What Does Undue Mean To You?

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.

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