This is an appeal from a judgment entered in the Southern District of New York, Robert L. Carter, District Judge, 469 F. Supp. 630, assessing $50,000 in attorneys' fees and expenses against plaintiff-appellant Robert B. Nemeroff and his law firm, Hale and Dorr, on the ground that they commenced an action under the federal securities laws in bad faith. The district court awarded the fees to Alan Abelson, Robert Bleiberg, and Dow Jones & Company, three of the defendants in the action. The remaining defendants cross-appeal from the judgment below on the ground that they too should have been awarded attorneys' fees. For the reasons below, we affirm in part, reverse in part, and remand for further proceedings.

Robert B. Nemeroff, a practicing dentist in New York City, was a shareholder of Technicare Corporation ("Technicare"), a manufacturer of medical equipment. Represented by the well known Boston law firm of Hale and Dorr, and in particular by Gordon T. Walker, Esq., a member of the firm, Nemeroff commenced a two-count class action on March 25, 1977 in the Southern District of New York against twelve defendants, including all of the defendants-appellees. The defendants-appellees consist of three "publishing defendants" and five "short seller or investor defendants". The publishing defendants are Alan Abelson, author of a column entitled "Up & Down Wall Street", which appears in the financial weekly Barron's, of which he is a managing editor; Robert M. Bleiberg, the editor of Barron's ; and Dow Jones & Company, Inc., the publisher of various financial publications and services, including Barron's and The Wall Street Journal. The short seller or investor defendants are Meyer Berman; the hedge fund Cumberland Associates and its managing partner, Walter Mintz; and the hedge fund Robert Wilson Associates and its managing partner, Robert Wilson.

The first count of the complaint alleged that all the defendants had conspired to violate § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1976), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 (1975). This count alleged that the publishing defendants deliberately leaked non-public information about forthcoming Abelson columns to the investor defendants, and in particular that the publishing defendants gave advance warning to the investor defendants that Abelson would make negative comments about Technicare; that the comments caused or tended to cause a decline in the price of Technicare stock; that the publishing defendants did this in order to enable the investor defendants to trade at a profit; and that the investor defendants profited from the information by selling Technicare short prior to publication and making covering purchases at a depressed price after publication.

The second count named the investor defendants only. It alleged that they engaged in a manipulative scheme to depress the price of Technicare stock through a pattern of massive short selling in violation of §§ 10(b) and 9(a)(2) of the Exchange Act, 15 U.S.C. §§ 78j(b) and 78i(a) (1976).1

On January 6, 1978 an amended complaint was filed. Nemeroff abandoned his allegation that the publishing defendants deliberately had leaked information about the Abelson columns to the investor defendants but alleged in his amended complaint that the investor defendants deliberately had solicited negative Abelson columns in an attempt to drive down the price of Technicare stock.

In May 1978, pursuant to plaintiff's voluntary stipulation to dismiss the action, an order was filed dismissing the action with prejudice.2 The stipulation explicitly reserved defendants' right to move for costs and reasonable expenses, including attorneys' fees, but without plaintiff's conceding that defendants were entitled to them.

In June 1978 defendants moved for costs, disbursements and attorneys' fees on the ground that the action had been commenced and prosecuted in bad faith.3 Defendants requested that the award of attorneys' fees be "assessed against plaintiff and/or his counsel." Oral argument on defendants' motions was heard in September 1978. Thereafter additional documents were filed by both sides.

On April 18, 1979 the district court filed a comprehensive, reasoned opinion. 469 F. Supp. 630. The court held that the action had been commenced in bad faith against the publishing defendants and awarded them $50,000 in attorneys' fees and expenses to be taxed against Nemeroff and Hale and Dorr. The court held that the action had not been commenced in bad faith against the investor defendants and accordingly denied their motions for attorneys' fees and expenses. The court held that defendants were the prevailing parties and granted their motions for costs to be taxed against plaintiff pursuant to Fed.R.Civ.P. 54(d). Pursuant to the parties' stipulation, the court ordered that the action be dismissed with prejudice.

On May 10, 1979 a final judgment was entered in accordance with the court's opinion. From that judgment, the instant appeal and cross-appeals have been taken as stated above.

In January 1977 Gordon T. Walker and Hale and Dorr first became involved in the discussions which led to the commencement of this action. At that time Walker met with a client of Hale and Dorr, Herbert Stein, who was a shareholder of Centronics Data Computer Corporation ("Centronics").4 By then Barron's already had carried several Abelson columns critical of Technicare.5 Stein told Walker that he was concerned that Abelson also would criticize Centronics in a forthcoming column. Stein said he had been informed that Abelson had criticized Technicare at the instance of several investors, including Robert Wilson, who had established large short positions in Technicare. Stein said that the same investors had established short positions in Centronics. Stein also mentioned that the Technicare trading was being investigated by the New York Stock Exchange ("NYSE") and the Securities and Exchange Commission ("SEC"). He gave Walker the names of two brokers who had voiced suspicions about the Technicare trading.

During the period between the meeting with Stein in January and the commencement of the action in March, Walker and his firm investigated the allegations regarding Technicare and Centronics. Walker called the NYSE and the SEC and received confirmation that they were investigating complaints about Technicare. Walker spoke to Howard Roth, one of the brokers mentioned by Stein, who reiterated his suspicions about the trading in Technicare. He stated that Nemeroff, his client, was considering commencing an action against Dow Jones and the investors holding short positions in Technicare. He added that Nemeroff would be represented by Paul, Weiss, Rifkind, Wharton & Garrison in the action. Later, Roth informed Walker that Nemeroff would not be represented by Paul, Weiss at that time for reasons not relevant here and that he had recommended to Nemeroff that he retain Hale and Dorr. Nemeroff later decided that he wanted Hale and Dorr to commence an action on his behalf. On March 20 an associate of Hale and Dorr discussed a draft complaint with Nemeroff. The complaint was filed on March 25.

In the remainder of this section of our opinion, we shall summarize only those facts believed to be necessary to an understanding of our rulings on the legal questions presented. The essential facts are those which led Walker to believe that there were adequate grounds for the commencement of Nemeroff's action against defendants. These facts fall generally into two categories:6 first, the nuts and bolts of the alleged conspiracy, including Abelson's columns, Abelson's relationship with the investor defendants, and the pattern of trading in Technicare; and second, Walker's contacts with the NYSE attorneys.

Barron's carried a series of articles beginning in May 1976 which mentioned Technicare or the CAT scanner market. All but one were written by Abelson. To the extent that these columns were negative, and not all of them were,7 they stated that the market for CAT scanners was going to level out because of various factors, including their high cost and the increasing concern over the rising cost of medical care, increased competition, and state regulation of hospital expenditures. The columns indicated that Technicare would be particularly vulnerable, due in part to its proportionately large reliance on CAT scanner sales.

Technicare was first listed on the NYSE in December 1975. During the first two months of 1976 approximately 100,000 shares were sold short. The aggregate short position remained relatively stable until October 1976, when it began to rise sharply.8 The aggregate position was over 238,000 shares by March 1977, when the complaint was filed.

The price of Technicare stock rose until approximately the end of 1976, when it began to decline. The only Abelson column which was closely related to a decline in the price of Technicare stock was that of January 10, 1977. Technicare fell almost three points, to $34.50, after that publication.

An important factor relied on by Walker in determining whether there was any basis for the charges against the publishing and investor defendants was what he understood to be the conclusion reached by the NYSE that there was in fact a "correlation" between the appearance of the Abelson articles and the short sales of Technicare stock. Walker says that he was told on February 3, 1977 by an NYSE attorney, Jeffrey Hass, Esq., that there was "no doubt" of a "relationship" between the short sellers and Abelson. Hass later denied making those statements; but in a supplemental affidavit he conceded that he could understand, based on their February 3 conversation, how Walker "could have come away from the conversation with the good faith impression that I had made such statements."9 The district court found erroneously in our view that the February 3 conversation was immaterial, because of a February 8 conversation which Walker had with Hass and others at the NYSE during which the NYSE people purportedly indicated that the NYSE was satisfied that there was no support for charges of manipulation. The critical fact, however, is that on February 8 Walker learned only that the NYSE was satisfied that the Technicare specialist of the NYSE was not involved in manipulation. Walker did not receive the report of the NYSE investigation until July 1977.

In addition to the foregoing, Walker points to other facts which led him to conclude that there were adequate grounds for commencing the action, including statements by Robert Wilson in a market newsletter10 and what Walker understood to be prior similar conduct on the part of Abelson and the investor defendants.11THE DISTRICT COURT OPINION

In its opinion of April 18, 1979 the district court found that the action was commenced in bad faith, but it made no finding on the propriety of plaintiff's conduct of the litigation. The court found it unnecessary to reach the latter issue in view of its approach to the case. 469 F. Supp. at 632 n.2.

With respect to the commencement of the action, the court found, as to appellants' motive, that "(t)he evident purpose was to secure maximum publicity harmful to the publishing defendants" and that "(c)learly, the purpose could not have been to litigate on the merits." Id. at 635-36. As to the colorability of appellants' complaint, the court found that, although Nemeroff, Roth and other Technicare investors believed that Abelson was guilty of wrongdoing, "(t)he suit was filed either with the knowledge that counsel had no adequate factual basis to sustain the allegations or in reckless disregard of the fact that proof of the charges was not available. In either circumstance, plaintiff and his counsel knowingly proceeded with litigation that lacked foundation." Id. at 636. The court also stated that "neither the plaintiff, his counsel, Roth, nor Stein had one iota of proof in the sense that term is defined in a court of law that Abelson was leaking any information to the short-selling defendants." Id. at 635. The foregoing constitute the underpinning for the court's ultimate finding that the action was commenced in bad faith.

Despite the invitation by counsel that we conduct a de novo review of the facts in view of the unique character of this proceeding, we find it unnecessary to do so. See Jack Kahn Music Co. v. Baldwin Piano & Organ Co., 604 F.2d 755 (2 Cir. 1979); New York v. Nuclear Regulatory Commission, 550 F.2d 745, 750-53 (2 Cir. 1977); Dopp v. Franklin National Bank, 461 F.2d 873, 878-79 (2 Cir. 1972). As we have indicated above, note 4, supra, the record before us consists entirely of documents and no evidentiary hearing was held in the district court.

We hold, based on our careful examination of the entire record, that the district court's finding that the action was commenced in bad faith was clearly erroneous. Fed.R.Civ.P. 52(a)12 Central to the court's clearly erroneous ultimate finding of bad faith was the court's erroneous subordinate finding regarding Walker's knowledge of the results of the NYSE investigation.III.

The general American rule governing allocation of the costs of litigation places the burden of counsel fees on each party, regardless of the outcome of the action. Alyeska Pipeline Service Co. v. Wilderness Society, 421 U.S. 240, 247 (1975) (no "private attorney general" exception to the general rule); F. D. Rich Co. v. United States ex rel. Industrial Lumber Co., 417 U.S. 116, 126 (1974) (reversing award of fees under Miller Act where there was no explicit statutory provision). Although the origin of the so-called American rule is somewhat unclear, there is no doubt about its current vitality.13

Fees can be shifted to the prevailing party under various exceptions to the general rule. The most important of these are the explicit statutory provisions which recently have proliferated.14 Another instance of fee-shifting is the "common benefit" exception which spreads the cost of litigation to those persons benefiting from it. Hall v. Cole, 412 U.S. 1 (1973); Mills v. Electric AutoLite Co., 396 U.S. 375 (1970); Sprague v. Ticonic National Bank, 307 U.S. 161 (1939) (fee shifted where plaintiff established right of others to recover from specific assets through stare decisis); Trustees v. Greenough, 105 U.S. 527 (1882). Finally, there is the exceptional power to shift fees where an action has been commenced or conducted "in bad faith, vexatiously, wantonly or for oppressive reasons." F. D. Rich Co. v. United States ex rel. Industrial Lumber Co., supra, 417 U.S. at 129; accord, Browning Debenture Holders' Committee v. DASA Corp., 560 F.2d 1078 (2 Cir. 1977); see also Vaughan v. Atkinson, 369 U.S. 527 (1962) (in admiralty, damages for failure to give maintenance and cure may include counsel fees as "necessary expenses" where defendant wilfully failed to respond to plaintiff's request for such maintenance).15

Browning Debenture Holders', supra, clarified the requirements for a finding of bad faith in this Circuit. We held that there must be "clear evidence" that the claims are "entirely without color and made for reasons of harassment or delay or for other improper purposes." 560 F.2d at 1088 (emphasis added). In the instant case we find it unnecessary to reach the question of the motives of Nemeroff or his counsel, for we hold that the claims were not "entirely without color" at the time the action was commenced.

A claim is colorable, for the purpose of the bad faith exception, when it has some legal and factual support, considered in light of the reasonable beliefs of the individual making the claim.16 The question is whether a reasonable attorney could have concluded that facts supporting the claim might be established, not whether such facts actually had been established.

We hold here that a reasonable attorney could have concluded, with respect to the first count of the complaint, that there was a relationship, in some cases a close relationship, between Abelson and the investor defendants; that Abelson had made comments critical of Technicare; that the price of Technicare had declined during the period in which Abelson's columns were published; that the investor defendants had sold Technicare short; and that the NYSE had found a correlation between the Abelson columns and the pattern of short trading.

As for the second count which alleged that the investor defendants had violated § 9(a) of the Exchange Act, we hold that a reasonable attorney could have concluded that there was an unusual pattern of short sales of Technicare stock and that this pattern of sales was intended to depress and manipulate the price of Technicare stock.

Even if some or all of these facts were not in fact true or might later fail to be established, that is irrelevant to the determination of bad faith under our law. These reasonable beliefs were factually and legally sufficient. To require more would promote the unwarranted abortion of many potentially meritorious claims.

Aside from invoking the bad faith exception to the general American rule for the award of attorneys' fees, appellees also sought to ground the award on § 9(e) of the Exchange Act, 15 U.S.C. § 78i(e),17 and Fed.R.Civ.P. 11.18 The district court concluded that the "ultimate question" under § 9(e) and Rule 11 was "whether the plaintiff and/or counsel instituted the action 'in bad faith, vexatiously, wantonly or for oppressive reasons.' " 469 F. Supp. at 637 (citing Browning Debenture Holders', supra, and Ernst & Ernst v. Hochfelder, 425 U.S. 185, 210 n.30 (1976)). Congress has enacted a number of statutory exceptions to the general rule governing attorneys' fees. Some statutes require that reasonable fees be awarded to the prevailing plaintiff; other statutes are permissive. Some permissive award statutes, such as § 9(e), authorize an award of fees by the court "in its discretion". By contrast, § 11(e) of the Securities Act of 1933, 15 U.S.C. § 77k(e) (1976), authorizes an award of fees to the prevailing party "if the court believes the suit or the defense to have been without merit"; and § 323 of the Trust Indenture Act, 15 U.S.C. § 77www(a) (1976), authorizes an award of fees "having due regard to the merits and good faith of the suit or defense."

Although the language of § 9(e) makes an award of fees discretionary, the legislative history of this provision indicates that Congress included it to deter bad faith actions and "strike suits." S.Rep.No. 792, 73d Cong., 2d Sess. (1934); Loss, Securities Regulation 1836 et seq. (2d ed. 1961). In interpreting a substantially similar provision of the Civil Rights Act of 1964, the Supreme Court concluded that fees should be awarded "upon a finding that the plaintiff's action was frivolous, unreasonable or without foundation, even though not brought in subjective bad faith." Christianburg Garment Co. v. EEOC, 434 U.S. 412, 421 (1978). The Court pointed out that to require less would defeat Congressional efforts to promote vigorous enforcement of the statute, but to require more would be unnecessary, in view of the long-standing equitable power to award fees upon a finding of bad faith. Id. at 419-22.

We hold that the minimum standard for an award of fees under § 9(e) of the Exchange Act is that set forth in Christianburg Garment, i. e., the action must have been frivolous and without foundation. Since we have held that the instant action was not entirely without foundation, we decline to sanction the award of fees to the defendants-appellees under § 9(e). See Dewitt v. American Stock Transfer Co., 433 F. Supp. 994 (S.D.N.Y.1977), modified, 440 F. Supp. 1084 (fee award under substantially similar provision of Exchange Act inappropriate where claim was not frivolous); see also Acker v. Shulte, 74 F. Supp. 683 (S.D.N.Y.1949); accord, Stella v. Kaiser, 83 F. Supp. 431 (S.D.N.Y.1949). In view of our holding, we need not consider whether a finding of bad faith also would be required for an award of fees under § 9(e). See Colonial Realty Corp. v. Brunswick Corp., 337 F. Supp. 546 (S.D.N.Y.1971).

Rule 11 speaks in plainly subjective terms: the attorney's certification of a pleading is an assertion that "to the best of his knowledge, information, and belief there is good ground to support it. . . . " The standard under Rule 11, therefore, is bad faith. See Kinee v. Abraham Lincoln Federal Savings & Loan Ass'n, 365 F. Supp. 975, 982-83 (E.D.Pa.1973); see also Peter Kiewit Sons' Co. v. Summit Construction Co., 422 F.2d 242, 271 (8 Cir. 1969); Levy v. Seaton, 358 F. Supp. 1, 6 (S.D.N.Y.1973). Assuming arguendo that an award of attorneys' fees is a permissible sanction under Rule 11, our conclusion that the instant action was not without foundation and hence not commenced in bad faith necessarily precludes the award of such fees under Rule 11. Miller v. Schweickart, supra, 413 F.Supp. at 1061-62; Brand v. Tisch, 253 F. Supp. 122, 125 (S.D.N.Y.1966).

The district court also awarded costs to both the publishing defendants and the investor defendants pursuant to Fed.R.Civ.P. 54(d), which provides that "costs shall be allowed as of course to the prevailing party unless the court otherwise directs."19 Appellants argue that this was error since appellees were not the prevailing parties. We disagree.

It is true that generally the defendant is not considered the prevailing party when, as here, there is a voluntary dismissal of the action by the plaintiff with prejudice. Mobile Power Enterprises, Inc. v. Power Vac, Inc., 496 F.2d 1311, 1312 (10 Cir. 1974); see generally 6 Moore's Federal Practice P 54.70(4) (2d ed. 1976).

Here, however, the stipulation and order of dismissal expressly reserved to defendants the right to move for "costs and disbursements of this action". Since appellants agreed to such a stipulation, we reject their claim that the reservation was inoperative from the moment of its entry. We affirm the district court's award of costs under Rule 54(d).

As indicated above, the district court expressly declined to make any findings on the propriety of appellants' conduct of the litigation, as distinguished from their commencement of the action. 469 F. Supp. at 632 n.2. Although we hold that the action was commenced in good faith, we remand for determination by the district court (a) whether appellants' conduct of the litigation was intentionally dilatory; and (b) whether at any point, during the litigation and prior to dismissal, sufficient facts became available to appellants to demonstrate that a failure at that point to withdraw the action necessarily amounted to bad faith. If the court finds that the litigation was conducted in good faith, that ends the matter and an order should be entered accordingly. If, however, the court finds that the litigation was conducted in bad faith, appellees' reasonable expenses resulting from such bad faith conduct by appellants should be assessed and an order should be entered accordingly. See Browning Debenture Holders, supra, 560 F.2d at 1088-89; In re Boston & Providence R.R. Corp., 501 F.2d 545, 550 (1 Cir. 1974); 28 U.S.C. § 1927 (1976).

(1) The action was commenced in good faith. Accordingly, we reverse the district court's award to the publishing defendants of $50,000 in attorneys' fees and expenses as assessed against appellants Nemeroff and Hale and Dorr; and we affirm the district court's denial of attorneys' fees and expenses to the investor defendants.

(2) We affirm the district court's award of costs under Rule 54(d) to the publishing defendants and the investor defendants.

(3) We remand to the district court for a determination of the propriety of appellants' conduct of the litigation.

(4) We order that taxation of costs in this Court in connection with the instant appeal and cross-appeal shall be held in abeyance pending the outcome of our remand to the district court and any ensuing appeal.

Affirmed in part, reversed in part, and remanded.