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.”