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April 12, 2005.

PAULA TAFT, Individually and on Behalf of All Others Similarly Situated, Plaintiffs,

The opinion of the court was delivered by: PETER LEISURE, District Judge


This securities class action arises out of the bankruptcy of KPNQwest N.V. ("KPNQ" or the "Company"). Although a motion to dismiss is pending, Class Plaintiffs have moved to lift the automatic stay of discovery imposed by the Private Securities Litigation Reform Act of 1995 ("PSLRA") in order to obtain a draft of a report ("Report") prepared at the request of the KPNQ bankruptcy trustees ("Trustees") in the Netherlands. On January 14, 2005, this Court referred the motion to the Honorable Frank Maas, United States District Magistrate Judge, for disposition. Subsequently, however, Judge Maas alerted the Court of his conflict in deciding the matter. To expedite resolution of the motion, this Court takes up Judge Maas' mantle in lieu of assigning the motion to another Magistrate Judge. For the reasons set forth below, Class Plaintiffs' motion to lift the stay of discovery is denied. BACKGROUND

I. Alleged Fraud

  The Consolidated Second Amended Class Action Complaint ("Complaint" or "Compl.") is 242 pages long and contains more than 500 paragraphs detailing defendants' alleged fraud. In brief, as alleged in the Complaint, the facts of this case are as follows:*fn1

  Defendants Koninklijke KPN N.V., also known as Royal KPN N.V. ("KPN"), and Qwest Communications International ("Qwest") founded KPNQ as a joint venture on February 26, 1999. (Compl. ¶¶ 50, 57.) The Company "combined the pan-European fiber optic network . . . being developed by KPN with the European Internet-services business of Qwest, to provide European telecommunications and Internet services." (Id.) The resulting entity soon "became one of Europe's largest data communications services companies." (Id.)

  Over the course of its first three years of operation, KPNQ artificially inflated its financial performance in several ways. First, the Company sold both unused network capacity (known as "dark fiber") and active capacity (known as "lit fiber") to other telecommunications providers. (Id. ¶ 11.) The Company should have reported these sales of dark and lit fiber as "network capacity sales," distinct from telecommunications services revenues, in part because the fiber sales were generally nonrecurring. (Id.) Instead, the Company reported its dark fiber sales as "Infrastructure Revenues" and combined its revenues from lit fiber sales with telecommunications revenues, labeling the two "Communications Services Revenues." (Id.) This accounting treatment was materially misleading because it created the impression that sales of lit fiber were recurring revenues and concealed the extent to which the Company's revenue depended upon one-time lit fiber transactions. (Id.) Second, the network capacity sales often took the form of twenty-year leases, known as indefeasible rights of use ("IRUs"). (Id. ¶ 13.) Defendants violated Generally Accepted Accounting Principles by booking the full value of the IRUs in the quarter in which the contracts were executed, rather than spreading their value over the full lease term. (Id. ¶ 14.)

  Third, some of the IRU sales were not in fact sales, but non-cash swaps, known as "hollow swaps," (id. ¶¶ 13, 15), in which the Company purchased network capacity it did not need and sold its parent companies, and others, network capacity that they did not need. (Id. ¶ 15.) Swaps involving KPNQ's parent companies and their affiliates accounted for more than forty percent of the Company's revenue in fiscal years 2000 and 2001. (Id. ¶ 18.)

  Because knowledge of the general contours of the swapping scheme was "widespread throughout the Company," (id. ¶ 26), in addition to KPN and Qwest, the Complaint names as defendants various directors and officers of KPN, KPNQ, and Qwest. (Id. ¶¶ 33-48.) The Complaint does not name KPNQ as a defendant because the Company filed for bankruptcy protection in the Netherlands on May 31, 2002. (Id. ¶ 32.)

  Approximately one month earlier, on April 24, 2002, KPNQ issued a press release announcing that it was "drastically" reducing its revenue guidance for fiscal year 2002. (Id. ¶¶ 10, 235.) Following that press release, there was an "immediate sell-off" resulting in a forty-six percent decrease in the price of KPNQ stock in a single day. (Id. ¶ 236.) Over the course of the next five weeks, the price of KPNQ shares plummeted from $2.00 per share to $0.14 per share. (Id. ¶¶ 253, 256.)

  II. Ensuing Litigation

  The original Complaint in this action was filed on October 4, 2002, with amended Complaints filed on January 9, 2004, and October 15, 2004. (See Docket, Doc. Nos. 1, 13, 37.) The plaintiffs ("Class Plaintiffs") are persons who purchased KPNQ common stock during the Class Period, which is defined as November 9, 1999, through April 24, 2002. (Id. ¶¶ 10, 31.) The Complaint alleges that, during this period, defendants "engaged and participated in a continuous course of conduct to misrepresent the results of [KPNQ's] operations, and to conceal adverse material information regarding the finances, financial condition, and results of operations of [KPNQ]." (Id. ¶ 56.) Class Plaintiffs also allege that defendants engaged in various devices and schemes to defraud in an effort to "maintain an artificially high market price for [KPNQ] common stock." (Id.) This conduct on defendants' part is alleged to give rise to violations of Sections 11 and 15 of the Securities Act of 1933, as amended, and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, as well as Rule 10b-5.

  This class action suit is not the only litigation arising out of KPNQ's demise. On June 25, 2004, the Trustees filed a RICO action ("RICO action") in the District of New Jersey against Qwest and three of the individual defendants named herein. (Id. ¶ 3.)

  III. Draft Report

  After KPNQ sought bankruptcy protection, the Trustees commissioned an investigation by forensic experts, to be memorialized in a formal report analyzing the precipitating cause of the Company's failure and determining where responsibility should lie. (Class Plaintiffs' Memorandum of Law in Support of Motion to Lift the PSLRA Stay of Discovery in Order to Obtain the KPNQwest Bankruptcy Trustees' Report ("Pls.' Mem. of Law") at 1.) To ...

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