Summary
lifting the stay to allow the deposition a former defendant employee
Summary of this case from In re Lernout & Hauspie Secs. Litig.Opinion
Civil No. 00-360-HA
December 13, 2000
AMENDED OPINION AND ORDER
This opinion has been amended to correct errata on page three. The citation to "Palmquist" in the original has been amended to "Cowen." No substantive changes have been made.
I. Introduction and Background.
Pending before the court are two motions: (1) defendants' joint motion for reconsideration or, in the alternative, stay of order permitting discovery; and (2) defendants' joint motion for a protective order. These motions relate to this court's Order of November 14, 2000, in which the court, pursuant to 15 U.S.C. § 78u-4(b)(3)(B), allowed the plaintiffs to depose former-Flir employee Steven Palmquist. That order arose out of a November 13, 2000 hearing on defendants' motion to dismiss plaintiffs' complaint for failure to meet the heightened scienter pleading requirements of the Private Securities Litigation Reform Act ("PSLRA").
In response to the defendants' motion, plaintiffs submitted a copy of a complaint filed in Oregon state court by Palmquist. In his state-court complaint, Palmquist alleged, among other things, that Flir's Chief Financial Officer, Defendant Mark Samper, and Flir's President, Defendant Ken Stringer, had engaged in "improper accounting and reporting practices relating to falsely booking sales and revenue, and then subsequently reversing or substituting the factitious sales after the relevant reporting period had closed." (Palmquist Complaint at ¶ 8.) The court found that the plaintiffs had "identified a former Flir employee who has filed a lawsuit alleging that defendants willfully engaged in the same type of accounting irregularities that are at the core of plaintiffs' complaint." (Order at 2.) Palmquist, however, refused to talk to plaintiffs' attorneys unless he was required to do so pursuant to a subpoena. (Id.) As a result, the court ruled that "undue prejudice would result if it were to grant defendants' motion to dismiss without allowing plaintiffs to depose Palmquist so that they may plead, if they can, particularized facts corroborating their allegations that defendants willfully engaged in fraud." (Order at 2.) The court also denied defendants' motion to dismiss without prejudice, and allowed plaintiffs to replead their allegations in an amended complaint. Plaintiffs have now submitted an affidavit averring that Palmquist refused to talk to them because defendants essentially threatened Palmquist with legal action if he did so. (Larson Aff. at ¶ 5.)
On November 29, 2000, defendants filed their motion for reconsideration, arguing that this court erred in allowing limited discovery as to Palmquist under SG Cowen Sec. v. United States District Court for the Northern District of Cal., 189 F.3d 909 (9th Cir. 1999). At the time of the hearing and the court's order, neither the parties nor the court were aware of the Cowen decision. On December 7, 2000, defendants filed a motion for a protective order barring the plaintiffs from taking Palmquist's deposition, which is currently scheduled for December 20 and 21, 2000, pending resolution of their motion for reconsideration or a petition for writ of mandamus from the Ninth Circuit. On December 8, 2000, defendants also petitioned the Ninth Circuit for a writ of mandamus directing this court to vacate its limited discovery order. The court notes that even if the Ninth Circuit issues a writ of mandamus regarding the Palmquist discovery, the court has already given plaintiffs leave to file an amended complaint so that their new allegations can be reviewed.
II. Discussion.
In Cowen, a district court allowed limited discovery to proceed against the defendants despite the stay imposed by the PSLRA. Id. at 911-12. The district court in Cowen believed that the plaintiffs' allegations did not satisfy the PSLRA's scienter requirement, but came close to doing so. Id. at 912. The district court allowed plaintiffs to attempt to obtain those facts by ordering limited discovery from the defendants. The Ninth Circuit found that the district court erred, stating that "as a matter of law, failure to muster facts sufficient to meet the Act's pleading requirements cannot constitute the requisite `undue prejudice' to the plaintiff justifying a lift of the discovery stay under § 78u-4(b)(3)(B)." Id. at 913. The case at bar is significantly different than Cowen.
As an initial matter, the discovery in Cowen was directed against the defendants. In this case discovery has been allowed to proceed only as to a single third party. This distinction is not without importance. The PSLRA's stay on discovery was "intended to prevent unnecessary imposition of discovery costs on defendants." Id. at 911 (quoting H.R. Conf. Rep. No. 104-369, 104th Cong. 1st Sess. at 32 (1995), reprinted in 1995 U.S.C.C.A.N. Sess. 731). Congress was concerned, for example, that "the threat that time of key employees will be spent responding to discovery requests, including providing deposition testimony, often forces coercive settlements. . . ." Id. (quoting 1995 U.S.C.C.A.N. Sess. at 733). Those concerns are not present here. Palmquist is not a defendant, nor is he a current employee of defendant. As a result, the reasons for the PSLRA's stay of discovery are diminished when discovery is sought only from a single third party, not a defendant.
Additionally, unlike Cowen, the court has not allowed his deposition merely as part of a fishing expedition in hope that the person subject to the discovery might be able to provide something helpful to the plaintiffs. Here, Palmquist has already filed a civil complaint in state court that directly corroborates plaintiff's allegations of fraud. By placing in his civil complaint allegations of Flir's accounting fraud, Palmquist has verified that his allegations "are supported by evidence." Oregon Rule of Civil Procedure 17(providing sanctions for unsubstantiated allegations in civil complaints). As a result, it is highly likely that Palmquist, a third party, has significant information about defendants' alleged fraud, information which Palmquist has already certified in state court documents to be true.
Finally, the only reason Palmquist has not already shared his information with the plaintiffs is that the defendants have essentially threatened him with legal action if he does so. In response to the motion for reconsideration, plaintiffs' have attached an affidavit of Steve Larson, one of plaintiffs' attorneys, which states as follows:
3. In the course of our investigation of this matter, plaintiffs' counsel learned that Steve Palmquist, the Vice President of Engineering, sent a memo to Ken Stringer, the CEO of Flir, in March, 1999 outlining accounting concerns. We also learned that Stringer and Flir refused to change these accounting practices so Palmquist resigned in July, 1999. According to Mr. Palmquist's attorney, Palmquist sent a resignation letter to the company that outlines the accounting misrepresentations.
. . .
5. In mid-March, 2000, I contacted Mr. Palmquist's attorney, Samuel Nicholls, to ask for copies of the March, 1999 memo to String and the resignation letter. Mr. Palmquist's attorney told me he would provide documents to us, and he would allow us to meet with Mr. Palmquist. However, a day or so later, Mr. Palmquist's attorney informed us that the attorney for Flir defending Palmquist's lawsuit had demanded that the resignation letter and the March memorandum, as well as any other documents that Mr. Palmquist had regarding Flir, be returned to Flir or Palmquist would be in violation of confidentiality provision of an employment contract. Mr. Palmquist's attorney told us that because of this assertion by Flir, he would not be able to provide us with copies of the documents and he would not be able to make Mr. Palmquist available for an interview, absent a subpoena.
(Larson Aff. at ¶ 5.) Thus, Palmquist is unavailable only because defendants have taken steps to ensure that Palmquist could not talk to plaintiffs or provide relevant documents without the protection of being ordered to do so pursuant to a subpoena.
In their motion for reconsideration, defendants claim that deposing Palmquist is inappropriate and contrary to the PSLRA; yet, defendants have arranged that the information Palmquist possesses can be obtained only if he is deposed. The PSLRA is a shield intended to protect security-fraud defendants from costly discovery requirements, Cowen, 189 F.3d at 911, not to be a sword with which defendants can destroy the plaintiffs' ability to obtain information from third parties who are otherwise willing to disclose it. Allowing defendants to seek dismissal of plaintiffs' complaint without affording plaintiffs the opportunity to discover Palmquist's information regarding defendants' fraud-information which is known to exist and which has been withheld only as a result of defendants' efforts to silence Palmquist-would result in "undue prejudice" to plaintiffs.
III. Conclusion.
For the foregoing reasons, defendants' motion for reconsideration of the court's discovery order, (doc. 36), is denied. In order to allow the Ninth Circuit to decide defendants' petition for mandamus, however, the court shall grant defendants' motion for a protective order barring plaintiff's from taking the Palmquist deposition on December 20 and 21, 2000, (doc. 36), and defendants' motion for a stay of discovery pending a ruling by the Ninth Circuit on the mandamus petition, (doc. 38). The Clerk of the Court shall immediately send a copy of this Opinion and Order to the Ninth Circuit Court of Appeals for inclusion in the materials for its mandamus decision.
IT IS SO ORDERED.