May 25, 2012

Back From The Dead

Can a plaintiff in a securities class action use information gained through the discovery process to resurrect previously dismissed claims? In In re Constellation Energy Group, Inc. Sec. Litig., 2012 WL 1067651 (D. Md. March 28, 2012), the court dismissed all of the fraud claims (1934 Act), but allowed the non-fraud claims (1933 Act) to proceed. Following discovery, the plaintiff argued that it had found "new evidence of scienter" and moved for lead to amend its complaint to re-plead the fraud claims.

The court held that neither the plain language nor the purpose of the PSLRA would be frustrated by allowing the fraud claims to go forward. The PSLRA's discovery stay provision (which stays all discovery pending the resolution of a motion to dismiss) was designed to "limit the pressure on innocent defendants to settle cases in lieu of proceeding to expensive discovery" not "to shield all defendants from any adverse evidence that may properly be discovered over the course of litigation." Moreover, the case was still ongoing against the same defendants, so they would not be prejudiced by having to defend themselves against the new claims. In this instance, however, the court denied the motion for leave to amend as futile, finding that even with the new evidence the plaintiff had failed to satisfy the "strong inference" pleading standard for scienter.

Holding: Motion for leave to amend denied.

Posted by Lyle Roberts at May 25, 2012 9:46 PM | TrackBack
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