Adding Exceptions To The Discovery Stay

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.

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