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Docket Number

Civil No. 04-1639(RJL).

Attorney(S)

Steven J. Toll, Joshua S. Devore, Cohen, Milstein, Hausfeld Toll, PLLC, Washington, DC, for Plaintiffs. Michael J. Walsh, Jr., O'Melveny Myers LLP, Edward Bernard Horahan, III, Dechert Price Rhoads, Steven Mark Salky, Zuckerman Spaeder LLP, Washington, DC, for Defendants.

Judges

Richard J. Leon

Acts

Commerce And Trade — Securities And Trust Indentures — Domestic Securities — Separability

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Smart Summary

Opinion Summary: In re: Fannie Mae Securities Litigation, Civil No. 04-1639 (RJL)

Court: United States District Court for the District of Columbia

Judge: LEON, District Judge

Date: February 23, 2005

Factual and Procedural Background

This opinion arises in In re: Fannie Mae Securities Litigation, Civil No. 04-1639 (RJL). Lead Plaintiffs moved for a partial lift of the automatic discovery stay imposed by the Private Securities Litigation Reform Act (PSLRA) so that they could obtain copies of documents that Fannie Mae had produced to the Office of Federal Housing Enterprise Oversight (OFHEO) and other government and regulatory agencies that were investigating alleged securities fraud. The PSLRA stay applies during the pendency of any motion to dismiss unless the court finds that particularized discovery is necessary to preserve evidence or to prevent undue prejudice, 15 U.S.C. § 77z-1(b)(1). Plaintiffs bore the burden of establishing that the stay should be lifted. After considering briefs and a hearing (at which plaintiffs' counsel conceded that not all documents produced to agencies would be relevant and suggested meeting with Fannie Mae's counsel to identify relevant documents), the Court denied Lead Plaintiffs' Motion for Partial Lift of the PSLRA Discovery Stay for Limited Discovery by Order dated February 23, 2005.

Legal Issues Presented

Whether plaintiffs carried their burden under the PSLRA exception (15 U.S.C. § 77z-1(b)(1)) to demonstrate that particularized discovery is necessary to preserve evidence or to prevent undue prejudice, thereby justifying a partial lift of the mandatory discovery stay while a motion to dismiss is pending.
Whether the discovery requested by plaintiffs (documents already produced to OFHEO and other government agencies) is sufficiently particularized under the PSLRA exception.
Whether plaintiffs demonstrated undue prejudice such that a partial lift to allow limited discovery is warranted (i.e., whether plaintiffs would be unfairly disadvantaged or defendants would be unfairly shielded from liability without the requested discovery).

Arguments of the Parties

Lead Plaintiffs' Arguments

Plaintiffs sought only documents that Fannie Mae had already produced to OFHEO and other governmental/regulatory agencies investigating alleged securities fraud.
Plaintiffs argued that a partial lifting of the PSLRA discovery stay was necessary to prevent undue prejudice because, without access to those documents, they would be unable to plan their litigation strategy and would be at an informational disadvantage relative to regulatory authorities who had already received the documents. (Pl. Memo. at 8.)
At the February 14 hearing, plaintiffs' counsel conceded that not all documents produced to agencies would be relevant and proposed that plaintiffs' counsel meet with Fannie Mae's counsel to determine which documents might be relevant.

Fannie Mae's Arguments (Defendant)

Fannie Mae opposed the partial lift, arguing that the documents produced to government agencies were voluminous and possibly irrelevant to the claims likely to be raised in the Consolidated Complaint. (Fannie Mae Opp. at 8.)
Fannie Mae contended that preservation of evidence was not at issue and that plaintiffs had not established undue prejudice under the PSLRA standard.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Vacold LLC v. Cerami, No. 00-4024, 2001 WL 167704 (S.D.N.Y. Feb. 16, 2001)	Principle that, unless exceptional circumstances are present, discovery in securities actions is permitted only after the court has sustained the legal sufficiency of the complaint.	The Court noted that although the D.C. Circuit had not addressed the issue, other courts (citing Vacold) have applied a rule that discovery ordinarily follows a finding that the complaint survives a motion to dismiss; the citation supported the conclusion that the burden to lift the stay is heavy.
In re Lernout & Hauspie Secs. Litig., 214 F. Supp. 2d 100 (D. Mass. 2002)	Requirement that the party seeking discovery under the PSLRA exception must adequately specify the target of the requested discovery and the types of information needed.	The Court applied this particularity requirement and found plaintiffs' request lacking because the documents produced to agencies were voluminous and plaintiffs had conceded that not all were relevant; plaintiffs' suggestion to meet and confer demonstrated lack of particularity inconsistent with meeting the PSLRA burden.
In re CFS-Related Securities Fraud Litig., 179 F. Supp. 2d 1260 (N.D. Okla. 2001)	Definition that undue prejudice justifying partial lifting is prejudice that is improper or unfair under the circumstances.	The Court used this standard to evaluate plaintiffs' undue prejudice claim and concluded plaintiffs did not show the requisite unfair prejudice.
In re Vivendi Universal, S.A. Secs. Litig., No. 02-5571, 2003 WL 21035383 (S.D.N.Y. May 6, 2003)	To demonstrate unfair prejudice, a plaintiff must show that either the defendant will be unfairly shielded from liability without the requested discovery, or the plaintiffs would be at an informational disadvantage during settlement negotiations.	The Court applied this formulation and found that plaintiffs failed to demonstrate either that defendants would be unfairly shielded from liability or that plaintiffs would be at an informational disadvantage in settlement negotiations; thus undue prejudice was not established.

Court's Reasoning and Analysis

The Court's analysis proceeded from the statutory text of the PSLRA and the allocation of the burden to plaintiffs. The PSLRA provides that discovery shall be stayed during the pendency of any motion to dismiss unless the court finds that particularized discovery is necessary to preserve evidence or to prevent undue prejudice, 15 U.S.C. § 77z-1(b)(1). The Court summarized the applicable two-part inquiry:

Particularity: The requested discovery must be particularized — the party seeking discovery must "adequately specify the target of the requested discovery and the types of information needed" (citing In re Lernout & Hauspie Secs. Litig.). The Court found plaintiffs' request insufficiently particular because the documents produced to governmental and regulatory agencies were voluminous, potentially irrelevant to the claims in the Consolidated Complaint, and plaintiffs' counsel conceded that not all such documents would be relevant and proposed a meet-and-confer to identify relevant documents. The Court concluded that this demonstrated a lack of particularity inconsistent with satisfying the heavy burden to justify lifting the stay.
Necessity to Preserve Evidence or Prevent Undue Prejudice: The Court observed that preservation of evidence was not asserted as an issue. Plaintiffs therefore relied on the undue prejudice prong, arguing they would be at an informational disadvantage relative to regulators and thus unable to plan litigation strategy. The Court applied authorities defining unfair prejudice (citing In re CFS-Related and In re Vivendi) and explained that to show unfair prejudice a plaintiff must demonstrate either that the defendant would be unfairly shielded from liability without the requested discovery or that plaintiffs would be at an informational disadvantage during settlement negotiations. The Court found plaintiffs did not establish either showing and therefore failed to prove undue prejudice.

The Court also noted that the D.C. Circuit had not addressed the issue and relied on decisions from other jurisdictions to articulate and apply the standards for particularized discovery and undue prejudice under the PSLRA exception.

Holding and Implications

HOLDING: The Court DENIED Lead Plaintiffs' Motion for Partial Lift of the PSLRA Discovery Stay for Limited Discovery. The written Order states: "ORDERED that the Lead Plaintiffs' Motion for Partial Lift of PSLRA Discovery Stay for Limited Discovery [# 54] is DENIED. SO ORDERED." (Dated February 23, 2005.)

Implications:

Direct effect: Plaintiffs were not permitted to obtain the requested documents produced by Fannie Mae to OFHEO and other government agencies at this stage; the PSLRA discovery stay remains in place with respect to that motion to dismiss unless and until another showing satisfying the PSLRA exception is made.
Broader precedent: The opinion applied existing authorities from other circuits and district courts to interpret the PSLRA exception, but the Court observed that the D.C. Circuit had not addressed the issue. The opinion did not announce a new, binding rule for the D.C. Circuit; it applied the established particularity and undue-prejudice framework to the facts presented and concluded plaintiffs did not meet their burden.

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In re: Fannie Mae Securities Litigation.

MEMORANDUM OPINION AND ORDER

LEON, District Judge.

Plaintiffs move for a partial lift of the automatic discovery stay provided for in the Private Securities Litigation Reform Act ("PSLRA") in order to obtain copies of the documents that Fannie Mae has produced to the Office of Federal Housing Enterprise Oversight ("OFEHO") and other government agencies investigating alleged securities fraud. The PSLRA provides that:

In any private action arising under this subchapter, 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.

15 U.S.C. § 77z-1(b)(1) (emphasis added). The plaintiffs bear the burden of establishing that lifting of the mandatory stay is necessary. For the following reasons, the Court finds that plaintiffs have failed to satisfy this burden and accordingly DENIES Lead Plaintiffs' Motion for Partial Lift of PSLRA Discovery Stay For Limited Discovery.

Although the D.C. Circuit has not addressed this issue, other courts have found that "unless exceptional circumstances are present, discovery in securities actions is permitted only after the court has sustained the legal sufficiency of the complaint." Vacold LLC v. Cerami, No. 00-4024, 2001 WL 167704, at *6 (S.D.N.Y. Feb. 16, 2001). The burden of establishing the need for a partial lifting of the discovery stay, not surprisingly, is a heavy one.

First, the discovery sought by plaintiffs must be particularized. 15 U.S.C. § 77z-1(b)(1). Indeed, "the party seeking discovery under the exception must adequately specify the target of the requested discovery and the types of information needed to relieve that burden." In re Lernout Hauspie Secs. Litig., 214 F.Supp. 2d 100, 108 (D. Mass. 2002). In this case, the plaintiffs argue that their request is sufficiently particularized because they seek only documents that have already been produced in connection with governmental and regulatory investigations. Pl. Memo. at 8. The documents produced in response to those investigations, however, are voluminous and possibly irrelevant to the claims likely to be raised in the Consolidated Complaint. Fannie Mae Opp. at 8. In fact, during the hearing on February 14, plaintiffs' counsel conceded that not all of the documents produced to the various agencies would be relevant to this litigation and suggested that the plaintiffs' counsel sit down with Fannie Mae's counsel to determine which documents might be relevant. This alone demonstrates a lack of particularity inconsistent with satisfying the burden required to justify a lift of the stay on discovery.

Second, the discovery sought must be necessary to either preserve evidence, or to prevent undue prejudice. 15 U.S.C. § 77z-1(b)(1). Preservation not being an issue here, plaintiffs contend, in effect, that undue prejudice would befall them if a partial lifting were not permitted. A partial lifting to prevent undue prejudice is warranted when the "prejudice . . . is improper or unfair under the circumstances." In re CFS-Related Securities Fraud Litig., 179 F.Supp. 2d 1260, 1265 (N.D. Okl. 2001). To demonstrate unfair prejudice, the plaintiff must show that either the defendant will be unfairly shielded from liability without the requested discovery, or the plaintiffs would be at an informational disadvantage during settlement negotiations. In re Vivendi Universal, S.A. Secs. Litig., No. 02-5571, 2003 WL 21035383, at *1 (S.D.N.Y. May 6, 2003). The plaintiffs here argue that the partial lifting of the stay is necessary to prevent unfair prejudice because without this discovery they will be unable to plan their litigation strategy and thus will not be on equal footing with the regulatory authorities who have already received documents. Pl. Memo. at 8. This argument, however, fails to demonstrate that the defendants will be either unfairly shielded from liability, or that the plaintiffs would be disadvantaged during possible settlement negotiations. Accordingly, plaintiffs have not satisfied their burden of establishing undue prejudice, and a lifting of the discovery stay is not justified.

ORDER

For the reasons set forth above, it is this 23 ^rd day of February, 2005 hereby

ORDERED that the Lead Plaintiffs' Motion for Partial Lift of PSLRA Discovery Stay for Limited Discovery [# 54] is DENIED. SO ORDERED.

IN RE FANNIE MAE SECURITIES LITIGATION