Opinion
CIVIL ACTION NO. 3:02-CV-2243-K.
July 30, 2004
MEMORANDUM OPINION AND ORDER
Before the Court is the TXU Defendants' Motion to Stay Parallel State Court Securities Action. Having considered the merits of the motion, and for the reasons stated below, the motion is GRANTED.
I. Background
This case is the consolidation of thirty securities class actions alleging violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934 ("1934 Act"), and Rule 10b-5 promulgated thereunder. Some petitions also allege violations of sections 11 and 12 of the Securities Act of 1933 ("1933 Act"). Plaintiffs Richard Schwartz, Roslyn Feder, White Lion Partners, Michael Connor, and Dale Lynn Connor ("Schwartz Plaintiffs") originally filed this case alleging that the Defendants made several false and misleading statements about the Company's financial status, causing them and similarly situated shareholders to suffer millions of dollars in losses. Specifically, the various Plaintiffs contend that Defendants' statements caused an artificial inflation in the stock price, which plummeted when TXU Corp. unexpectedly disclosed that its financial position required it to drastically reduce its projected dividend and sell most of its failing European assets.
In addition to this case, four plaintiffs have filed a similar securities fraud action in Texas state court. That case is Mark L. and Jocelyn K. Roth, as Trustees of the Mark L. Roth C.P.A. Money Purchase Plan and Trust, et al. v. TXU Corp., et al., No. 03-03159-B, and is currently pending in the 44th Judicial District Court for Dallas County, Texas (hereinafter referred to as "Roth"). In Roth, the plaintiffs allege that TXU Corp., CEO Erle Nye, and CFO Michael J. McNally made false and misleading statements as part of a fraud perpetuated on TXU's investors. The focal point of their claims is the reduction in TXU's historical dividend, which precipitated the stock price decline that led, in part, to the claims now consolidated in the present case. The TXU Defendants filed this motion in order to prevent the state court from issuing substantive rulings on issues in Roth which could potentially apply to this case, thus raising potential conflicts between the rulings of the courts.
II. Applicable Law
The Private Securities Litigation Reform Act ("PSLRA"), 15 U.S.C. § 78u-4(b)(3)(B), passed by Congress in 1997, provides for a stay of all discovery in a securities fraud case while a motion to dismiss is pending. The purpose of the discovery stay is to prevent costly in-depth discovery and disruption of the defendants' normal business activities until a court can determine whether a suit which has been filed is meritorious. See Newby v. Enron Corp., 338 F.3d 467, 471 (5th Cir. 2003). Initially, the discovery stay in federal cases led many plaintiffs to file suit in state court where no such provisions existed. Congress responded to this undesirable shift of securities litigation to state courts by enacting the Securities Litigation Uniform Standards Act ("SLUSA"), 15 U.S.C. § 78u-4(b)(3)(D), which was meant to prevent plaintiffs in securities fraud cases from evading the protections afforded by PSLRA's discovery stay. See id. SLUSA addressed the problems caused by plaintiffs filing securities fraud cases in state court in two ways: (1) by preempting certain securities fraud class actions brought pursuant to state law; and (2) by granting federal district courts the power to quash discovery in state court actions if discovery in the state case conflicted with an order of the federal court. See id. Upon a proper showing, SLUSA allows a court to stay discovery proceedings in any private action in a state court, "as necessary in aid of its jurisdiction, or to protect or effectuate its judgments." 15 U.S.C. § 78u-4(b)(3)(D); Newby, 338 F.3d at 472. This provision allows a district court to stay discovery in any related state court proceeding, whether the case is a class action or not. See id. at 473.
III. Analysis
The TXU Defendants ask the Court to stay all discovery in Roth until the Court rules on the motions to dismiss currently pending in this case, and at that time, to coordinate discovery and other pretrial matters in Roth with discovery and pretrial matters in this case. The Roth plaintiffs oppose the TXU Defendants' motion.
The Roth plaintiffs attempt to avoid a stay of discovery in the state case by urging the Court to consider the fact that their claims are but a fraction of the claims to be considered in this case. Specifically, they argue that "[g]iven the extremely narrow scope of the state court suit filed by Roth, et al. when compared with the breadth of the federal lawsuit in this Court, it is clear that the corresponding scope of discovery in Roth, et al.'s state court will be far narrower and much more limited than that which will inevitable occur in the federal court lawsuit." While that may be true, the Roth plaintiffs do not dispute that some of the discovery which will likely occur in Roth would probably be duplicative of some of the discovery which could potentially take place in this case.
Under Newby, the Court may issue a stay of discovery in Roth if a stay is either "necessary in aid of its jurisdiction, or to protect its judgments." Newby, 338 F.3d at 473 ( quoting 15 U.S.C. § 78u-4(b)(3)(D)). In this case, a stay of discovery in Roth is warranted in order to aid the Court's jurisdiction. Simply stated, if the Court does not stay discovery in Roth, its jurisdiction to rule upon the motion to dismiss the plaintiffs' federal securities claims filed in this case, before any discovery has been conducted, will have been circumvented by discovery in the state court actions and, therefore, compromised.
Indeed, both this case and Roth involve the TXU Defendants' alleged misrepresentations about the security of TXU Corp.'s dividend. Without a stay of the Roth discovery, there is a very real possibility that the TXU Defendants would have to provide discovery to the Roth plaintiffs on matters relating directly to the claims of the plaintiffs in this case while the PSLRA discovery stay is still in effect. Although the Roth plaintiffs are not necessarily putative plaintiffs in this class action, the legislative history of SLUSA establishes that SLUSA is designed to be liberally applied to prevent circumvention of the discovery stay made part of the PSLRA. See id. at 471 ( quoting H. Rep. 105-640 (1998)).
Accordingly, the Court hereby rules as follows:
it is hereby ORDERED that all discovery in Roth is stayed until discovery in this action is allowed;
it is further ORDERED that all parties to the Roth action are hereby enjoined from conducting any discovery in Roth before any discovery in this action is allowed;
it is further ORDERED that after discovery is allowed to proceed in this case, all parties to the Roth action are to coordinate discovery and other pretrial matters in the Roth action with discovery and pretrial matters in this case; and
it is further ORDERED that all the parties to the Roth action are hereby enjoined from seeking, and the 44th Judicial District Court of Dallas County, Texas is enjoined from issuing, any scheduling or pretrial order in Roth which is inconsistent with a scheduling or pretrial order in this action or from setting Roth for trial before the trial in this action.
SO ORDERED.