## Facts

- A group of investors previously sued Prudential‑Bache Securities, Inc. over alleged misrepresentations and omissions related to GNMA/T‑Bond “spread” transactions, claiming substantial losses.
- Sullivan & Cromwell represented Prudential‑Bache in the earlier litigation, which proceeded through extensive discovery, including document production and depositions.
- In January 1985, the investors settled the earlier cases for about $1.6 million, and the court dismissed the claims with prejudice on February 1, 1985.
- In April 1987, 56 of the prior claimants sued Prudential‑Bache and Sullivan & Cromwell for fraud and negligent misrepresentation.
- Plaintiffs alleged that, during discovery in the earlier litigation, defendants intentionally withheld responsive, material documents (including internal memoranda and analyses) showing management’s awareness of serious problems and risks in the spread-transaction program.
- Plaintiffs alleged they relied on an incomplete discovery record when settling and would have obtained a higher settlement (or litigated differently) had the withheld materials been produced.

## Issues

1. Whether Rule 60(b) provides the exclusive remedy for alleged fraud occurring in prior federal litigation, barring a later independent action for damages based on discovery misconduct.
2. Whether a damages suit premised on alleged discovery fraud constitutes an impermissible collateral attack on a prior judgment dismissing the earlier claims with prejudice.
3. Whether plaintiffs pleaded fraud with sufficient particularity under Rule 9(b) to survive a Rule 12(b)(6) motion.

## Decision

- The court denied defendants’ Rule 12(b)(6) motion to dismiss the amended complaint.
- Rule 60(b) did not bar an independent action seeking tort damages for alleged fraud and negligent misrepresentation based on discovery misconduct in prior litigation.
- The complaint adequately alleged categories of withheld documents, the manner of concealment, reliance in settlement, and resulting damages, satisfying pleading requirements at the motion-to-dismiss stage.

## Legal Principles

- Rule 60(b) preserves, rather than eliminates, the court’s ability to entertain independent actions; it is not necessarily the exclusive mechanism addressing fraud connected to prior proceedings.
- A subsequent action seeking damages for separate tortious conduct during earlier litigation is not barred merely because the conduct affected a settlement and dismissal, where the plaintiff does not seek to vacate or modify the prior judgment.
- Allegations of discovery-related fraud may state claims for fraud and negligent misrepresentation when the pleading identifies the alleged concealment, materiality, reliance, and injury with sufficient specificity to meet Rule 9(b) at the pleading stage.
- Finality concerns do not automatically foreclose a damages remedy for litigation misconduct; the availability of such claims may serve to deter discovery abuse.

## Conclusion

The court allowed investors to proceed with fraud and negligent misrepresentation claims against a party and its counsel based on alleged concealment of material discovery in prior litigation, holding that Rule 60(b) did not preclude an independent damages action that did not seek to set aside the earlier judgment.


Cresswell v. Sullivan & Cromwell, 668 F. Supp. 166 (S.D.N.Y. 1987)