Should a securities class action defendant be able to get discovery from absent class members to support its defenses? In Garden City Employees' Retirement System v. Psychiatric Solutions, Inc., 2012 WL 4829802 (M.D. Tenn. Oct. 10, 2012), the defendants issued subpoenas to 14 institutional investors in a case where the class had already been certified. In their motion for leave to conduct this discovery, the defendants contended that the discovery was necessary on "individual issues" and to further their "truth on the market defense."
The court noted that, as a general matter, discovery of absent class members is disfavored. The defendants "bear the burden of showing necessity and the absence of any motive to take undue advantage of the class members." In the instant case, the court concluded that mere "speculation" that absent class members might have invested even knowing of the alleged misstatements was insufficient to satisfy the defendants' burden. Moreover, any discovery related to individual reliance on the alleged misstatements could be done after a trial on the common issues.
Holding: Motion for leave to conduct discovery of absent class members denied.
As the U.S. Supreme Court begins its October term, a securities litigator's thoughts turn to what cases the court might take next. A leading indicator (although far from a guarantee) is a cert petition where the Court asks the government to provide its input. On Monday, the Court made this request in three related cases arising out of an alleged Ponzi scheme.
The Securities Litigation Uniform Standards Act ("SLUSA") precludes certain class actions based upon state law that allege a misrepresentation in connection with the purchase or sale of nationally traded securities. In determining what is meant by "in connection with," the Supreme Court has held that it is sufficient that the alleged misrepresentation "coincide" with a covered securities transaction. The circuit courts have had difficulty, however, in expanding upon this requirement to form a consistent standard (see, e.g., decisions from the Second Circuit, Sixth Circuit, and Seventh Circuit).
In the Ponzi scheme cases, the Fifth Circuit held that the "best articulation of the 'coincide' requirement" is that the fraud allegations must be "more than tangentially related to (real or purported) transactions in covered securities." The court concluded that the relationship between the alleged Ponzi scheme, which centered around the sale of certificates of deposit, and any transactions in covered securities was too attenuated to trigger SLUSA preclusion.
Will the Supreme Court revisit SLUSA? Stay tuned.
Addition: Bloomberg has an article on the Supreme Court's request.