UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

---------------------------------------X

INTERNET LAW LIBRARY, INC. :

and HUNTER M.A. CARR,

Plaintiffs, OPINION

-against- 01 Civ. 6600 (RLC)

SOUTHRIDGE CAPITAL MANAGEMENT, LLC,

et al., :

Defendants.

---------------------------------------X

COOTES DRIVE, LLC., :

Defendant, Counterclaim-Plaintiff, :

-against- :

INTERNET LAW LIBRARY, INC., :

Plaintiff, Counterclaim-Defendant :

---------------------------------------X

Jack Tompkins, Kerwin Drouet, et al., :

Plaintiffs, : 02 Civ. 0138 (RLC)

-against- :

SOUTHRIDGE CAPITAL MANAGEMENT, et al., :

Defendants. :

---------------------------------------X

APPEARANCES

KOERNER SILBERBERG & WEINER, LLP

Attorneys for Internet Law Library, Inc.

112 Madison Avenue, 3^rd Floor

New York, New York 10016

MARYANN PERONTI

Of Counsel

CHRISTIAN, SMITH & JEWELL

Attorneys for Internet Law Library, Inc.

2302 Fannin, Suite 500

Houston, Texas 77002

GARY M. JEWELL

JAMES W. CHRISTIAN

Of Counsel

TATE & ASSOCIATES

Attorneys for Internet Law Library, Inc.

206 South 2d Street

Richmond, Texas 77469

RICHARD L. TATE

JAMES W. CHRISTIAN

Of Counsel

PIPER RUDNICK

Attorneys for Southridge Capital Management LLC, Cootes Drive

LLC, Stephen Hicks, Daniel Picket, Christy Constabile, David

Sims, and Navigator Management Ltd.

1251 Avenue of the Americas

New York, New York 10020

PERRIE M. WEINER

CARYN G. MAZIN

PALMINA M. FAVA

Of Counsel

KRAMER LEVIN NAFTALIS & FRANKEL LLP

Attorneys for Citco Group Limited

919 Third Avenue

New York, New York 10022

MICHAEL J. DELL

Of Counsel

LAW OFFICES OF MICHAEL S. ROSENBLUM

Attorneys for Southridge Capital Management LLC, Cootes Drive

LLC, Stephen Hicks, Daniel Pickett, Christy Constabile, Dave

Sims, and Navigator Management Ltd.

1875 Century Park East, Suite 700

Los Angeles, California 90067

MICHAEL S. ROSENBLUM

AMY M. CAVES

Of Counsel

MORRISON & FOERSTER LLP

Attorneys for Mark Valentine

1290 Avenue of the Americas

New York, New York 10104

CARL H. LOEWENSON, JR.

JAMES E. JOHNSON

JOEL C. HAIMS

Of Counsel

GIBBONS, DEL DEO, DOLAN, GRIFFINGER & VECCHIONE, PC

Attorneys for Thomson Kernaghan & Co, Ltd., and TK Holdings, Inc.

One Pennsylvania Plaza

37^th Floor

New York, New York 10119-3701

DEBRA A. CLIFFORD

Of Counsel

ROBERT L. CARTER, District Judge

          Defendants Southridge Capital Management LLC, Stephen
     Hicks, Daniel Pickett, Christiy Constabile, David Sims,
     Navigator Management Ltd., The Citco Group Limited and
     Citco Trustees Limited move to dismiss the complaint
     brought by plaintiffs, ITIS Holdings Inc. (“ITIS”) (f/k/a
     ITIS Inc. and Internet Law Library), Hunter Carr, Kerwin
     Drouet, and Jack Tompkins pursuant to Rule 37(b)(2), F.R.
     Civ. P., due to plaintiffs’ abuse of the discovery process
     and persistent refusal to abide by the court’s discovery
     orders.

Background

          The underlying action originally brought by plaintiffs
     alleges fraud, misrepresentation of material facts,
     manipulation of ITIS’ stock in violation of federal and
     state laws, control person liability claims, tortious
     interference with contract, and breach of contract, all in
     connection with defendants’ investment in ITIS by means of
     a Convertible Stock Purchase Agreement entered into on or
     about May 11, 2000. Plaintiffs request relief that
     includes amongst other remedies: rescission of all
     agreements between the parties, declaratory relief excusing
     ITIS from performance of its duties under the Convertible
     Stock Purchase Agreement, and damages and costs that total

     more than $300 million. In the two years the parties have
     litigated this action the court has dealt with various
     issues, see, e.g., Internet Law Library v. Southridge
     Capital Mgmt. LLC, 208 F.R.D. 59 (S.D.N.Y. 2002); Internet
     Law Library v. Southridge Capital Mgmt. LLC, 223 F. Supp.
     2d 474 (S.D.N.Y. 2002), with which familiarity is assumed.

          This request for dismissal follows several attempts by
     plaintiffs to override and misconstrue the authority of
     this court. Plaintiffs’ pattern of disrespect for the
     court’s rulings began with a conference held in chambers on
     September 26, 2002. The purpose of this conference was to
     set a timeframe for discovery and the filing of dispositive
     motions as well as resolve any open disputes between the
     parties. During the conference, defendants alleged that
     plaintiffs were using discovery to shop for new parties and
     requested a protective order for all document productions.
     In response, plaintiffs acknowledged they were inquiring
     with nonparties about defendants’ actions but denied the
     allegations they were shopping for more plaintiffs.
     Plaintiffs claimed that defendants employed a financing
     scheme, similar to the one used with ITIS, to defraud many
     other companies and as a result these nonparty companies
     may have information relevant to the allegations or market
     manipulation and fraud in plaintiffs’ complaint.

          Taking into account plaintiffs’ and defendants’
     arguments, the court placed its trust in plaintiffs’ sense
     of restraint and denied the protective order. The court
     indicated that any information gained in discovery was not
     to be used to identify new clients or initiate new
     litigation but that it could be used to “locate additional
     witnesses or join new parties on a showing of good cause.”
     (Endorsement Oct. 3, 2002). In addition, the court
     indicated that in the event plaintiffs wanted to use any
     information gained in discovery before another judge in a
     different litigation, the use of such information would be
     subject to the ruling of the presiding judge. This was in
     sum and substance the court’s ruling on the scope of
     discovery made in the September conference.

          Judging from their subsequent actions, plaintiffs
     interpreted the court’s ruling to entitle plaintiffs to
     request every manner of discovery from defendants and
     nonparties with regard to all companies that bore a
     resemblance to the way in which ITIS was financed or its
     stock was sold. Using the interpretation, plaintiffs
     served subpoenas on February 3, 2003, under the ITIS
     caption, to the National Association of Securities Dealers
     (“NASD”) and the National Securities Clearinghouse
     Corporation (“NSCC”) in which they requested the records of

          trading in ATSI Communications (“ATSI”) securities by the
     following companies: The Shaar Fund, Ltd., Levinson
     Capital Management, Shaar Advisory Services, N.V., Marshall
     Capital Services, LLC, Jessup & Lamont Structured Finance
     Group, RGC International Investors, LDC, Rose Glen Capital
     Management, L.P., MG Security Group, Inc., Corporate
     Capital Management, and Crown Capital Corporation. Every
     company referred to in the subpoenas is a party before
     Judge Lewis Kaplan in the ATSI Communications v. The Shaar
     Fund, No. 02 Civ. 8726 (S.D.N.Y.), action. None of them,
     however, are parties to the action before the court. The
     only common thread between the ATSI case and the ITIS case
     is the plaintiffs in both cases are represented by the
     same counsel, Maryann Peronti of Koerner Silberberg &
     Wiener, LLP and Gary Jewell of Christian Smith & Jewell.

          In a February 24, 2003 conference before Judge Kaplan
     in the ATSI matter, the ATSI defendants, only recently
     informed of the subpoenas, brought them to the attention of
     Judge Kaplan. In defending the subpoenas, Ms. Peronti
     failed to produce the October 3, 2002 Endorsement upon
     which she was relying for her alleged authorization and
     misrepresented to Judge Kaplan that they were issued with
     the permission of the court. She further defended the
     subpoenas as a permissible search for pattern and practice

          evidence, alleging that there were factual alliances
     between defendants in the ATSI and ITIS cases such as to
     make the actions of the ATSI defendants in trading ATSI’s
     stock relevant to allegedly similar manipulations of ITIS’
     stock by the ITIS defendants. When Judge Kaplan inquired
     into whether Ms. Peronti had advised this court that she
     planned to use the subpoenaed information in the ATSI
     action, in which discovery was stayed by the Private
     Securities Litigation Reform Act (“PSLRA”), she admitted
     she had not done so. Judge Kaplan effectively barred
     plaintiffs from using the subpoenaed information in the
     ATSI case and left the relevance of the subpoenas in the
     ITIS case for this court to decide. ATSI Communications,
     Inc., v. The Shaar Fund, Ltd., No. 02 Civ. 8726, 2003 WL
     1877227, at *3 (S.D.N.Y. April 9, 2003).

               On June 9, 2003, the court held a conference in
     chambers in which the validity of the ATSI subpoenas as
     well as plaintiffs’ attempts to secure discovery of
     defendants’ trading records which regard to nonparties were
     considered. After hearing arguments from both parties,
     including plaintiffs’ claim that the ATSI subpoenas were
     issued simply in an attempt to find pattern and practice
     evidence of defendants’ manipulative investment schemes,
     the court made it very clear that the substance of the

     October 3, 2003 Endorsement was that plaintiffs were to
     seek witnesses and not trading records with regard to
     nonparties. (Tr. of June 9, 2003 Conference, p. 6.) The
     court quashed the subpoenas and barred plaintiffs from
     making “any other efforts in this regard.” (Id. at p. 9.)
     In addition the court warned plaintiffs that “any further
     violation of my order in any way [and] I’m going to
     dismiss your case.” (Id. at p. 10.)

          On June 10, 2003, the day after this ruling,
     plaintiffs served defendants with notice that plaintiffs
     would be serving a subpoena on the NASD seeking every short
     sale made since March 30, 1999, irrespective of the
     identify of the stock or the trader. On June 11, 2003,
     defendants, by letter, moved to quash the subpoenas and
     also brought the present motion to dismiss in light of
     plaintiffs’ clear violation of the court’s order. The
     subpoenas were quashed immediately and the court requested
     that plaintiffs justify their actions promptly so that the
     court could rule on defendants’ motion. Plaintiffs’
     response by letter of June 18, 2003, in essence indicates
     that its justification lies in the court’s lack of clarity
     when it barred plaintiffs from making “any other efforts in
     this regard.” (emphasis added) (Id. at p. 9.) Without
     knowing whether ‘this’ referred specifically to the ATSI

     subpoenas or to discovery in trading records of nonparties
     in general, plaintiffs argue that they could not have
     violated any order as the order the court gave was so
     unclear as to not exist for all practical purposes.

Discussion

          Rule 37 (b)(2)(c), F.R. Civ. P., authorizes dismissal
     of a plaintiff’s complaint along with other sanctions by
     the district court if a party “fails to obey an order to
     provide or permit discovery.” Dismissal is the harshest
     sanction available to a district court, and should thus “be
     imposed only in extreme circumstances.” Jones v. Niagara
     Frontier Transp. Auth., 836 F.2d 731, 734-35 (2d Cir.
     1987). Accordingly, dismissal is appropriate only where a
     party who has disobeyed an order has done so willfully, in
     bad faith, or is in some way at fault. Gilpin v. Phillip
     Morris Int’l, Inc., No. 01 Civ. 5960, 2002 WL 1461433
     (S.D.N.Y. July 8, 2002) (Carter, J.).

          It is clear that the court never gave any permission
     in the September conference, explicit or otherwise, to
     plaintiffs to issue the ATSI subpoenas in the manner that
     they represented to Judge Kaplan. In issuing its order
     the court intended that plaintiffs could use defendants’
     discovery to seek witnesses, be they parties or nonparties,

     that plaintiffs reasonably believed to have information
     supporting the allegations in their complaint. This is the
     only reference to nonparties in the order, and there was no
     more expansive discussion regarding nonparties in the
     conference that went unreflected in the order. The issue
     of nonparty trading records were never raised and in making
     such an unsupported claim to this court as well as to Judge
     Kaplan, plaintiffs all but fatally jeopardize their
     credibility.

          In issuing the ATSI subpoenas, plaintiffs not only
     violated and misrepresented the court’s ruling to Judge
     Kaplan, but they also attempted to violate the discovery
     stay mandated by the PSLRA in the ATSI case. The PSLRA
     provides in relevant part:

In any private action arising under this

chapter, all discovery and other proceedings

shall be stayed during the pendency of any

motion to dismiss, unless the court finds upon

the motion of any party that particularized

discovery is necessary to preserve evidence or

to prevent undue prejudice to that party.

See 15 U.S.C. § 78u-4(b)(3)(B).

          Plaintiffs’ claim that the ATSI subpoenas were not intended
     for use in the ATSI case but rather could lead to the
     discovery of relevant evidence in this case is not
     supported by facts. The only alleged factual connection

     between that subpoenas and the ITIS case is the presence of
     one of defendant Citco Group Limited’s hundreds of
     subsidiaries in filings that one of the subpoenaed
     broker/dealers made with the SEC. This connection,
     however, is so tenuous in comparison to the obvious utility
     the subpoenaed information had in assisting counsel to
     amend the ATSI complaint to defeat the ATSI defendants’
     motion to dismiss, as to make clear that plaintiffs
     intended to abuse this court’s subpoena power to circumvent
     the PSLRA’s constraints in the ATSI case. See ATSI, 2003
     WL 1877227, at *3.

          On its own, plaintiffs’ abuse of the subpoena power
     would justify severe sanctions. In combination with
     plaintiffs’ subsequent disregard for the court’s order in
     the June 9, 2003 conference, plaintiffs’ conduct warrants
     dismissal of their complaint. Plaintiffs defend their
     actions by claiming that they did not understand the
     court’s order to include all nonparty discovery when it
     barred plaintiffs from making any more efforts “in this
     regard.” In light of plaintiffs’ vigorous defense of the
     ATSI subpoenas in the conference as part of their effort to
     find a pattern and practice of manipulative investments in
     nonparties, this alleged misunderstanding seems impossible.
     Furthermore, even if the court’s order was unclear in some

     respects, it was absolutely clear with regard to ATSI, and
     the issuance of the second NASD subpoena does not reflect
     even the understanding that ATSI records were off limits.

          Plaintiffs seem to believe that by playing innocent
     they can escape their duty to be a responsible litigant.
     The inexplicably self destructive nature of plaintiffs’
     action in serving the second NASD subpoena on defendants,
     considering the court’s ruling and warning, can only be
     understood by the court as a willful attempt to try this
     case as they see fit, and not in the way the court has
     ordered or that law requires. Were plaintiffs proceeding
     pro se, the court would be more apt to believe plaintiffs
     misunderstood the court’s order or made careless errors by
     failing to omit ATSI from the second NASD subpoena. These
     plaintiffs, however, are represented by experienced
     counsel. Based on their disregard for the court’s orders
     and discovery rules in the past, the court can only
     conclude that their behavior with regard to the latest
     subpoena was willful and in bad faith, just as it was with
     the ATSI subpoenas.

          Due to the harshness of dismissal, the court has
     considered other sanctions but does not find them to be as
     effective considering the circumstances of plaintiffs’
     transgressions. For example, an adverse inference

     instruction is not applicable as the subject matter of
     plaintiffs’ actions, defendants trading in nonparties, is
     actually not relevant to plaintiffs’ burden of proof and
     thus would be no punishment at all. The court also
     believes that monetary sanctions would not effectively
     deter future misconduct were this litigation to continue
     due to plaintiffs’ failure to heed the court’s explicit
     warning that any further violations would result in
     dismissal. Plaintiffs’ conduct has diverted the court’s
     attention from the efficient adjudication of this case and
     its case docket, despite clear warnings and orders to
     adhere to plaintiffs’ obligations as litigants. This
     failure to respect the court and its orders justifies
     dismissal of plaintiffs’ complaint as both a remedy and a
     deterrent to future misconduct. See United States Freight
     Co., v. Penn Central Transp. Co., 716 F.2d 954, 955 (2d
     Cir. 1983).

Conclusion

          Plaintiffs’ complaint is dismissed pursuant to Rule
     37(b)(2), F.R. Civ. P., as to all defendants with prejudice
     due to plaintiffs’ repeated and flagrant disregard for the
     court’s orders.