs’ law firms think harder about the contents of their original complaints and put more work into drafting them. Because the original complaint is almost always superseded by an amended complaint filed after the court appoints lead plaintiff and lead counsel, plaintiffs and defendants have tended to treat those initial pleadings as placeholders whose main purpose is to start the 60-day lead-plaintiff process. Original complaints often consist mostly of block quotations from SEC filings and other public documents plus conclusory allegations asserting – without factual detail – that the defendants knew or recklessly disregarded that the quoted statements were false or misleading. Plaintiffs’ firms might lack economic incentive to put too much work into these initial complaints because the firms know that some other plaintiff and law firm might end up being appointed lead plaintiff and lead counsel.

For example, amended complaints frequently include allegations from “confidential witnesses,” who often are former employees who cannot be identified, located, and interviewed without significant expenditures of resources by plaintiffs’ counsel. Original complaints rarely contain that level of detail. But the Toft decision shows that, even if no one expects an actual ruling on the original complaint, and even if the lawyers who file it might not be appointed lead counsel, the firm that files the original complaint might pay a price under the PSLRA if the pleading cannot withstand Rule 11 scrutiny.

Second, the Toft decision might make defendants think about whether to move to dismiss flimsy original complaints even though they know that the initial pleading will be superseded by an amended complaint and that the court likely will not decide a motion to dismiss the initial one. The lead-plaintiff process and the prospect of an amended complaint usually cause the parties to agree to suspend the defendants’ deadline to respond until after the court appoints lead plaintiff and lead counsel and the lead plaintiff files an amended complaint. But nothing prevents a defendant from responding to the original complaint, as the defendants did in Toft. And if the original complaint is sanctionable, the defendant might be able to recover its attorneys’ fees for a motion to dismiss. The Toft ruling might therefore cause some defendants to consider moving to dismiss instead of agreeing to stay all deadlines, although even a successful motion to dismiss the original complaint will not insulate the defendant from a better-pled amended one.

While the potential availability of sanctions could prove enticing to some defendants, the ultimate strategic benefit of moving to dismiss the original complaint is less clear. Even if a defendant were to recover all its costs for that motion, it likely would need to spend significantly more money to move to dismiss the amended complaint, which is usually far longer and more detailed than the original one. And, as happened in Toft, the defendant might not succeed in obtaining sanctions for the amended complaint even if the defendant wins its motion to dismiss. Thus, from an economic point of view, moving to dismiss the original complaint might, at best, be cost-neutral if the defendant recoups all its costs through a successful sanctions motion but might be a net loss if the awarded sanctions (if any) are less than the client’s actual out-of-pocket expenditures.

However, one cannot discount the message that sanctions motions addressed to original complaints might send to the plaintiffs’ bar. Anything that drives up the cost of filing an initial complaint could make plaintiffs’ firms think harder about whether to get involved at all. If the original complaint cannot be viewed as a placeholder that does not demand extensive effort, plaintiffs’ firms will need to consider whether they must invest more time and resources in those pleadings. And the need for greater up-front expenditures, with no assurance of appointment as lead counsel, could chill some plaintiffs’ firms’ willingness to file securities class actions.

We will see whether the Toft decision has long-term ramifications or whether it will be viewed as an anomaly in light of the parties’ departure from standard practice in PSLRA cases. And, of course, RLF might appeal the District Court’s ruling.