A mere fourteen years after the passage of the Private Securities Litigation Reform Act, litigation over the meaning of the various procedural provisions continues. Two recent cases highlight disputes over the role of the court in the selection of lead counsel and the scope of the exceptions to the mandatory discovery stay.
(1) Selection of Lead Counsel - In Cohen v. U.S. District Court for the N.D. of Cal., 2009 WL 3681701 (9th Cir. Nov. 5, 2009), the court addressed a writ of mandamus filed by the lead plaintiff in a securities class action. At issue was whether the district court had acted within its authority when it rejected the lead plaintiff's proposed lead counsel and substituted lead counsel of the court's own choosing.
The Ninth Circuit found that "[i]t would be difficult for the [PSLRA] to be more clear that it is lead plaintiff who selects lead counsel, not the district court." While the district court had the "limited power to accept or reject the lead plaintiff's selection," it could go no further.
Holding: Remanded to district court to accept or reject lead plaintiff's selection for lead counsel according to applicable standard. (Go to Securities Litigation Watch for more on the decision.)
(2) Mandatory Discovery Stay - The PSLRA provides that "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." Whether a plaintiff suffers undue prejudice if not provided with documents that have already been produced to a government agency or in other litigations has been a contentious issue.
In In re Bank of America Corp. Securities, Derivative, and ERISA Lit., No. 09 MDL 2058 (S.D.N.Y. Nov. 16, 2009), the court considered whether to lift the discovery stay in a case related to the merger of Bank of America and Merrill Lynch. The merger is also the subject of a Delaware derivative action, an SEC action, and numerous governmental investigations. The court found that the plaintiffs had sufficiently demonstrated undue prejudice because "[d]iscovery is moving apace in parallel litigation" and without access to the documents produced in those proceedings the plaintiffs would "be less able to make informed decisions about litigation strategy."
Holding: Motion granted to lift the discovery stay as to the documents already produced in related matters. (See The American Lawyer for a comprehensive write-up of the decision, including links to all of the court filings.)
The PSLRA provides that "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." Whether a plaintiff suffers undue prejudice if not provided with documents that have already been produced to a government agency has been the subject of a number of judicial decisions.
Despite an initial split over the issue, in the past few years plaintiffs generally have been unsuccessful in arguing that there is a "government investigation" exception to the discovery stay. As noted in a recent S.D.N.Y. decision, even if it would be easy for the defendant to produce documents that had already been produced to the government, "the mere fact that the discovery stay will prevent Plaintiffs from collecting evidence to assist in potential settlement negotiations or plan their litigation strategy does not constitute undue prejudice." 380544 Canada, Inc. v. Aspen Technology, Inc., 2007 WL 2049738 (S.D.N.Y. July 18, 2007) (finding that there were no "exceptional circumstances," such as the possibility that the plaintiff would be left without a recovery because of the defendant's bankruptcy).
In the absence of appellate court affirmance of the prevailing position, however, there is always the possibility that a district court will decide to turn back the clock. Last week, in Waldman v. Wachovia Corp., 2009 WL 86763 (S.D.N.Y. Jan. 12, 2009), the court considered a request to partially lift the discovery stay in an auction rate securities case to obtain documents produced to the SEC. The court found that because "lead plaintiffs must determine whether to continue with this case despite the settlement reached between the defendants and the SEC," they had sufficiently demonstrated "undue prejudice."
Holding: Motion to partially lift the PSLRA discovery stay granted.
Three unusual recent decisions addressing the PSLRA's discovery stay, appeals from the denial of a motion to dismiss, and prolixity in complaints:
(1) While the primary securities class action against Time Warner was settled last year, a consolidated action consisting of suits by institutional investors that opted out of the main case continues on. Moreover, the plaintiffs in the consolidated action have access to the approximately 14 million documents that Time Warner produced in the primary securities class action and related state court litigation. In re AOL Time Warner, Inc. Sec. Litig., 2006 WL 1997704 (S.D.N.Y. July 13, 2006), the court addressed a "unique" request by the defendants to lift the PSLRA's discovery stay to allow them to obtain discovery from the plaintiffs. Time Warner argued, and the court agreed, that the discovery stay should be lifted because "prohibiting Time Warner's discovery of Plaintiffs while Plaintiffs are able to formulate their litigation and settlement strategy on the basis of the massive discovery Time Warner has already produced constitutes undue prejudice."
(2) The denial of a motion to dismiss is not a final judgment in a securities class action and is normally not subject to appeal. Although a district court might certify an interlocutory appeal based on the existence of a novel and dispositive legal issue, whether the district court correctly found that the plaintiff met the heightened pleading standards of the PSLRA is not usually thought to meet that criteria. In Thompson v. Shaw Group, Inc., 2006 WL 2038025 (E.D. La. July 18, 2006), however, the district court certified its denial of the defendants' motion to dismiss for appeal, finding that "reasonable minds might disagree on the issue of whether the Plaintiffs have satisfied their pleading burden under the heightened standards for securities claims." The court noted that an immediate appeal was justified because "a ruling favorable to Defendants on this issue would render years of discovery, enormous expenses incurred by the parties, and a trial on the merits unnecessary."
(3) The modern securities class action complaint can be a massive tome, primarily because of the need to meet the PSLRA's heightened pleading standards. That said, not every court appreciates getting so much reading material. In In re Leapfrog Enterprises, Inc. Sec. Litig. 2006 WL 2192116 (N.D. Cal. Aug. 1, 2006), the court addressed a 147-page consolidated complaint that it believed was unnecessarily long. After clarifying the issues in the case at oral argument, the court granted leave to amend with the express condition that the amended complaint "not exceed fifty (50) pages in length."
As posted on The 10b-5 Daily last July, the D. of Conn. held in the Crompton securities class action that discovery should be stayed in a parallel state court derivative action pursuant to SLUSA. To obtain this stay, the defendants only needed to show "a likelihood that the federal Plaintiffs will obtain state Plaintiff's discovery."
In an interesting follow-up decision - In re Crompton Corp. Sec. Litig., 2005 U.S. Dist. LEXIS 23002 (D.Conn. Aug. 16, 2005) - the court also ordered the return of the discovery that had already been produced. Although the derivative plaintiff argued that it was beyond the federal court's authority to force the return of the 2.5 million pages of electronic discovery in question, the court found that Congress had intended courts to apply the SLUSA stay provision "liberally."
Quote of note: "In granting Defendants' motion to stay discovery in [the derivative case], this Court sought to prevent the erosion of its jurisdiction during the pendency of the motion to dismiss in the federal securities class action suit. By refusing to return discovery produced to date, Plaintiff violates the letter and the spirit of the PSLRA and SLUSA, and thereby circumvents this Court's determination to preserve its jurisdiction."
As part of the Securities Litigation Uniform Standards Act of 1998 ("SLUSA"), Congress mandated that "a court may stay discovery proceedings in any private action in state court, as necessary in aid of its jurisdiction, or to protect or effectuate its judgments, in an action subject to a stay of discovery pursuant to [the PSLRA]." One of the primary goals of this provision was to prevent plaintiffs from using a simultaneous state court action to circumvent the mandatory discovery stay imposed by the PSLRA in federal securities fraud cases. There is a growing judicial debate over when courts should exercise this power.
A court in the D. of Conn. has taken a broad view of the provision's applicability. In a decision handed down last Friday in In re Crompton Corp. Sec. Litig., 3:03-CV-1293 (D. Conn. July 22, 2005), the court held that discovery should be stayed in a parallel state court derivative action. The defendants only needed to show "a likelihood that the federal Plaintiffs will obtain state Plaintiff's discovery." In this regard, the court found that a substantial portion of the federal and state complaints were identical and that the derivative plaintiff was "a putative class member in the federal action, and her receipt of discovery without a showing that it is necessary to preserve evidence or prevent undue prejudice violates the PSLRA." The court also noted that it would be burdensome to the defendants to produce the same discovery that had been stayed, the risk of inconsistent rulings between the federal and state courts was high, and the derivative plaintiff would not be prejudiced by the stay. (The 10b-5 Daily will post an electronic cite to the decision when available.)
Holding: Motion for protective order granted.
Addition: The decision can be found electronically here - In re Crompton Corp. Sec. Litig., 2005 U.S. Dist. LEXIS 23001 (D. Conn. July 25, 2005).
Some miscellaneous items that have been piling up in The 10b-5 Daily's mailbox and around the web:
1) There is an interesting commentary, entitled "The Incoherent Jurisprudence of the PLSRA Discovery Stay," in the May 18, 2005 issue of the Andrews Securities Litigation and Regulation Reporter (Westlaw cite: 11 No. 1 ANSLRR 2). The author (Jesse Weiss) examines the applicability of the stay where: (a) defendants have produced documents to government agencies; (b) plaintiffs have brought state law claims in addition to federal securities fraud claims; or (c) there are parallel proceedings in state or federal court.
(2) Securities Litigation Watch tries to track down the elusive answer to the following question: exactly how many securities class actions have gone to trial since the passage of the PSLRA? (As The 10b-5 Daily recently noted, everyone has a different number.)
As part of the Securities Litigation Uniform Standards Act of 1998 ("SLUSA"), Congress mandated that "a court may stay discovery proceedings in any private action in state court, as necessary in aid of its jurisdiction, or to protect or effectuate its judgments, in an action subject to a stay of discovery pursuant to [the PSLRA]." One of the primary goals of this provision was to prevent plaintiffs from using a simultaneous state court action to circumvent the mandatory discovery stay imposed by the PSLRA in federal securities fraud cases. Exactly when, where, and under what circumstances a court should use this power, however, has been the subject of recent debate.
In City of Austin Police Ret. Sys. v. ITT Educational Services, Inc., 2005 WL 280345 (S.D. Ind. Feb. 2, 2005), the court addressed whether it should stay a related books and records action brought in Delaware state court. Plaintiff's counsel in the books and records action had previously filed "several" of the federal securities cases consolidated by the court and had unsuccessfully sought to be named lead counsel. In addition, the books and records action sought company records directly related to the fraud allegations in the federal securities case, albeit as a stated precursor to bringing a derivative suit for breach of fiduciary duties.
While the plain language of SLUSA states that it is applicable to any private action in state court, the court found that an intent to evade the PSLRA's stay of discovery "should probably be the biggest factor in deciding how far to extend SLUSA's discovery stay provision beyond the securities fraud cases that are its principal target." In the instant case, the court found that there was no convincing evidence of an intent to circumvent the PSLRA. The court also noted that plaintiff's counsel had no further involvement in the federal litigation and was "willing to enter a protective order in the Delaware case that would bar them from sharing information with plaintiffs' counsel in this case." Under these circumstances, the court declined to enter the requested stay.
It did not take long for another federal district court to strongly disagree with the ITT Educational decision. In In re Cardinal Health, Inc. Sec. Litig., 2005 WL 894693 (S.D. Ohio March 1, 2005), the court addressed whether it should stay discovery in a state court derivative action relating to the same accounting issues raised in the pending federal securities class action. The court found that "[h]ad Congress intended to limit [the SLUSA discovery stay] to securities fraud actions, it could have done so." Moreover, the plain language of the statue "includes no mention of a requisite intent to circumvent the PSLRA." The court held that the imposition of a discovery stay in the derivative case was appropriate for three reasons: (1) trial in the derivative case was set to begin within a year, leading to a strong possibility that some form of discovery would reach the federal plaintiffs; (2) the derivative case involved the same subject matter as the federal securities class action, raising concerns that the courts might issue inconsistent rulings; and (3) complying with similar discovery requests would be duplicative and burdensome.
Addition: A similar situation arose in the El Paso Corp. securities litigation last year. In a post about an unsuccessful SLUSA discovery challenge brought by the defendants in state court, The 10b-5 Daily questioned whether the defendants would have been better off making the same arguments in federal court. The answer is provided in the ITT Educational decision - "After the Delaware court declined to stay the action under SLUSA, the district judge presiding over the Wyatt case in the Southern District of Texas issued a one-line order staying the Cohen Section 220 action. Wyatt v. El Paso Corp., No. H-02-2717 (S.D.Tex. Dec. 8, 2004)."
The New York Law Journal has a column (via law.com - free regist. req'd) on the hazards of cooperating with government investigations. Among the possible consequences is that securities plaintiffs may be able to lift the PSLRA's mandatory discovery stay. The 10b-5 Daily has covered the district court spit on this issue extensively, most recently in a post from last September entitled "The 'Government Investigation' Exception."
Quote of note: "Recently, some courts have been moved by the argument that sustaining the mandatory stay would unduly prejudice or unfairly disadvantage plaintiffs otherwise unable to gain access to documents already produced to government agencies conducting investigations that mirror plaintiffs' claims. Reasoning that securities plaintiffs would be unfairly kept out of the judicial loop without access to the documents already held by those agencies while parallel investigations and prosecutions proceeded, these courts have determined that plaintiffs are entitled to have these same documents."
The Court of Chancery of Delaware has issued an opinion on the interaction between the PSLRA's discovery stay and 8 Del. C. Sec. 220, which allows shareholders to inspect certain books and records of a corporation. In Cohen v. El Paso Corp., 2004 WL 2340046 (Del. Ch. Oct. 18, 2004), the court addressed whether the discovery stay in effect in a federal securities class action brought against El Paso preempted the court from hearing Cohen's Sec. 220 action.
Although the court conceded that Cohen's complaint relied on similar facts to those forming the basis of the federal securities fraud claims, it found that nothing supported El Paso's assertion that Cohen was attempting to aid the class action plaintiffs. Moreover, the records sought by Cohen did not "pertain directly to a federal securities law claim asserted in a pending federal action," but rather to "state law claims of waste, mismanagement and breach of fiduciary duty." The court therefore held that the PSLRA did not "operate to preempt or otherwise interrupt Cohen's Sec. 220 action."
Holding: Motion to stay or dismiss denied.
Quote of note: "Neither the PSLRA nor SLUSA prevents a state court from considering a books and records demand, or similar state corporate law claims, merely because one of the parties to the state action is protected by a PSLRA automatic discovery stay in an unrelated federal securities class action."
Addition: An open question (or so it would appear) is whether El Paso might have more success arguing to the federal judge presiding over the securities class action that he/she should stay the Section 220 action pursuant to SLUSA, which states that "a court may stay discovery proceedings in any private action in state court, as necessary in aid of its jurisdiction, or to protect or effectuate its judgements, in an action subject to a stay of discovery pursuant to [the PSLRA]."
Thanks to Jesse Weiss for sending the opinion to The 10b-5 Daily.
The PSLRA provides that "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." A district court split has developed over whether this provision allows for the discovery, prior to a decision on a motion to dismiss, of documents that have been produced to government entities. (See this post.)
In In re LaBranche Sec. Litig., 2004 WL 1924541 (S.D.N.Y. Aug. 27, 2004), Senior Judge Sweet agreed with those courts holding that not allowing plaintiffs access to documents previously produced to government entities would cause "undue prejudice." LaBranche had already settled with the SEC and NYSE and the court found that the plaintiffs needed the documents produced to those organizations "to make informed decisions about their litigation strategy in this rapidly shifting landscape." The New York Law Journal has an article (via law.com - free regist. req'd) discussing the decision.
The PSLRA provides that "all discovery and other proceedings shall be stayed during the pendency of any motion to dismiss" unless the court determines "that particularized discovery is necessary to preserve evidence or to prevent undue prejudice to that party." The exact meaning of "necessary to preserve evidence" and "prevent undue prejudice" has been the subject of frequent litigation.
As discussed in The 10b-5 Daily, two recurring issues are: (a) whether defendants should be required to produce documents that previously have been produced to governmental entities (see this post); and (b) whether the discovery stay should also apply to related federal cases that do not allege securities law claims (see this post). District courts have come to markedly different conclusions.
In In re Royal Ahold N.V. Sec. & ERISA Litig., 2004 WL 502558 (D. Md. March 12, 2004), the court addressed both issues at the same time. Advantage: the plaintiffs.
The court held that Royal Ahold must produce any documents it had previously given to governmental entities and the reports of various internal investigations conducted by the company. First, the court found that there was a need to preserve evidence because Royal Ahold's corporate reorganization, including the divestiture of subsidiaries relevant to the case, added "urgency to the discovery timetable." Although there was no risk that the documents requested by the plaintiffs would be destroyed, they "could help the plaintiffs identify other specific materials that may be at risk of loss."
Second, the court found that the securities plaintiffs might suffer undue prejudice by being denied discovery that was available to other litigants. In particular, the court held that the discovery stay did not apply to the related ERISA litigation and, therefore, "the securities plaintiffs could suffer a severe disadvantage in formulating their litigation and settlement strategy -- particularly if [all of] the parties proceed quickly to settlement negotiations, as the court has urged them to do."
Holding: Partial lifting of discovery stay (although the court, at the request of the government, postponed production of the investigative reports).
According to a Reuters report, plaintiffs' counsel in the securities class action pending against Parmalat SpA in the S.D.N.Y. has sought a court order preventing the destruction of documents by the company and its advisors. District Judge Lewis Kaplan was apparently unimpressed with the request. Noting that destruction of documents is a criminal offense and any order would be redundant, the judge suggested at a hearing on Friday that the request for an order was done mainly for the benefit of the media. "If anyone wants to file papers on this, God bless them," Judge Kaplan said. "But don't waste my time."
Quote of note: In response to plaintiffs' counsel's description of the Parmalat case as "unusually high-profile," Judge Kaplan responded - "Not by the standards of this district. There is nobody named Martha in this case."
The PSLRA provides that "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." Based on the legislative history, Congress was concerned about the high costs associated with discovery and the possibility that defendants would be forced into early settlements to avoid these costs.
An open question, however, is whether the discovery stay should be applied to related federal cases that do not allege securities law claims. In In re AOL Time Warner, Inc. Sec. and "ERISA" Litig., 2003 WL 22227945 (S.D.N.Y. Sept. 26, 2003), the court stayed all non-ERISA specific discovery. The court found: "If plaintiffs in a securities case could, by tacking ERISA claims onto underlying Securities actions, obtain discovery to which they would otherwise not be entitled under the PSLRA, then the PSLRA's mandatory stay provision would, as a practical matter, never apply. Congress could not possibly have intended for the PSLRA to be so easily marginalized." (The 10b-5 Daily has previously posted about the case.)
The court in In re FirstEnergy Shareholder Derivative Lit., 2004 WL 161330 (N.D. Ohio Jan. 26, 2004) has recently disagreed with this approach (the opinion cites the AOL decision, but does not discuss it). Derivative and securities class action cases have been brought against FirstEnergy based on the same course of conduct. The defendants argued that discovery in the derivative case should be stayed pending a decision on the motion to dismiss in the securities class action, noting that the discovery could be used to assist the securities class action plaintiffs. The court found that the PSLRA is silent on the issue of staying discovery in derivative cases and it refused to "read in this silence Congress's intent to prevent discovery in non-securities fraud cases simply because the cases share facts in common with securities fraud cases." The court also declined to grant a protective order under Fed. R. Civ. Proc. 26(c).
Holding: Motion for stay of discovery denied.
Quote of note: The FirstEnergy court also found that permitting discovery to go forward would not frustrate the PSLRA's goals because "an exchange [between the derivative and securities class action plaintiffs] of information, otherwise discoverable in this derivative action, facilitates the purpose of Fed. R. Civ. Proc. 1." This appears difficult to reconcile with the PSLRA's legislative history and the holding in AOL.
The mandatory discovery stay in the PSLRA is often the subject of contention in securities class actions. The PSLRA provides that "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."
A minor district court split has developed over whether this provision allows for the discovery, prior to a decision on a motion to dismiss, of documents that have been produced to governmental entities. Compare, e.g., In re Enron Corp. Securities, Derivative & ERISA Litig., 2002 WL 31845114 (S.D. Tex. Aug. 16, 2002) (permitting partial lifting of discovery stay for documents made available to government entities because burden would be slight and the documents had already been made available outside of securities case) with In re Vivendi Universal, S.A. Sec. Litig., 2003 WL 21035383 (S.D.N.Y. May 6, 2003) (statute does not create exception for documents previously produced to governmental agencies and plaintiffs failed to establish the need to preserve evidence or undue prejudice). The 10b-5 Daily has previously posted about the Vivendi decision.
The N.D. of Alabama has now weighed in on the issue. In In re HealthSouth Securities Litigation, CV-03-BE-1500-S (N.D. Ala. Dec. 8, 2003), relevant documents had been produced to Congress and to the parties in a derivative lawsuit filed against HealthSouth in Delaware state court. Plaintiffs argued that "adherence to the two exceptions enumerated in the [PSLRA's mandatory discovery stay] would create absurd results in a case like this one of admitted securities fraud and where a discovery stay would not effectuate Congress' goals in enacting the statute." The court, however, found that allowing plaintiffs to use documents produced to Congress "is not only inconsistent with the statute's plain language, but creates an absurd result in direct contravention of Congress' intent to protect defendants from the possibility that documents produced to governmental entities may by used by the plaintiffs in formulating a complaint or in opposing a motion to dismiss."
Holding: Motion to partially lift discovery stay denied.
Thanks to Matt Herrington for pointing The 10b-5 Daily to this decision.
As The 10b-5 Daily has discussed in numerous posts over the past few months, the recent trend in securities fraud cases is for employees who lost retirement savings as a result of their investment in company stock to file an ERISA class action against the company that parallels the pending securities class action on behalf of all investors. In the ERISA class action, the employees allege the company and its officers violated their fiduciary duties under ERISA by making false statements that induced employees to invest in the stock at artificially inflated prices. One of the problems with these cases, commentators have noted, is that they allow plaintiffs to make an end run around the procedural safeguards of the PSLRA. Because they are brought under ERISA, rather than the federal securities laws, plaintiffs can obtain early discovery and seek to force a quick settlement.
The AOL Time Warner litigation may provide some comfort for defendants on this issue, especially if they are able to obtain consolidation of the pre-trial proceedings in the cases. The Judicial Panel on Multidistrict Litigation consolidated the AOL Time Warner ERISA and securities class actions last December, "in order to eliminate duplicative discovery, prevent inconsistent pretrial rulings (especially with respect to questions of class certification), and conserve the resources of the parties, their counsel and the judiciary." In re AOL Time Warner, Inc. Sec. Litig., 235 F. Supp. 2d 1380 (J.P.M.L. 2002). The consolidated action is being heard before Judge Kram in the S.D.N.Y.
The court has recently ruled on whether a discovery stay should be applied to the consolidated action, despite the fact that the PSLRA mandatory discovery stay does not apply to ERISA cases. In re AOL Time Warner, Inc. Sec. and "ERISA" Litig., 2003 WL 22227945 (Sept. 26, 2003 S.D.N.Y.). Judge Kram found that "the ERISA plaintiffs are seeking very broad discovery, a significant portion of which concerns issues common to the Securities Action." Not only was the burden on defendants high, but "if the Securities Action does survive the Motion to Dismiss, the entire discovery process will likely have to be repeated." The court rejected the ERISA plaintiffs' argument that they would suffer prejudice as a result of the stay, noting that there were no time-sensitive claims at issue, and found that the creation of a protective wall between the ERISA plaintiffs and the securities plaintiffs would be untenable. As a result, the court concluded that "a stay of all non-ERISA-specific discovery is efficient, non-prejudicial, and best comports with the purposes of the PSLRA."
Holding: Motion for limited stay of discovery granted.
Quote of note: "If plaintiffs in a securities case could, by tacking ERISA claims onto underlying Securities actions, obtain discovery to which they would otherwise not be entitled under the PSLRA, then the PSLRA's mandatory stay provision would, as a practical matter, never apply. Congress could not possibly have intended for the PSLRA to be so easily marginalized."
The PSLRA provides that "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." With the passage of SLUSA, Congress attempted to strengthen the discovery stay by granting the power to federal court judges to quash discovery in state court actions if discovery in the state case conflicted with an order of the federal court.
In Newby v. Enron Corp., 2003 WL 21658666 (5th Cir. July 30, 2003), the underlying lawsuit was a state court action in Texas (Bullock), filed on behalf of thirteen individuals, against many of the same defendants as in the Enron federal securities class action litigation (Newby). The plaintiffs received permission from the state court to commence discovery, even though there was no dispute "that the discovery sought in Bullock would have fallen squarely within the discovery that may eventually take place in Newby if the plaintiffs survive a motion to dismiss." The defendants requested emergency injunctive relief from the U.S. District Judge presiding over the Newby case to stay discovery in the Bullock case. Pursuant to SLUSA, the discovery was enjoined until a ruling on the motion to dismiss in the Newby case. The Bullock plaintiffs appealed.
In Newby, the Fifth Circuit addressed whether the power granted to federal court judges to quash state court actions is only limited to state court actions brought on behalf of a class of investors. The plain language in SLUSA would appear to suggest otherwise, "a court may stay discovery in any private action in a State court . . . ." Appellants argued, however, that (1) the PSLRA and SLUSA were enacted to combat abuses in class action securities cases; and (2) other provisions of SLUSA refer specifically to state court class actions and control over the more general terminology in the operative provision.
Not surprisingly, the Fifth Circuit decided to stick with the plain language of the statute. "The title of [the SLUSA provision] reflects its purpose: to prevent the 'circumvention of stay of discovery' provided for in [the PSLRA]. The provision in [SLUSA] allows the federal court presiding over an action subject to the automatic stay of discovery to order a similar stay in a state court action. On its face [the SLUSA provision] applies to 'any private action in a State court.' The action stayed by the district court is plainly within the scope of this clause."
Holding: Stay of discovery affirmed (the panel also upheld additional injunctive relief granted by the district court).
The PSLRA provides that "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." Seven years after the passage of the PSLRA, the parameters for the exception to the discovery stay are still being established.
In In re Vivendi Universal, S.A., Sec. Litig., 2003 WL 21035383 (S.D.N.Y. May 6, 2003), plaintiffs moved for the discovery of documents already produced by the defendants to the DOJ, SEC, and two French regulatory agencies. Plaintiffs argued that a "partial lift on the stay of discovery is necessary because defendants are liquidating certain subsidiaries or affiliates of the Vivendi corporation, and there is a risk that documents may be lost with the transfer of control over portions of defendants' business." Based on defendants' representations that (1) documents would not be destroyed and (2) they had retained copies of any documents previously produced to investigators, the court held that there was no basis for concluding that evidence needed to be preserved or that plaintiffs had shown "exceptional circumstances" warranting the lifting of the stay.
Holding: Motion to lift the stay on discovery denied.
Quote of note: "Although the Second Circuit has yet to make any pronouncement, district courts here and elsewhere have construed 'undue prejudice' to mean 'improper or unfair treatment amounting to something less than irreparable harm.'"