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ATSI COMMUNICATIONS, INC. v. SHAAR FUND

April 9, 2003

ATSI COMMUNICATIONS, INC., PLAINTIFF,
v.
THE SHAAR FUND, LTD., ET AL., DEFENDANTS.



The opinion of the court was delivered by: Lewis A. Kaplan, United States District Judge

ORDER

Three defendants in this securities fraud action seek an order requiring plaintiff and its counsel to disclose discovery obtained by plaintiff without notice to defendants and allegedly in violation of the automatic stay of disclosure contained in the Private Securities Litigation Reform Act of 1995 ("PSLRA") and to enjoin plaintiff and its counsel against further discovery violations.

Facts

The Internet Law Library Case Background concerning another case before this Court is necessary to put defendants' motion in context.

Internet Law Library, Inc., and others, all represented by a group of attorneys including Gary M. Jewell of Houston, Texas, commenced a securities fraud action in the Southern District of Texas against Southbridge Capital Management LLC and others (the "ILL Case"). The ILL Case was transferred to this Court by order dated July 20, 2001.*fn1 The essence of the action is a claim that the defendants in the ILL action engaged in a scheme to defraud plaintiffs and to manipulate ILL's stock downward.*fn2 At some point, Maryann Peronti, Esq., a member of the Bar of this Court, appeared on behalf of the plaintiffs in the ILL Case along with Mr. Jewell. The Commencement of this Action On October 31, 2002, ATSI Communications, Inc. ("ATSI"), also represented by Ms. Peronti and, at least at some later point, by Mr. Jewell brought this action against The Shaar Fund, Ltd. ("Shaar") and other defendants. The gravamen of the original complaint was an alleged scheme by defendants to defraud ATSI into selling multiple series of convertible preferred stock and to manipulate the price of its stock downward in order to take advantage of increased conversion rates resulting from the price decline.*fn3 Significantly, no party to this case is a party to the ILL Case and vice versa.

On December 13, 2002, the Court issued an order (1) setting a scheduling conference for February 3, 2003 absent prior agreement by the parties on an acceptable schedule, and (2) directing plaintiffs' counsel to send a copy of the order to the defendants' counsel or, if no appearance had been filed, to the defendants themselves. On February 3, 2003, Ms. Peronti appeared and advised the Court that plaintiffs had not served any defendants. Another conference was set for February 24, 2003.

The Disputed Subpoenas

Promptly after the February 3 conference, plaintiffs' counsel issued subpoenas to the National Association of Securities Dealers ("NASD") and the National Securities Clearinghouse Corporation ("NSCC") under the ILL Case caption. Both subpoenas seek exclusively documents relating to trading and market making in securities of ATSI.*fn4 Defendants in this case were not notified of the service of those subpoenas.

On February 21, 2003, counsel for one of the individual defendants in this case learned of the NASD and NSCC subpoenas. At the conference on February 24, 2003, which was attended by counsel for defendants as well as Ms. Peronti, Ms. Peronti first indicated that she intended to amend the complaint. The Court gave her until March 17 to do so and deferred defendants' time to move until after service of the amended pleading.*fn5 Defendants advised the Court of the issuance of the subpoenas in the ILL Case. Ms. Peronti responded that they had been issued with the permission of Judge Carter, to whom the ILL Case is assigned. When the Court inquired as to whether Ms. Peronti had advised Judge Carter that she planned to use the subpoenaed information in this case, in which discovery was stayed as a matter of law by the PSLRA, she admitted that she had not done so.*fn6

Defendants then sought plaintiff's voluntary withdrawal of the subpoenas. When that was not forthcoming, they moved to intervene in the ILL Case and to quash them. Judge Stein, sitting in Part I, promptly stayed the subpoenas.*fn7 The motion remains sub judice.

Discussion

Two things are reasonably plain.

First, the PSLRA provides in relevant 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."*fn8
In view of Congress' manifest intention to protect defendants in actions such as this from the burden and expense of premature discovery, the statute precludes discovery, whether from parties or nonparties, until the court sustains the sufficiency of the complaint.*fn9 As this action arises under the relevant chapter of ...

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