March 19, 2004 · 10:11 pm
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; and (b) whether the discovery stay should also apply to related federal cases that do not allege securities law claims. 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).
February 16, 2004 · 6:47 am
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.”
February 2, 2004 · 3:22 pm
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.
December 18, 2003 · 8:28 pm
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.
October 24, 2003 · 6:50 pm
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.”
August 1, 2003 · 6:04 pm
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).
May 15, 2003 · 7:06 pm
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.'”