united states district court northern district...

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF NEW YORK - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - X

NXIVM CORPORATION,

Plaintiff,

v.

TONI FOLEY, JOSEPH O’HARA, JOHN TIGHE, SUZANNA ANDREWS, JAMES ODATO, and JOHN DOES 1-59,

Defendants.

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Case No.: 14-cv-01375-LEK-RFT

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MEMORANDUM OF LAW IN SUPPORT OF MOTION BY DEFENDANT SUZANNA ANDREWS FOR LEAVE TO FILE MOTION

PURSUANT TO RULE 11(c)(2), AND FOR SANCTIONS PURSUANT TO 28 U.S.C. § 1927 AND THE INHERENT POWER OF THE COURT

GREENBERG TRAURIG, LLP

54 State Street Sixth Floor Albany, New York 12207 Tel: (518) 689-1400 Attorneys for Defendant Suzanna Andrews

Case 1:14-cv-01375-LEK-RFT Document 86-12 Filed 09/24/15 of 30

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TABLE OF CONTENTS

TABLE OF AUTHORITIES ......................................................................................................... iii

PRELIMINARY STATEMENT .....................................................................................................1

PROCEDURAL HISTORY.............................................................................................................3

A. The Complaint’s CFAA and SCA Allegations. ..........................................................3

B. The Uncontested Motion to Transfer Venue. .............................................................4

C. Ms. Andrews’s Rule 12(b)(6) Motion Based on Statute of Limitations Grounds. ..................................................................................................5

D. Materials Exposing NXIVM’s Allegations and Representations as False. ................5

E. NXIVM’s Refusal to Withdraw Its Time-Barred Claims. ..........................................6

F. The Court’s Memorandum-Decision and Order. ........................................................8

G. NXIVM Threatens Rule 11 Sanctions in an Attempt to Keep Its Misrepresentations and Misconduct Hidden From This Court. ..................................8

ARGUMENT ...................................................................................................................................9

I. SANCTIONS ARE APPROPRIATE AND NECESSARY IN LIGHT OF NXIVM’S DELIBERATE MISREPRESENTATIONS TO THE COURT ........................9

A. NXIVM’s Allegations Concerning Its Discovery of the Alleged Unauthorized Access Were False When Made. ........................................................10

B. NXIVM’s Own Evidence Contradicts Its Allegations and Arguments. ...................10

C. NXIVM’S Representations Are Demonstrably False. ..............................................13

D. NXIVM’S Legal Arguments Are Unwarranted Under Existing Law ......................15

E. NXIVM Continued to Press Its Baseless Allegations and Arguments in the Face of Undisputable Proof Demonstrating the Falsity of Those Allegations and Arguments.......................................................................................17

II. MS. ANDREWS SHOULD BE GRANTED LEAVE TO FILE HER RULE 11 MOTION FOR SANCTIONS ...........................................................................18

III. SANCTIONS ARE APPROPRIATE AND NECESSARY UNDER 28 U.S.C. § 1927 AND THE COURT’S INHERENT POWER, AND SHOULD INCLUDE THE ASSESSMENT OF ATTORNEYS’ FEES INCURRED BY MS. ANDREWS IN DEFENDING NXIVM’S TIME-BARRED CLAIMS ....................22


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1. NXIVM’s Allegations and Arguments Were Without a Colorable Basis ............... 23

2. NXIVM Brought and Pressed Its Claims and Arguments in Bad Faith .................. 23

CONCLUSION ..............................................................................................................................25


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TABLE OF AUTHORITIES

Cases

Chambers v. NASCO, Inc., 501 U.S. 32 (1991) .............................................................................................................18, 22

Cooter & Gell v. Hartmarx Corp., 496 U.S. 384 (1990) .................................................................................................................18

Dietz v. Kautzman, 681 N.W.2d 437 (Sup. Ct. N.D. 2004) ....................................................................................20

In re Dones, Nos. 10-45608 & 10-45609, 2011 WL 5079585 (W.D. Wash. Bankr. Ct. Oct. 25, 2011) ........24

Enmon v. Prospect Capital Corp., 675 F.3d 138 (2d Cir. 2012).....................................................................................................23

Giganti v. Gen-X Strategies, Inc., 222 F.R.D. 299 (E.D. Va. 2004) ........................................................................................20, 21

Gollomp v. Spitzer, 568 F.3d 355 (2d Cir. 2009).....................................................................................................22

Hadden v. Letzgus, 121 F.3d 708 (Table), 1997 WL 434413 (6th Cir. Jul. 31, 1997) ............................................21

Hamlin v. TD Bank, No. 1:13-cv-200, 2014 WL 3101942 (W.D.N.C. Jul. 7, 2014) .........................................19 n.5

Howell v. Nesbit, No. 98–1402, 1998 WL 340291 (4th Cir. June 16, 1998) .................................................19 n.5

Johnson v. University of Rochester Medical Center, 715 F. Supp. 2d 427 (W.D.N.Y. 2010) ....................................................................................20

Johnson v. University of Rochester Medical Center, 642 F.3d 121 (2d Cir. 2011)...............................................................................................20, 22

Matrix IV, Inc. v. American National Bank & Trust Co., 649 F.3d 539(7th Cir. 2011) ....................................................................................................18

NXIVM Corp. v. Metroland Magazine, No. 136445 (Sup. Ct. Niagara Cnty. 2009)..............................................................................25

NXIVM Corp. v. O’Hara et al., No. 1:05-cv-1546 (N.D.N.Y. 2005) .........................................................................................24


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NXIVM Corp. v. Ross, No. 09-cv-338S, 2011 WL 5080238 (W.D.N.Y. Oct. 25, 2012) .........................................5, 24

Pannonia Farms, Inc. v. USA Cable, No. 03-civ-7841, 2004 WL 1276842 (S.D.N.Y. Jun. 8, 2004) .......................................... 19-20

Revson v. Cinque & Cinque, P.C., 221 F.3d 71 (2d Cir. 2000).......................................................................................................22

Schlaifer Nance & Co. v. Estate of Warhol, 194 F.3d 323 (2d Cir. 1999)...............................................................................................18, 23

S.E.C. v. Smith, 798 F. Supp. 412 (N.D.N.Y. 2011) ....................................................................................23 n.6

Sewell v. Bernardin, 795 F.3d 337 (2d Cir. 2015)............................................................................................. passim

Truelove v. Heath, 86 F.3d 1152 (Table), 1996 WL 271427 (4th Cir. 1996) ..................................................19 n.5

Weeks Stevedoring Co. v. Raymond Int’l Builders, Inc., 174 F.R.D. 301 (S.D.N.Y. 1997) .............................................................................................22

Statutes

Federal Rules of Civil Procedure 11(c)(3) ...............................................................................23 n.6

Federal Rules of Civil Procedure 11(c)(2) ............................................................................. passim

Computer Fraud and Abuse Act, 18 U.S.C. § 1030 .........................................................................3

Computer Fraud and Abuse Act, 18 U.S.C. § 1030(g) ....................................................................3

Stored Communications Act, 18 U.S.C. § 2701 ..............................................................................3

Stored Communications Act, 18 U.S.C. § 2707(f) ..........................................................................4

28 U.S.C. § 1927 ..............................................................................................1, 2, 9, 19, 22, 23, 25


Defendant Suzanna Andrews, by her attorneys, respectfully submits this memorandum of

law in support of her motion for leave to file a motion pursuant to Rule 11(c)(2) that was served

on Plaintiff NXIVM Corporation (“NXIVM”) on August 31, 2015, and for sanctions against

NXIVM pursuant to 28 U.S.C. § 1927 and the Court’s inherent power.

PRELIMINARY STATEMENT

NXIVM commenced this action knowing that its federal claims were time barred. In the

Complaint, NXIVM alleges that it suspected unauthorized access to its computer system and

commenced an investigation “in late 2011.” NXIVM reiterated these allegations in opposition to

Ms. Andrews’s motion to dismiss, and argued that it did not have “a reasonable opportunity to

discover” any alleged unauthorized access until 2012. However, NXIVM’s own sworn statements

and other evidence, which it submitted to the New York State Police in furtherance of criminal

charges it pursued against certain defendants in this case, demonstrates that it became suspicious of

unauthorized access and commenced an investigation in August of 2011. The evidence and

testimony further demonstrates that NXIVM confirmed the alleged unauthorized access by no

later than September 27, 2011, when it shut down access to its website through the account of

“Client P.” Thus, NXIVM’s federal claims were unquestionably time barred when they were filed

on October 22, 2013.

On August 14, 2015, shortly after receiving the materials establishing that NXIVM’s

claims were time barred, counsel for Ms. Andrews sent NXIVM’s counsel of record a detailed

letter with exhibits setting forth the reasons that NXIVM’s allegations and arguments violated

Rule 11, and demanding that NXIVM’s claims against Ms. Andrews be withdrawn. NXIVM’s

counsel stated that it disagreed with Ms. Andrews’s allegations and, notwithstanding additional

time to investigate Ms. Andrews’s assertions, never responded substantively to Ms. Andrews’s


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letter. Accordingly, on August 31, 2015, pursuant to Rule 11(c)(2), counsel for Ms. Andrews

served on NXIVM, but did not file, a Rule 11 motion, declaration, and memorandum of law.

NXIVM also never responded to Ms. Andrews’s Rule 11 motion. However, on

September 15, 2015 (15 days after service of the Rule 11 motion, and 32 days after receipt of

Ms. Andrews’s detailed letter setting forth the grounds for the Rule 11 motion), NXIVM’s

counsel filed a letter with the Court in response to a letter filed by Ms. Andrews’s counsel

concerning the Second Circuit’s recent decision in Sewell v. Bernardin. The September 15 letter

reflects a deliberate distortion of Sewell, and reiterates the patently false allegations that NXIVM

did not suspect or investigate unauthorized access until “late 2011” and did not have “a

reasonable opportunity to discover” such access until 2012. Thus, NXIVM made clear – just six

days before the 21-day safe harbor expired – that it had no intention of withdrawing its time-

barred claims or otherwise correcting its misrepresentations to the Court.

On September 17, 2015, just four days before the expiration of the safe harbor under Rule

11(c)(2), the Court granted Ms. Andrews’s motion to dismiss on statute of limitations grounds,

and dismissed the Complaint in its entirety with respect to all defendants. Based on the

fortuitous timing of the Court’s decision, NXIVM has taken the extraordinary position that the

Court lacks jurisdiction to entertain the Rule 11 motion, and has even gone so far as to threaten

Ms. Andrews with Rule 11 sanctions if she files the previously served Rule 11 motion. While

NXIVM’s position is unfounded, Ms. Andrews seeks leave to file the Rule 11 motion in light of

the dismissal of the Complaint prior to the expiration of the safe harbor under Rule 11.

In addition, Ms. Andrews requests sanctions pursuant to 28 U.S.C. § 1927 and the

Court’s inherent authority. This case should never have been filed by NXIVM. Both this Court

and the District Court for the Western District of New York have been required to expend


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unnecessary time and attention to a meritless case. Ms. Andrews has been required to expend

significant time and expense in seeking leave to transfer and obtaining dismissal of this case.

And when NXIVM was presented with information that established that its claims were time

barred, NXIVM persisted in its frivolous conduct. NXIVM, a serial litigant, must be made to

answer for its waste of judicial resources and its outrageous conduct.

PROCEDURAL HISTORY

A. The Complaint’s CFAA and SCA Allegations.

NXIVM filed its Complaint in this action on October 22, 2013, in the United States

District Court, Western District of New York. (See Complaint, N.D.N.Y. Dkt. No. 1

(“Compl.”).) The Complaint alleges claims against Ms. Andrews and others for purported

violations of the Computer Fraud and Abuse Act (“CFAA”), 18 U.S.C. § 1030, and the

Stored Communications Act (“SCA”), 18 U.S.C. § 2701, et seq. (See Compl. ¶¶ 93-111.)

Ms. Andrews, a professional journalist and Contributing Editor of Vanity Fair, wrote an article

about NXIVM and its principals that was published by Vanity Fair in 2010. (Declaration of

Michael J. Grygiel, dated September 24, 2015 (“Grygiel Dec.”) ¶ 2.)

The Complaint alleges that Ms. Andrews accessed Plaintiff’s password-protected website

on July 9, July 10, August 9 and September 10, 2010. (Compl. ¶ 69.) The Complaint further

alleges that certain Defendants (other than Ms. Andrews) made available in the public domain

information taken from NXIVM’s website, or used the information to harass NXIVM and its

members. (Id. ¶¶ 77, 85-89, 91-92.)

A claim brought under the CFAA must be brought “within 2 years of the date of the act

complained of or the date of the discovery of the damage.” 18 U.S.C. § 1030(g). Thus, with

respect to Ms. Andrews, NXIVM’s CFAA claim would be time-barred if NXIVM discovered, or


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reasonably should have discovered, the “damage” caused by the alleged unauthorized access on

or before October 22, 2011.

Similarly, a claim brought under the SCA “may not be commenced later than two years

after the date upon which the claimant first discovered or had a reasonable opportunity to

discover the violation.” 18 U.S.C. § 2707(f). NXIVM’s SCA claim against Ms. Andrews would

thus be untimely if NXIVM had “discovered or had a reasonable opportunity to discover” the

alleged unauthorized access on or before October 22, 2011.

With respect to NXIVM’s discovery of the alleged unauthorized access, the Complaint

cryptically avers as follows:

In late 2011, suspicions arose as to whether unauthorized users were accessing [NXIVM’s] Password Protected Website.

An investigation was conducted, and in January 2012, a client of NXIVM who was on good terms with NXIVM, but who had not recently been active (hereinafter referred to as “Client P”), confirmed that she had not used her username and password since 2003, and yet NXIVM’s records showed use of Client P’s username and password through 2011.

(Compl. ¶¶ 52, 53.)

Contemporaneously with the filing of the Complaint, Plaintiff filed an ex parte motion to

seal the Complaint. (See Dkt. No. 2.) In support of its motion to file the Complaint under seal,

NXIVM’s counsel noted that “due to approaching deadlines associated with the statute of

limitations applicable to certain of the claims asserted herein, Plaintiff cannot delay in filing the

present litigation.” (Dkt. No. 2, pg. 4 at ¶ 4.) Ultimately, the Complaint was unsealed on

August 12, 2014. (Dkt. No. 9.)

B. The Uncontested Motion to Transfer Venue.

On September 30, 2014, Ms. Andrews and Defendant James Odato, also a professional

journalist, filed a joint motion to transfer venue from the Western District of New York to this


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Court. (Dkt. No. 22.) The motion papers demonstrated that transfer was appropriate because all

of the parties − including NXIVM − except one resided in the Northern District of New York,

the operative facts occurred here, and nearly all material witnesses and proof were within this

District. (Id.) The motion papers also set forth that, in similar circumstances, Chief Judge

Skretny had transferred a NXIVM lawsuit out of the Western District after concluding that

NXIVM had falsely alleged that its principal place of business was in Buffalo, New York.

(Dkt. No. 22-3, at 7 (citing NXIVM Corp. v. Ross, No. 09-cv-338S, 2011 WL 5080238, at *3

(W.D.N.Y. Oct. 25, 2012)).)

Not surprisingly, NXIVM consented to the transfer. Accordingly, the case was

transferred to this Court on November 13, 2014. (Dkt. No. 45.)

C. Ms. Andrews’s Rule 12(b)(6) Motion Based on Statute of Limitations Grounds.

Simultaneously with the transfer motion, Ms. Andrews moved to dismiss the Complaint

as against her for failure to state a claim based on statute of limitations grounds. (Dkt. No. 27.)

NXIVM filed its response to Ms. Andrews’s motion to dismiss on December 5, 2014. (Dkt.

No. 53.) Ms. Andrews filed her reply to NXIVM’s response on January 9, 2015. (Dkt. No. 62.)

The return date of the motion was January 16, 2015, and no appearances were made.

D. Materials Exposing NXIVM’s Allegations and Representations as False.

Since April 2012, NXIVM, together with its Albany counsel of record in this proceeding,

have been working with the New York State Police in furtherance of criminal charges against

Defendants based on alleged unauthorized access to NXIVM’s website.1 In connection with the

investigation stemming from NXIVM’s criminal complaint, NXIVM has submitted evidence and

information to the New York State Police. (Grygiel Dec. ¶¶ 19, 26-27.)

1 No criminal charges were ever brought against Ms. Andrews. (Grygiel Dec. ¶ 26.)


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On or about July 23, 2015, Ms. Andrews’s counsel obtained voluminous materials (the

“NXIVM Materials”) provided by NXIVM to law enforcement, including sworn testimony from

NXIVM officers and Information Technology (“IT”) professionals. (Grygiel Dec. ¶ 28 & Ex. 1.)

The NXIVM Materials describe how, in August 2011, NXIVM came to be suspicious that

individuals were accessing its website allegedly without authorization, and the investigation it

immediately commenced as a result of those suspicions. (Id. ¶ 29.) The NXIVM Materials

conclusively demonstrate that NXIVM discovered the alleged unauthorized access to its

computers by no later than August or early September 2011. (Id. ¶ 30.)

Finally, the NXIVM Materials confirm that NXIVM took definitive steps to “shut down”

access to its website through the Client P. account on September 27, 2011. (See Id. ¶ 31 & Ex. A

to Ex. 1, ¶ 5.d.iii.)

E. NXIVM’s Refusal to Withdraw Its Time-Barred Claims.

By letter to all counsel of record dated August 14, 2015, counsel for Ms. Andrews

demanded that NXIVM withdraw its claims against her on the grounds that they are time barred.

(Grygiel Dec. ¶ 32 & Ex. 1.) The seven-page letter included specific evidence establishing that

the claims are untimely, and identified in detail NXIVM’s claims, assertions and legal arguments

that are unwarranted. (Id.) Counsel demanded that NXIVM confirm by no later than August 21,

2015, that NXIVM would withdraw its claims. (Id.)

On August 18, 2015, counsel for NXIVM requested that it be allowed until August 26,

2015, to respond to Ms. Andrews’s letter, on the basis that co-counsel was on vacation. Counsel

for Ms. Andrews agreed to this request. (Id. ¶¶ 33-34.)

On or about August 25, 2015, counsel for NXIVM asked for a further extension until

September 2, 2015, to respond to Ms. Andrews’s letter, on the basis that NXIVM was still

“investigating” the allegations in her letter. (Id. ¶ 35.) Counsel for Ms. Andrews did not agree to


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a further extension, but rather indicated that if NXIVM did not confirm its intention to withdraw

its claims by August 26, 2015, Ms. Andrews would serve a Rule 11 motion. (Id. ¶ 36.)

By letter dated August 25, 2015, counsel for NXIVM objected to counsel’s refusal to

provide additional time for NXIVM to respond to the August 14 letter. (Id. ¶ 37 & Ex. 2.)

Notably, in that letter, NXIVM’s counsel rejected the position that NXIVM had violated Rule

11, stating “we do not agree with the allegations contained in your August 14, 2015, letter[.]”

(Id.) Accordingly, it was clear at that point that NXIVM intended to challenge the Rule 11

allegations and would not be withdrawing its baseless claims.

By letter dated August 26, 2015, counsel for Ms. Andrews responded to NXIVM’s

August 25, 2015 letter, indicating that NXIVM had “regrettably left us no choice but to engage

in formal motion practice under Rule 11.” (Id. ¶ 38 & Ex. 3.) Having received no response from

NXIVM, counsel for Ms. Andrews served on NXIVM, but did not file, a Rule 11 motion for

sanctions on August 31, 2015. (Grygiel Dec. ¶ 39 & Exs. 4 and 5.) NXIVM has never

responded substantively to the August 14 letter or the Rule 11 motion.

On September 15, 2015, counsel for NXIVM filed with the Court a “letter motion”

responding to a letter filed on August 25, 2015, by Ms. Andrews’s counsel regarding the Second

Circuit’s recent decision in Sewell v. Bernardin. (See Dkt. No. 82; see also Dkt. No. 75.) In the

letter, NXIVM’s counsel reiterated the allegations in the Complaint that NXIVM was prompted

by suspicious activity “in late 2011” to investigate unauthorized access to its website. (Id. at 2.)

Counsel’s letter also distorted the facts and holding of Sewell, and argued that, under that

decision, the statutes of limitations under the CFAA and SCA did not begin to run until

NXIVM’s investigation was complete. (See id.)


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F. The Court’s Memorandum-Decision and Order.

On September 17, 2015, the Court issued its Memorandum – Decision and Order

(“Decision”) granting Ms. Andrews’s motion and dismissing the Complaint in its entirety with

prejudice. (See Dkt. No. 83.) Importantly, the Decision astutely notes that “[a]lthough the

Complaint is generally specific and detailed, including the dates on which each Defendant

allegedly accessed the password-protected website, Plaintiff offers only the vague statement that

it discovered the alleged unauthorized access ‘in late 2011.’” (Id. at 14.) The Court concluded

that the SCA claim was untimely because NXIVM “had a reasonable opportunity to discovery

the alleged access prior to October 23, 2011.” (Id. at 15-16.) Similarly, the Court concluded that

the CFAA was untimely because NXIVM “was aware of unauthorized access to its website more

than two years before it commenced this action.” (Id. at 18.) Ultimately, the Court dismissed

the Complaint in its entirety. (See id. at 21-22.) The Clerk of the Court entered Judgment

dismissing the Complaint on September 17, 2015. (See Dkt. No. 82.)

G. NXIVM Threatens Rule 11 Sanctions in an Attempt to Keep Its Misrepresentations and Misconduct Hidden From This Court.

On September 18, 2015, NXIVM’s counsel sent defense counsel a letter stating that as a

result of the Court’s decision, “it appears evident that the Rule 11 Motions that you previously

served on Plaintiff are now moot. We assume you agree. Please confirm.” (Grygiel Dec. ¶ 44

& Ex. 4.) By letter dated September 19, 2015, counsel for Mr. Odato responded to NXIVM’s

letter, disagreeing that the Decision rendered the Rule 11 motions moot, and inquiring as to

whether NXIVM would pursue an appeal. (Id. ¶ 45.)

By letter dated September 21, 2015, NXIVM’s counsel argued that the Court is “divested

of jurisdiction” by virtue of the Court’s dismissal and entry of judgment. (Id. ¶ 46 & Ex. 5.)

Counsel threatened that it would seek the impositions of Rule 11 sanctions if defendants were to


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file the Rule 11 motions. (Id.) NXIVM did not respond to the inquiry concerning whether it

would file an appeal from the Court’s decision. (See id.) On September 22, 2015, counsel for Ms.

Andrews sent a response to NXIVM’s September 18 and 21 letters concerning the impact of the

Court’s dismissal on Ms. Andrews’s Rule 11 motion. (Id. ¶ 47 & Ex. 6.)

Notably, at no time has NXIVM agreed to withdraw or amend its claims, nor has it indicated

that it will not seek reconsideration of, or take an appeal from, the Court’s Decision. Indeed, in light

of NXIVM’s track record of guerrilla litigation tactics, it can only be inferred that it will continue to

press its baseless claims in the Second Circuit.

ARGUMENT

I. SANCTIONS ARE APPROPRIATE AND NECESSARY IN LIGHT OF NXIVM’S DELIBERATE MISREPRESENTATIONS TO THE COURT

NXIVM and its counsel knowingly brought claims that they knew were time barred. The

Complaint was drafted with the specific purpose of misleading the Court, and NXIVM’s

arguments in response to the motions to dismiss were both factually and legally baseless. Even

after being presented with indisputable evidence that the federal claims were not viable, NXIVM

and its counsel persisted in pressing those claims, reasserted false statements of fact, and made

specious arguments of law to the Court. As a result of this misconduct, NXIVM caused this

Court and the District Court for the Western District of New York to expend judicial resources

addressing baseless claims and arguments, and further caused Ms. Andrews and the other

Defendants to incur significant costs in defending unmeritorious claims. This unquestionably

frivolous conduct, undertaken deliberately and in bad faith by a serial litigant and its counsel,

should be sanctioned under Rule 11, 28 U.S.C. § 1927, and the inherent power of the Court.


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A. NXIVM’s Allegations Concerning Its Discovery of the Alleged Unauthorized Access Were False When Made.

In asserting its claims, NXIVM was not only intentionally vague but deceptive with respect

to when it first learned that its website had been accessed. Specifically, NXIVM alleged as follows:

In late 2011, suspicions arose as to whether unauthorized users were accessing the Password Protected Website.

An investigation was conducted, and in January 2012, a client of NXIVM who was on good terms with NXIVM, but who had not recently been active . . . , confirmed that she had not used her username and password since 2003, and yet NXIVM’s records showed use of Client P’s username and password through 2011.

(Compl. ¶¶ 52, 53; emphasis added.) The unmistakable import of these allegations was to

suggest that it was only after October 22, 2011 – less than two years before this suit was

commenced – that NXIVM’s “suspicions arose” concerning unauthorized access and that it

initiated an investigation.

In opposition to Ms. Andrews’s pending motion to dismiss, NXIVM reiterated its

allegations, and argued that it did not discover, and did not have a “reasonable opportunity” to

discover, any unauthorized access to its website until January 2012 at the earliest. (Dkt. No. 53,

Plaintiff’s Memorandum of Law in Opposition of Defendant Suzanna Andrews’s Rule 12(b)(6)

Motion to Dismiss (“Pl. Mem.”) at 3-4, 14-15.) NXIVM further argued that the posting of its

purportedly proprietary information on Defendant John Tighe’s blog did not put NXIVM on

notice that its website may have been unlawfully accessed because the website was not the only

source of this information. (Pl. Mem. at 19.)

B. NXIVM’s Own Evidence Contradicts Its Allegations and Arguments.

The NXIVM Materials demonstrate that NXIVM’s pleading and its statements of fact

and arguments in support of its claims and in opposition to the motions to dismiss were patently

false, that NXIVM knew they were false, and that even a less than diligent inquiry would have


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revealed that this litigation could not be instituted or maintained in good faith. Specifically, it is

abundantly clear that NXIVM – by its own account – not only had a “reasonable opportunity” to

discover any unauthorized access before October 22, 2011, but actually suspected, investigated,

and discovered the alleged unauthorized access well before that date.

In a sworn statement provided to the New York State Police, Benjamin T. Myers,

NXIVM’s IT professional, described the process by which NXIVM determined that its “private,

confidential data” had been obtained by individuals who allegedly lacked permission to access or

acquire the data. (See Grygiel Dec., Ex. A to Ex. 1, Supporting Deposition of Benjamin T.

Myers, dated September 26, 2012 (“Myers Sept. Dep.”).) This testimony establishes that

NXIVM suspected that unauthorized individuals were accessing its website in August of 2011,

when Defendant Tighe posted NXIVM’s client list on his blog (Myers Sept. Dep., ¶ 1); that it

immediately commenced an investigation (id. ¶¶ 1-5); and that its investigation had confirmed

such allegedly unauthorized access by no later than September 27, 2011, when NXIVM

“shut down” access to its website through Mary Jane Pino’s account. (Id. ¶ 5.d.iii.)

In his sworn testimony, Mr. Myers thus reveals that NXIVM’s “suspicions arose” (Compl.

¶ 52) concerning unauthorized access on or about August 7, 2011, when Defendant Tighe published

NXIVM’s website material on his blog, and that NXIVM immediately began an investigation:

1. I was advised by Clare Bronfman that a current NXIVM client list was posted on a blog site. The list appeared to be a mirror image of information accessible only through the NXIVM website by members of NXIVM. Since each member is assigned individual usernames and passwords, I ran a list of all members who accessed the website around the time of the blog post. With the assistance of Clare Bronfman and Steve Ose, we were looking for any unusual activity of a particular member.

2. By checking the login attempts using (DB), we noticed that Mary Jane Pino (MJP) [Client P in the Complaint, ¶ 53] had an unusual amount of logins in between 2010 and 2011.


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3. Clare and I suspected that the MJP login (maryjane) was being used by someone other than Mary Jane Pino to access our system with the intent to steal information.

(Id. ¶¶ 1-3.) As a result of these suspicions, NXIVM immediately conducted an investigation.

From NXIVM’s existing records, Mr. Myers was able to determine that the MJP logins “traced back

to a number of geographically distant locations, including at least one instance where the login was

used at the same time period in two geographically distant locations.” (Id. ¶ 4.) Mr. Myers was also

able to determine from NXIVM’s records “what data was downloaded using the MJP login

credentials[.]” (Id. ¶ 5.) Finally, Mr. Myers establishes that on September 27, 2011, NXIVM “shut

down MJP access” and also performed testing to “ensure the login was shut down.” (Id. ¶ 5.d.iii.)

This testimony is consistent with less detailed testimony provided previously by

Mr. Myers to the State Police. (Supporting Deposition of Benjamin T. Myers, dated May 23,

2012 (“Myers May Dep.”) (Grygiel Dec., Ex. B to Ex. 1).) In that deposition, Mr. Myers stated

he is required to conduct “a daily audit of the log in system for the NXIVM website.” (Myers

May Dep., p. 1.) He further stated that such “daily audits” were triggered when “some material

from the website began to show up on the blog at Saratoga in Decline” in August 2011. (Id.; see

also Compl. ¶¶ 91-92, 121, 130.) Thus, Mr. Myers’s sworn testimony establishes that NXIVM’s

“suspicions arose” (Compl. ¶ 52) concerning unauthorized access due to Mr. Tighe’s postings

and that NXIVM commenced an investigation by no later than early September of 2011.

Mr. Myers’s account is corroborated by Clare Bronfman in her sworn testimony provided

to the New York State Police. (See Grygiel Dec., Ex. C to Ex. 1, Supporting Deposition of Clare

W. Bronfman, dated April 18, 2012 (“Bronfman Dep.”).) In her deposition, Ms. Bronfman

indicated that she is “on the Executive Board for NXIVM and . . . oversee[s] the IT and legal

teams for NXIVM.” (Bronfman Dep., p. 2.) She further testified that she “regularly monitor[s]

the blog” published by Defendant Tighe, and “observed NXIVM material that had been posted to


13

the site.” (Id.)2 Significantly, Ms. Bronfman represented that the material she observed “could

only have come from the NXIVM computers.” (Id.; emphasis added.)3 Ms. Bronfman also

averred that NXIVM promptly commenced an investigation in which the IT team reported to her

“every night” (id.), and determined as a result that Mary Jane Pino’s account had been used to

obtain the information posted on the blog. (Id.)

This timeline is further confirmed by other records in the NXIVM Materials provided to

the New York State Police in connection with NXIVM’s criminal complaint. For example,

Mr. Myers provided the State Police with data identifying the dates on which the MJP login was

used. This data shows that Mr. Myers himself accessed the database using an IT “override

password” on September 3 and 4, 2011, and that any successful use of the MJP Login ceased

over three weeks later, on September 27, 2011, after Mr. Myers “shut down MJP access[.]”

(Myers Sept. Dep., ¶ 5.d.iii; see Grygiel Dec., Ex. F to Ex. 1, Spreadsheet showing Pageloads by

Date).) Thus, NXIVM’s investigation had already revealed issues with Client P’s account by no

later than early September of 2011, and after further investigation NXIVM concluded that the

account needed to be and was deactivated on September 27, 2011.

C. NXIVM’S Representations Are Demonstrably False.

In view of the foregoing, it is clear that the following representations and arguments that

NXIVM did not discover, and could not discover, the alleged unauthorized access until January

2012 are flatly contradicted by NXIVM’s own proof submitted relative to its criminal complaint:

2 We note that NXIVM also provided the New York State Police with screenshots of

Mr. Tighe’s blog captured on August 24, 2011, and again on September 19, 20 and 22, 2011, which contain materials allegedly obtained directly from NXIVM’s website. (See Grygiel Dec., Exs. D & E to Ex. 1.) Thus, there can be no dispute that NXIVM was monitoring the blog at that time.

3 Mr. Myers similarly testified that the material posted on Tighe’s blog was “accessible only through the NXIVM website by members of NXIVM.” (Myers Sept. Dep., ¶ 1; emphasis added.)


14

• “In late 2011, suspicions arose as to whether unauthorized users were accessing the Password Protected Website,” and thereafter “[a]n investigation was conducted” by NXIVM. (Compl. ¶¶ 52-53.)

• “In late 2011, NXIVM first became suspicious that unauthorized users were accessing its Password Protected Website. . . . As a result, NXIVM had its IT personnel perform an investigation . . . .” (Pl. Mem. at 3.)

• NXIVM “first became suspicious that its Password Protected Website was being accessed without authorization in late 2011, but was unable to confirm those suspicions it [sic] personnel completed their initial investigation in January 2012.” (Pl. Mem. at 14.)

• NXIVM “first became suspicious that its Password Protected Website had been accessed in late 2011, and was not able to confirm that unlawful access actually occurred until January 2012.” (Pl. Mem. at 15.)

• NXIVM “discovered the defendants’ violation and unauthorized access to the Password Protected Website in January 2012.” (Pl. Mem. at 17.)

Indeed, NXIVM continued to press these false allegations in its letter to the Court dated

September 15, 2015, which was filed more than a month after NXIVM and its counsel received

Ms. Andrews’s Rule 11 notice, and more than two weeks after NXIVM and its counsel were

served with Ms. Andrews’s Rule 11 motion.

Unlike the plaintiff in Sewell, NXIVM was not immediately tipped off to the security breach because it initially appeared as if Client P simply logged into the website using her proper name and password. Suspicious activity prompted NXIVM in late 2011 to undertake an in-depth investigation into whether someone had improperly obtained Client P’s login credentials to gain access to NXIVM’s site. (Compl. ¶ 52.) However, NXIVM was not presented with a sworn affidavit from Client P until January 2012 when she “confirmed that she had not used her username and password since 2003” despite the fact that “NXIVM’s records showed use of Client P’s username and password through 2011.” (Complaint ¶ 53.)

(Dkt. No. 82, Letter from NXIVM counsel, dated September 15, 2015, at 2.)

Also clearly false are NXIVM’s representations and arguments that the posting of

NXIVM’s website information by Defendant Tighe on August 7, 2011, did not put NXIVM on

notice of potential unauthorized access.


15

• The fact that certain defendants had NXIVM’s client list “did not place NXIVM on notice” that its website had been accessed “because the website was not the only source of this information.” (Pl. Mem. at 14; emphasis in original.)

• Ms. Andrews’s argument that the public posting of NXIVM’s website information put NXIVM on notice of unauthorized access “does not account for the fact that the information published and used by the defendants was not exclusively maintained on NXIVM’s Password Protected Website and was legitimately accessible to NXIVM’s current coaches, field trainers and staff.” (Pl. Mem. at 19 (citing Compl. at ¶¶ 13, 16, 18, 19, 22-25, 31, 40, 41).)

• “Because there were other sources of this information, . . . NXIVM at the time of the publications reasonably did not suspect that the defendants were illegally accessing its Password Protected Website.” (Pl. Mem. at 19.)

Also demonstrably false is the argument made in NXIVM’s September 15, 2015, letter to

the Court that “[g]iven that the logins using Client P’s username and password on their face

appeared legitimate and valid, it was not unreasonable to assume that they were.” (Dkt. No. 82,

at 2.) Indeed, the NXIVM Materials make clear that due to the “unusual amount of logins” using

Client P’s username and password, Clare Bronfman and NXIVM’s IT professional “suspected

that the MJP login (maryjane) was being used by someone other than [Client P] to access our

system with the intent to steal information.” (Myers Sept. Dep. ¶¶ 2-3.)

D. NXIVM’S Legal Arguments Are Unwarranted Under Existing Law.

In addition to being directly contravened by its own evidence, NXIVM’s arguments

concerning whether it had a “reasonable opportunity” to discover any violations are unsupported

by applicable law. As this Court found, the Second Circuit’s decision in Sewell v. Bernardin,

795 F.3d 337 (2d Cir. 2015) establishes that NXIVM’s arguments are untenable. (See Dkt. No.

84, Decision at 11-16 (analyzing Sewell and applying decision to facts alleged by NXIVM).)

The Sewell Court addressed the specific issue of when the period of limitations begins to

run for claims brought under the CFAA and the SCA. The plaintiff there, like NXIVM in this

case, argued that the limitation periods under those statutes should not begin to run until the


16

plaintiff is able to confirm unauthorized access by the defendant. The Second Circuit squarely

rejected this argument:

We pause to acknowledge that the statutes of limitations governing claims under the CFAA and SCA, as we understand them, may have troubling consequences in some situations. Even after a prospective plaintiff discovers that an account has been hacked, the investigation necessary to uncover the hacker’s identity may be substantial. In many cases, we suspect that it might take more than two years. But it would appear that if a plaintiff cannot discover the hacker’s identity within two years of the date she discovers the damage or violation, her claims under the CFAA and SCA will be untimely.

Sewell, 795 F.3d at 342.

The Second Circuit also confirmed, as argued by Ms. Andrews based on well-settled law,

that the discovery rule applies to both CFAA and SCA claims, and that the two-year “limitations

period begins to run when the plaintiff discovers that, or has information that would motivate a

reasonable person to investigate whether, someone has intentionally accessed” a protected

computer. Id. Here, by its own account and as detailed above, NXIVM had information in

August 2011 that in fact motivated it to investigate whether its website had been accessed by

individuals allegedly without authorization. Again, NXIVM’s sworn testimony and records

establish that NXIVM was able to confirm and terminate such access by no later than

September 27, 2011.

Although NXIVM’s arguments concerning its ability to identify the defendants are

irrelevant to a statute of limitations analysis,4 NXIVM had all of the information necessary to

identify the named defendants by no later than early September of 2011. As Mr. Myers averred

in his sworn statements, NXIVM’s computers track the IP addresses of individuals who access

the website. Moreover, by no later than September 14, 2011, NXIVM had possession of emails

4 Sewell, 795 F.3d at 342 (“The plaintiff does have the option of initiating a lawsuit against a

Jane or John Doe defendant, but she must still discover the hacker’s identity within two years of discovery or a reasonable opportunity to discover the violation to avoid dismissal.”).


17

that allowed NXIVM to link IP addresses to the Defendants. (See Grygiel Dec., Ex. H to Ex. 1,

Declaration of Robert D. Crockett, dated September 14, 2011; see also id., Ex. I to Ex. 1,

Certification of Benjamin Myers, dated January 15, 2015 (submitting spreadsheet identifying

email addresses of defendants and others taken from a “recovered drive” obtained by NXIVM).)

This evidence directly contradicts NXIVM’s representations to the Court that “it was not until

well after January 2012 that NXIVM was able to identify the defendants as the individuals who

had accessed the Password Protected Website.” (Pl. Mem. at 14 n.5.)

E. NXIVM Continued to Press Its Baseless Allegations and Arguments in the Face of Undisputable Proof Demonstrating the Falsity of Those Allegations and Arguments.

On August 14, 2015, counsel for Ms. Andrews served NXIVM and its counsel with a

detailed letter, including exhibits, establishing that NXIVM’s allegations and arguments were

false, and that its federal claims were time barred. (See Grygiel Dec. Ex. 1.) Nonetheless,

NXIVM refused to withdraw its claims, and even continued to press its baseless allegations and

arguments to the Court in a letter filed September 15, 2015. (Dkt. No. 82 (arguing, among other

things, that “NXIVM’s claims against Andrews were timely filed”).) And NXIVM and its

counsel compounded their misconduct when they purposefully distorted the Second Circuit’s

decision in Sewell:

• “It is not enough, under the holding of Sewell, that a plaintiff may be suspicious of wrongdoing.” (Dkt. No. 82, at 2.)

• “Under Sewell, the mere possibility, or suspicion, that someone may have unlawfully accessed NXIVM’s site in violation of the CFAA and SCA is not enough to trigger the statute of limitations. See Sewell, 795 F.3d at 342 (holding that the district court’s conclusion was based on the erroneous assumption that ‘a plaintiff is on notice of the possibility’ of a security breach when she discovers any suspicious activity affecting her Internet accounts).” (Id.)

• “Until NXIVM’s investigation was completed and Client P confirmed that she was not the individual who accessed the NXIVM site, the statutes of limitations on the CFAA and SCA claims did not begin to run.” (Id.)


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II. MS. ANDREWS SHOULD BE GRANTED LEAVE TO FILE HER RULE 11 MOTION FOR SANCTIONS

On August 31, 2015, Ms. Andrews properly served a notice motion pursuant to

Rule 11(c)(2), supporting declaration, and memorandum of law on NXIVM. Pursuant to

Rule 11(c)(2), a motion for sanctions “must not be filed or be presented to the court if the

challenged paper, claim, defense, contention, or denial is withdrawn or appropriately corrected

within 21 days after service or within another time as the court sets.” Fed. R. Civ. P. 11(c)(2).

Here, NXIVM did not withdraw or otherwise correct its frivolous filings within 21 days of

service of the motion. Although the Court dismissed the Complaint before the expiration of the

21-day safe harbor period, Ms. Andrews has complied with Rule 11(c)(2), and the fortuitous

timing of the Court’s Decision should not permit NXIVM to escape scrutiny under that Rule.

As an initial matter, there can be no question that the Court retains post-judgment

jurisdiction over collateral issues, such as a motion for sanctions. See Chambers v. NASCO, Inc.,

501 U.S. 32, 56 (1991) (“[W]e have made clear that, even under Rule 11, sanctions may be

imposed years after a judgment on the merits.”); Cooter & Gell v. Hartmarx Corp., 496 U.S.

384, 395-96 (1990) (holding courts may consider collateral issues, such as Rule 11 sanctions,

after the entry of judgment); Schlaifer Nance & Co. v. Est. of Warhol, 194 F.3d 323, 333 (2d Cir.

1999) (“The District Court clearly had jurisdiction to impose sanctions irrespective of the status

of the underlying case because the imposition of sanctions is an issue collateral to and

independent from the underlying case.”); Matrix IV, Inc. v. Am. Nat’l Bank & Trust Co., 649

F.3d 539, 553 (7th Cir. 2011) (“Postjudgment motions for sanctions are permissible so long as

the moving party substantially complies with Rule 11’s safe-harbor requirement[.]”).

There can also be no question that Ms. Andrews complied with Rule 11 by serving her

motion before filing it, and even gave NXIVM substantial advance notice and an opportunity to


19

withdraw its claims before actually serving the Rule 11 motion. Indeed, on August 14, 2015,

counsel for Ms. Andrews provided NXIVM with a letter and exhibits that set forth in detail the

bases for a Rule 11 motion. At NXIVM’s request, counsel for Ms. Andrews extended the date by

which NXIVM could respond to the letter from August 21, 2015 to August 26, 2015. Thus, the

only issue is whether the motion is permissible in light of the dismissal of the Complaint before the

expiration of the 21-day safe harbor. Under the circumstances, the Court should permit the filing

for at least three reasons.

First, the terms of Rule 11(c)(2) will be satisfied if the Court permits the filing to occur,

because more than 21 days have passed since service of the motion, and NXIVM has not “withdrawn

or appropriately corrected” its baseless allegations and arguments. Fed. R. Civ. P. 11(c)(2). Indeed,

NXIVM’s correspondence (both before and after the Rule 11 motion was served) demonstrates

that NXIVM had no intention of withdrawing its claims (Grygiel Dec. ¶ 37, Ex. 2; Dkt. No. 82) and,

further, that NXIVM fully intends to pursue its appeal rights. (Grygiel Dec. ¶¶ 44-46, Exs. 4 & 5.)

Some courts have held that sanctions may not be imposed if the offending claim is dismissed during

the safe harbor period due to a concern that dismissal deprived the party of the full 21-day period.5

However, this approach is not compelled by the plain language of Rule 11(c)(2). Nor is this

approach required where, as here, “the purposes of the twenty-one day safe harbor and separate

motion requirement have been served.” Pannonia Farms, Inc. v. USA Cable, No. 03-civ-7841, 2004

WL 1276842, at *10-11 (S.D.N.Y. Jun. 8, 2004) (granting sanctions where procedural requirements

5 See, e.g., Howell v. Nesbit, No. 98–1402, 1998 WL 340291, at *3 (4th Cir. June 16, 1998)

(unpublished) (denying sanctions where court dismissed the case one day after plaintiff was served with the Rule 11 motion); Hamlin v. TD Bank, No. 1:13-cv-200, 2014 WL 3101942, at *2 (W.D.N.C. Jul. 7, 2014) (denying Rule 11 motion where court dismissed action seven days after service of the motion); see also Truelove v. Heath, 86 F.3d 1152 (Table), 1996 WL 271427, at *2 (4th Cir. 1996) (denying Rule 11 motion where action dismissed eleven days after service of motion and movants unreasonably delayed in serving the Rule 11 motion).


20

of Rule 11(c)(2) had not been met, including the service of a formal Rule 11 motion); see also

Johnson v. Univ. of Rochester Med. Ctr., 715 F. Supp. 2d 427 (W.D.N.Y. 2010) (granting sanctions

notwithstanding party’s failure to comply with procedural requirements of Rule 11(c)(2) where there

was “no basis to conclude that plaintiff would have acted any differently – that is, that he would have

exercised any opportunity to withdraw his claims – had strict compliance with Rule 11(c)(2) been

effected”), aff’d 642 F.3d 121 (2d Cir. 2011) (upholding sanctions under 28 U.S.C. § 1927).

Second, NXIVM waived its right to rely on the 21-day safe harbor when it continued to

press its baseless allegations and arguments to the Court in its September 15 letter brief

(Dkt. No. 82), which NXIVM filed more than two weeks after being served with the Rule 11

motion and more than a month after receiving the August 14 letter. Under similar circumstances,

the District Court for the Eastern District of Virginia held that when a party makes clear that it

will continue to press its claims notwithstanding service of a Rule 11 motion, it waives the right

to complain about the loss of the full 21-day period. Giganti v. Gen-X Strategies, Inc., 222

F.R.D. 299, 306-07 (E.D. Va. 2004).

The conclusion compelled by these record facts is inescapable: Plaintiffs never had any intention of withdrawing any of the challenged claims, nor of availing themselves of the protection of the safe harbor provision. Put differently, by choosing to remain steadfast in their support of the offending claims during the hearing on the motion to dismiss, even in the face of defendants’ cited authorities . . . that the . . . claims might well violate Rule 11, plaintiffs, by counsel, knowingly waived any right to complain about loss of no more than approximately five hours of the twenty-one day period.

Id. (footnotes omitted). The same can certainly be said of NXIVM here, as “the party against

whom sanctions were sought could not be heard to complain about the loss of the benefit of the

twenty-one day safe harbor when it was clear that the party rejected that option.” Id. at 307; see

also Dietz v. Kautzman, 681 N.W.2d 437, 440-441 (Sup. Ct. N.D. 2004) (holding party waived

right to 21-day safe harbor under state rule analogous to Rule 11 where party continued to


21

advance objectionable arguments during the safe harbor period and thereafter appealed court’s

decision).

The Giganti court elaborated the reasons the policies animating Rule 11 would be

disserved if NXIVM were allowed to rely on the sheer happenstance of the issuance of the

Court’s decision a mere four days before the expiration of Rule 11(c)(2)’s safe harbor when,

through its counsel’s September 15 letter brief to the Court, it had already renounced that option

in no uncertain terms:

[N]othing in Rule 11, the Advisory Committee’s Note, or the cases suggests that a sanctions motion must be filed before the conclusion of the case. Nor would such a rule make sense, for if a party were required to file a sanctions motion before conclusion of the case, the party, in preparation for a hearing on a motion to dismiss scheduled twenty-two days after service of the sanctions motion, should prudently file the sanctions motion at precisely 5:00 p.m. on the twenty-first day of the safe harbor period, just in case the dismissal motion is granted via a bench ruling or order issued first thing on the morning of the twenty-second day. The point is that courts, as is often the case, will be unaware that a sanctions motion has been served on a party and may proceed to dismiss the case without a hearing or before the party serving the motion has a reasonable opportunity to file the sanctions motion. In this event, a movant’s right to seek Rule 11 sanctions would be cut off through no fault of the movant and importantly, with no notice to the movant to be found anywhere in the Rule’s language.

Id., 222 F.R.D. at 309 (footnote omitted). That is precisely the situation here, where any

theoretical “technical noncompliance” with Rule 11’s safe harbor “did not prejudice” NXIVM in

any way because it “had ample opportunity to dismiss this meritless [case] voluntarily.” Hadden

v. Letzgus, 121 F.3d 708 (Table), 1997 WL 434413, at *1 (6th Cir. Jul. 31, 1997). Instead,

NXIVM persisted in “reiterat[ing] [its] completely frivolous argument” (id.) that its federal

claims were timely because it became suspicious and commenced an “in-depth investigation”

into alleged computer system security breaches “in late 2011.” (Dkt. No. 82, p. 2.)

Third, the Court has discretion under the express terms of Rule 11(c)(2) to set the time in

which the Rule 11 motion may be filed. See Fed. R. Civ. P. 11(c)(2) (motion may be filed


22

“within 21 days after service or within another time the court sets”) (emphasis added); Weeks

Stevedoring Co. v. Raymond Int’l Builders, Inc., 174 F.R.D. 301, 305 (S.D.N.Y. 1997). The

Rule thus affords the Court the discretion to permit Ms. Andrews to file her motion, recognizing

that NXIVM should not avoid the consequences of its own misconduct merely because the

Complaint was dismissed shortly before the expiration of the safe harbor. NXIVM would

certainly not be prejudiced by an order permitting the filing, because the record is clear that in no

event was NXIVM going to withdraw its claims or otherwise correct its frivolous filings.

III. SANCTIONS ARE APPROPRIATE AND NECESSARY UNDER 28 U.S.C. § 1927 AND THE COURT’S INHERENT POWER, AND SHOULD INCLUDE THE ASSESSMENT OF ATTORNEYS’ FEES INCURRED BY MS. ANDREWS IN DEFENDING NXIVM’S TIME-BARRED CLAIMS

Under 28 U.S.C. § 1927, “[a]ny attorney . . . who so multiplies the proceedings in any

case unreasonably and vexatiously may be required by the court to satisfy personally the excess

costs, expenses, and attorneys’ fees reasonably incurred because of such conduct.” The

imposition of sanctions under § 1927 requires a showing that (1) the attorney’s actions were “so

completely without merit as to require the conclusion that they must have been undertaken for

some improper purpose”; and (2) the attorney acted in bad faith. Johnson v. Univ. of Rochester

Med. Ctr., 642 F.3d 121, 125-26 (2d Cir. 2011) (citing Gollomp v. Spitzer, 568 F.3d 355, 368 (2d

Cir. 2009)).

Courts also possess the “inherent power to sanction parties and their attorneys, a power

born of the practical necessity that courts be able to manage their own affairs so as to achieve the

orderly and expeditious disposition of cases.” Revson v. Cinque & Cinque, P.C., 221 F.3d 71, 78

(2d Cir. 2000) (internal quotation marks and citation omitted). Sanctions may be considered

under this authority when a party or attorney acts “in bad faith, vexatiously, wantonly, or for

oppressive reasons.” Chambers, 501 U.S. at 45. “In order to impose sanctions pursuant to its


23

inherent power, a district court must find that: (1) the challenged claim was without a colorable

basis and (2) the claim was brought in bad faith, i.e., motivated by improper purposes such as

harassment or delay.” Enmon v. Prospect Cap. Corp., 675 F.3d 138, 143 (2d Cir. 2012) (internal

quotation marks omitted, citing Schlaifer Nance & Co., 194 F.3d at 323).

The Second Circuit has observed that “in practice, the only meaningful difference

between an award made under § 1927 and one made pursuant to the court’s inherent power is

that awards under § 1927 are made only against attorneys . . . while an award made under the

court’s inherent power may be made against an attorney, a party, or both.” Schlaifer Nance &

Co., 194 F.3d at 336 (internal quotations and alterations omitted). Thus, courts use the same

standard for evaluating a sanctions claim under § 1927 and the court’s inherent power.6

1. NXIVM’s Allegations and Arguments Were Without a Colorable Basis.

As discussed at Section I., above, NXIVM’s allegations and arguments were not only

without a colorable basis, they were directly contradicted by NXIVM’s own sworn testimony

and other evidence. NXIVM knew at the outset that its claims against Ms. Andrews had absolutely

no chance of success, yet it pursued them. Moreover, NXIVM and its counsel continued to argue

the timeliness of its federal claims on September 15, 2015, more than thirty days after

Ms. Andrews supplied NXIVM with the evidence that contravened its allegations and arguments.

2. NXIVM Brought and Pressed Its Claims and Arguments in Bad Faith.

There can also be no question that NXIVM’s claims were pursued in bad faith. “Bad

faith can be inferred when the actions taken are so completely without merit as to require the

conclusion that they must have been undertaken for some improper purpose.” Schlaifer Nance & 6 In addition, “[U]nder Rule 11(c)(3), a court sua sponte may initiate sanctions proceedings,

for which no ‘safe harbor’ is afforded but which requires a finding of subjective bad faith.” S.E.C. v. Smith, 798 F. Supp. 2d 412, 420-21 (N.D.N.Y. 2011) (Homer, M.J.).


24

Co., 194 F.3d at 338 (internal quotation marks and citation omitted). Here, the clear evidence

establishes NXIVM’s subjective bad faith:

• NXIVM’s own sworn testimony and other evidence that it presented to the New York State Police establish that NXIVM’s federal claims were time barred by no later than September 27, 2013. (Grygiel Dec. ¶¶ 26-32 & Ex. 1.) Yet, NXIVM filed the Complaint on October 22, 2013.

• Knowing that its federal claims were time barred, NXIVM included in the Complaint deliberate misrepresentations concerning its knowledge of allegedly unauthorized access to its website. (Compl. ¶¶ 52-53.)

• NXIVM’s arguments in opposition to the motions to dismiss – that NXIVM did not discover, and did not have a reasonable opportunity to discover, any allegedly unauthorized access – are contradicted by its own sworn testimony and other evidence. (Grygiel Dec. ¶¶ 26-32 & Ex. 1.)

• NXIVM stated that it disagreed with Ms. Andrews’s allegations of Rule 11 violations set forth in her August 14, 2015 letter, and refused to respond substantively to those allegations. (Id. ¶¶ 32-39 & Ex. 2.)

• NXIVM continued to press its claims and untenable arguments on September 15, 2015, after being served with the August 14 letter and Rule 11 motion. (Dkt. No. 82.)

• NXIVM purposefully distorted the facts and holding of Sewell v. Bernardin in its September 15 letter to the Court. (Id.)

• NXIVM has threatened Ms. Andrews with Rule 11 sanctions if Ms. Andrews files her Rule 11 motion. (Grygiel Dec. ¶ 46.)

• NXIVM refused to respond to an inquiry regarding whether it would be taking an appeal from the Court’s decision. (Id. ¶¶ 45-46.)

• NXIVM brought this action in the District Court for the Western District of New York, knowing that it would be an inconvenient forum for Defendants. (Dkt. No. 22, 45.)

It is also important to note that NXIVM has a documented history of using litigation to

punish its detractors. See, e.g., In re Dones, Nos. 10-45608 & 10-45609, 2011 WL 5079585,

at *18 (W.D. Wash. Bankr. Ct. Oct. 25, 2011) (holding NXIVM’s treatment of party in

bankruptcy adversary proceeding was “deplorable”); see also NXIVM Corp. v. Ross Inst.,

No. 06-cv-1051-KSH (D.N.J. 2006); NXIVM Corp. v. O’Hara et al., No. 1:05-cv-1546


25

(N.D.N.Y. 2005); NXIVM Corp. v. Metroland Mag., No. 136445 (Sup. Ct. Niagara Cnty. 2009).

In this case, NXIVM asserted baseless claims against two professional journalists who wrote

articles critical of NXIVM, two outspoken critics of NXIVM, and a former member of NXIVM

who was at one time romantically involved with NXIVM’s “Vanguard” Keith Raniere. There

can be no question that NXIVM’s dogged pursuit of its baseless claims was driven by a

vindictive desire to harm the Defendants.

CONCLUSION

For the foregoing reasons, Defendant Suzanna Andrews respectfully requests that this

Court grant leave to file her motion for Rule 11 sanctions, grant her request for sanctions

pursuant to 28 U.S.C. § 1927 and the Court’s inherent authority, including the assessment of

attorneys’ fees, costs, and expenses, and grant her such other and further relief as the Court

deems appropriate.

Respectfully submitted,

Dated: September 24, 2015 GREENBERG TRAURIG, LLP

By: Michael J. Grygiel Michael J. Grygiel Cynthia E. Neidl 54 State Street, 6th Floor Albany, New York 12207 Tel: (518) 689-1400 [email protected] Attorneys for Defendant Suzanna Andrews

ALB 1884031v1


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