Category Archives: Discovery Stay

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.

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).

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 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.

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.