Opinion
No. 03 Civ. 6942 (SAS).
February 17, 2005
Blair C. Fensterstock, Esq., Maureen McGuirl, Esq., Fensterstock Partners, L.L.P., New York, New York, Attorney for Plaintiffs.
Laurence M. Hill, Esq., Seth C. Farber, Esq., Dewey Ballantine, L.L.P., New York, New York, Attorney for Defendants Deutsche Bank AG and Deutsche Bank Securities.
Andrew A. Ruffino, Esq., Covington Burling, New York, New York, Bruce D. Abbot, Esq., Munger, Tolles Olson, L.L.P., Los Angeles, California, Attorneys for Defendants Sidley Austin Brown Wood.
Stuart Abrams, Esq., Frankel Abrams, New York, New York, Attorney for Defendant R.J. Ruble.
MEMORANDUM OPINION AND ORDER
I. INTRODUCTION
The Seippels' First Amended Complaint stated federal claims under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962, and state law claims for malpractice, fraud, and disgorgement of excessive fees. The Court has jurisdiction over the Seippels' state law claims on the basis of diversity. In an Opinion and Order dated August 25, 2004, I dismissed the RICO claims, on the ground that the Seippels had alleged a potential securities fraud claim, and the RICO claims were therefore barred by Section 107 of the Private Securities Litigation Reform Act ("PSLRA"). I also dismissed the Seippels' malpractice claims as time-barred, but sustained their common law fraud and disgorgement claims. Finally, I granted the Seippels leave to replead to add a securities fraud claim.
See Seippel v. Jenkens Gilchrist, P.C., 341 F. Supp. 2d 363 (S.D.N.Y. 2004).
Pub.L. No. 104-67, § 107. The PSLRA amended RICO to provide that "no person may rely upon conduct that would have been actionable as fraud in the purchase or sale of securities to establish a violation of section 1962." 18 U.S.C. § 1964(c).
The Seippels filed a Second Amended Complaint, with a securities fraud claim, on December 8, 2004. On January 25, 2005, defendants Sidley Austin Brown Wood, joined by R.J. Ruble ("Brown Wood") and Deutsche Bank AG and Deutsche Bank Securities ("Deutsche Bank") moved to dismiss the Second Amended Complaint. Because the Second Amended Complaint contains a securities fraud claim, defendants maintain that all discovery should be stayed pursuant to the PSLRA's discovery stay provisions. The Seippels seek to proceed with discovery, arguing that the PSLRA's discovery stay provisions do not, given the circumstances of this case, apply to their state law claims.
On February 1, 2005, the Court heard oral argument, and issued a partial ruling. This Order represents the Court's full and final ruling on this issue.
II. APPLICABLE LAW
Section 21D(b)(3)(B) of the 1934 Act, added as part of the PSLRA, reads in pertinent part:
In any private action arising under this chapter, 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.
Furthermore, 15 U.S.C. § 78u-4(b)(3)(D), entitled "Circumvention of stay of discovery," states:
Upon a proper showing, a court may 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, in an action subject to a stay of discovery pursuant to this paragraph.
Identical provisions apply to any private action brought under the Securities Act of 1933.
See 15 U.S.C. §§ 77z-1(b)(1) and (b)(4).
III. DISCUSSION
Courts "have modified the discovery stay in [cases] involving concurrent investigations by governmental agencies when doing so would not frustrate Congress' purposes in enacting the PSLRA." In such cases, courts have lifted the stay as to documents which have already been produced to the government, on the ground that the cost of such discovery to defendants is minimal, as the documents have already been compiled for production, while plaintiffs would suffer severe prejudice if discovery in their case is delayed while government investigations and other lawsuits proceed ahead of them.
In re LaBranche Sec. Litig., 333 F. Supp. 2d 178, 181 (S.D.N.Y. 2004) (citing In re Firstenergy Corp. Sec. Litig., 316 F. Supp. 2d 581 (N.D. Ohio 2004); Singer v. Nicor, Inc., No. 02 Civ. 5168, 2003 WL 22013905 (N.D. Ill. Apr. 23, 2003); In re Enron Sec. Derivative ERISA Litig., No. MDL 1446, 2002 WL 31845114 (S.D. Tex. Aug. 16, 2002); In re WorldCom, Inc. Sec. Litig., 234 F. Supp. 2d 301, 306 (S.D.N.Y. 2002)).
See, e.g., In re LaBranche Sec. Litig., 333 F. Supp. 2d at 183 (finding that there will be no costs to defendants in producing the requested materials, while "[i]f the stay remains in place, Lead Plaintiffs will be the only ones without access to those documents and will be prejudiced by their inability to make informed decisions about their litigation strategy in this rapidly shifting landscape.").
Here, defendants have been subject to governmental investigations and many other private lawsuits. These governmental investigations and lawsuits are ongoing, and the Seippels will be prejudiced if they lack access to documents which have been produced to others. Although the Sieppels' request for discovery is not limited solely to documents that have already been produced to the government, I have no doubt that much of the material the Seippels seek has already been produced. For this reason, at the hearing on February 1, I ordered that the stay should be modified to permit discovery of documents that have already been produced to the government.
The remaining question is whether the stay should also be lifted with respect to documents that have not been produced to the Government, so as to permit the Seippels to proceed with discovery on their state law claims. For the following reasons, I now hold that it should.
The Seippels assert both federal securities claims and state law claims, over which the Court has jurisdiction on the basis of diversity. In Tobias Holdings, Inc. v. Bank United Corp., this Court observed that the application of the statutory language to that situation is somewhat unclear.
177 F. Supp. 2d 162 (S.D.N.Y. 2001).
The ambiguity arises because the automatic stay provisions apply to "any private action arising under" Chapter 2B of Title 15 of the United States Code and "any private action arising under" Subchapter 1 of Chapter 2A of Title 15 of the United States Code. It is not clear from the face of the statute whether Congress contemplated the situation where both federal question and diversity jurisdiction are invoked in a single action. Conceptually, the claims can be split into two groups: the federal securities fraud claims which are subject to the automatic stay and the state law claims which are not. Because the statutory language is silent on this issue, resort to legislative history is permitted to determine the scope of the automatic stay provisions.
Id. at 165.
The policies underlying the PSLRA are well-known. The PSLRA was passed to redress certain perceived abuses in securities litigation including "the abuse of the discovery process to coerce settlement."
The purpose of the [PSLRA] was to restrict abuses in securities class action litigation, including: (1) the practice of filing lawsuits against issuers of securities in response to any significant change in stock price, regardless of defendants' culpability; (2) the targeting of `deep pocket' defendants; (3) the abuse of the discovery process to coerce settlement; and (4) manipulation of clients by class action attorneys.
In re Advanta Corp. Secs. Litig., 180 F.3d 525, 530-31 (3d Cir. 1999).
Id. at 531 (citing H.R. Conf. Rep. No. 104-369, 104th Cong. 1st Sess. at 31 (1995), reprinted in 1995 U.S.C.C.A.N. 730, 748).
To prevent the unnecessary imposition of discovery costs on defendants, the PSLRA includes provisions for a mandatory stay of discovery. Under these provisions, "unless exceptional circumstances are present, discovery in securities actions is permitted only after the court has sustained the legal sufficiency of the complaint."
The purposes of these provisions were acknowledged to include the protection of the defendants in [securities fraud class actions] from being subjected to extortionate demands for settlement on behalf of class plaintiffs simply because of the high costs associated with discovery in these cases; protection of the corporate defendants from federal judges' reluctance to impose Rule 11 sanctions in frivolous lawsuits; and protection of the corporate defendants from plaintiffs' counsel `discovering' their way into facts which could allow them to amend an initially frivolous complaint so as to state a claim.
Vacold LLC v. Cerami, No. 00 Civ. 4024, 2001 WL 167704, at *6 (S.D.N.Y. Feb. 16, 2001).
In re Transcrypt Int'l Sec. Litig., 57 F. Supp. 2d 836, 841 (D. Neb. 1999) (citing Conference Report at 32).
In Tobias Holdings, finding that "none of the perceived abuses addressed by Congress [were] present," I permitted discovery to proceed on plaintiffs' non-fraud state law claims, which were related to, but separate and distinct from the securities claims in that case. In Fazio v. Lehman Bros, Judge John Manos of the Northern District of Ohio explained that:
Tobias Holdings, 177 F. Supp. 2d at 166.
Fazio v. Lehman Bros, No. 1:02CV157, 2002 WL 32121836 (N.D. Ohio, May 16, 2002).
[c]ases interpreting Tobias have not recognized a general rule that the stay should never apply if there is diversity jurisdiction over the state law claims. . . . However, if diversity jurisdiction exists, and additionally, the Congressional policies behind the [PSLRA] would not be furthered by maintaining the stay, relief from the stay is warranted.
Id. at *10, 12 (citing Angell Investments, LLC v. Purizer Corp., No. 01 Civ. 6359, 2001 WL 1345996 (N.D. Ill. Oct. 29, 2001)). Accord Vacold, 2001 WL 167704 at *6 (modifying stay to permit a highly particularized discovery request; plaintiff's request was clearly not a mere fishing expedition and therefore the concerns underlying the PSLRA stay were not implicated).
As in Tobias Holdings, the Court has an independent basis for jurisdiction over the Seippels' state law claims, which do not arise under the federal securities laws. The policies behind the PSLRA's discovery stay provisions do not apply here. The PSLRA stay is intended to prevent defendants from being forced to bear the expense of discovery until after a court has assessed the sufficiency of the complaint. I have already assessed the sufficiency of the Seippels' remaining state law claims, and sustained them. I have found the Seippels' state law fraud claim to be supported by sufficient factual allegations to pass muster under Federal Rule of Civil Procedure 9(b). Clearly, this is not a case in which plaintiffs are alleging state law claims in hopes of circumventing the PSLRA stay and discovering facts to support a securities fraud claim; indeed, the Seippels only asserted a securities fraud claim after the Court sustained their state law fraud claims but dismissed their RICO claims.
Brown Wood is now moving to dismiss only the Seippels' securities fraud claims. Deutsche Bank moves to dismiss the Seippels' state law fraud claim on the ground that the claim is time-barred because "the allegations in the present Complaint establish that, to the extent a fraud existed, it should have been discovered with the exercise of reasonable due diligence on September 5, 2000." If Deutsche Bank's argument prevails, the Seippels' state law fraud claim will be dismissed as untimely. Thus, I cannot say with certainty that lifting the stay will impose no costs on defendants. However, Deutsche Bank's argument is based on a narrow and specific factual ground, and does not affect my finding with respect to the sufficiency of the Seippels' factual allegations. Accordingly, the concerns underlying the PSLRA stay do not apply here.
Deutsche Bank's Memorandum of Law in Support of Motion to Dismiss Second Amended Complaint at 15 n. 8.
Although that argument has not yet been fully briefed, it appears on preliminary review that it will not likely succeed, particularly given the deferential standard of review required on a motion to dismiss. See Swierkiewicz v. Sorema N.A., 534 U.S. 506, 514 (2002).
Moreover, neither defendant is moving to dismiss the Seippels' disgorgement claim. The disgorgement claim will remain, and discovery on it will take place in due course regardless of the outcome of the pending motions. There is therefore no prejudice to defendants in permitting discovery to proceed on the disgorgement claims sooner rather than later.
IV. CONCLUSION
For the foregoing reasons, the stay is lifted with respect to the Seippels' state law claims.
SO ORDERED.