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United States District Court, S.D. New York

August 30, 2005.

JOSEPH P. LASALA, as assignee of, Inc., Plaintiffs,

The opinion of the court was delivered by: SHIRA SCHEINDLIN, District Judge



  A. Background of the IPO Litigation

  This case, and the fifty-four other cases governed by this Opinion by stipulation of the parties, is an offshoot of the hundreds of actions brought by investors against numerous underwriters and issuers of stock, coordinated in this court as In re Initial Public Offering Securities Litigation ("the IPO Litigation").*fn1 In those actions, plaintiffs seek recovery for securities fraud pursuant to the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act").

  The alleged scheme is described at length in my February 19, 2003 Opinion denying defendants' motion to dismiss.*fn2 Familiarity with that Opinion is assumed. In short, plaintiffs allege that defendants fraudulently inflated the share prices of 310 technology stocks during and after their initial public offerings ("IPOs") through an elaborate scheme characterized by tie-in agreements, undisclosed compensation and analyst conflicts. According to plaintiffs, the investment banks (the "Underwriters") required investors seeking allocations in the IPOs to participate in the alleged laddering scheme. The companies going public (the "Issuers") allegedly profited from the scheme by taking advantage of the artificially inflated stock resulting from the laddering to raise capital, enter into stock-based transactions, or sell their individual holdings at high prices. Plaintiffs allege that the value of their holdings plummeted when this artificial inflation dissipated.

  After extensive negotiations, plaintiffs agreed to a settlement with the Issuers (but not the Underwriters) in 298 of the cases coordinated in the IPO Litigation. This Court preliminarily approved the settlement in February 2005.*fn3 As part of this settlement, which is awaiting final approval from this Court, the Issuers agreed to assign their interest in all claims against the Underwriters for "Excess Compensation" to a Litigation Trust, to be created upon final approval of the settlement and to be represented by plaintiffs' counsel.*fn4 These claims are hereinafter referred to as the "Assigned Claims." The Issuers retain their claims against the Underwriters for underpricing, contribution, indemnification, or antitrust violations, but agree that they will not assert such claims except in certain defined circumstances.*fn5

  B. The "LaSala Actions"

  Of the fifty-five Underwriters named as defendants in the IPO litigation, all but a handful have entered into agreements with the plaintiffs which toll the applicable statute of limitations for the Assigned Claims until the Issuers Settlement is approved by this court.*fn6 The Underwriters who have not consented to such a tolling agreement are J.P. Morgan Securities, Inc., Needham & Company, Inc., Morgan Stanley, Allen & Company, Inc., E*Trade Securities, and Prudential Equity Group, LLC (the "Non-Tolling Underwriters").

  In order to ensure that the statute of limitations on the Assigned Claims does not expire,*fn7 the plaintiffs and the Issuers have arranged to assign each Issuer's Assigned Claims against the Non-Tolling Underwriters to Joseph LaSala, a New Jersey resident who (subject to court approval) will become the Litigation Trustee once the Issuers Settlement is approved.*fn8 But these assignments are conditional and for an extremely limited purpose. Specifically, these assignments give LaSala the power to do only two things: 1) file a separate action for each Issuer who has assigned claims to him; and 2) immediately seek a stay of that action.*fn9 Moreover, on the occurrence of any one of five specified events, his assignment automatically reverts to the assignor-Issuer, or to the Litigation Trust after approval of the IPO Issuers Settlement.*fn10

  In accordance with his conditional assignments, LaSala has filed numerous actions in this Court ("LaSala Actions").*fn11 Each action is the result of a conditional assignment of claims from a different Issuer, and each action names as defendants one or more of the Non-Tolling Underwriters. In order to avoid expiration of the statute of limitations, LaSala has filed each action shortly before the six-year anniversary of the IPO of the Issuer-assignor for that action.*fn12

  The parties have collectively filed three motions in each LaSala Action. First, LaSala filed a complaint together with a motion to stay the action he had just initiated. Then, the defendants in each case filed a motion to dismiss for lack of subject-matter jurisdiction, as well as for failure to state a claim upon which relief can be granted.*fn13 Finally, in responding to the motion to dismiss, LaSala filed a cross-motion to consolidate each LaSala Action with the IPO Litigation.*fn14 This Opinion relates only to LaSala's request for a stay of his action.

  While each LaSala Action involves the IPO of a different Issuer, and different combinations of Non-Tolling Underwriters, the pending motions in each LaSala Action involve identical legal issues. Accordingly, the parties stipulated that the resolution of the pending motions in LaSala (as assignee for v. Needham & Co., 04 Civ. 9237, would govern the disposition of the identical motions in all of the pending LaSala Actions, and any future LaSala Actions that raise the same issues.*fn15 Therefore, this Opinion will resolve the Motion to Stay now pending in all LaSala Actions covered by the Stipulation.*fn16

  C. Background of the "" LaSala Action

  Joseph LaSala is a New Jersey resident, who had no connection to the events giving rise to the Complaint's allegations prior to receiving his assignment of the claims.*fn17 The assignor of these claims, ("Fatbrain"), was at the time of its IPO "an online retailer of information resources focused on the technical professional."*fn18 Although LaSala's complaint does not mention Fatbrain's corporate citizenship, at the time of its IPO it was registered in. Delaware.*fn19

  The defendants in this case are three of the Non-Tolling Underwriters. Needham & Co., Inc. ("Needham") was a co-lead managing underwriter for the Fatbrain IPO, receiving and reselling Fatbrain stock as part of that offering.*fn20 J.P. Morgan Securities, Inc. ("J.P. Morgan") and Morgan Stanley were also members of the underwriting syndicate for the IPO.*fn21 All three defendants are Delaware corporations, with principal executive offices in New York City.*fn22 LaSala invokes this court's jurisdiction on the basis of diversity of citizenship between himself (New Jersey) and the defendants (Delaware-registered corporations principally doing business in New York).*fn23

  On or about November 20, 1998, Fatbrain entered into a "firm commitment underwriting" with Defendants.*fn24 The defendants contracted to buy three million shares, which they would then sell to investors in an IPO.*fn25 In connection with this underwriting, LaSala alleges that the defendants received "Excessive Compensation" as a result of agreements extracted from their customers (who purchased Fatbrain shares from the underwriters on the IPO and in the aftermarket). Specifically, LaSala alleges that customers were forced to "kick back" a portion of the profits they derived through participation in the IPO through: 1) payment of inflated brokerage commissions; 2) transactions in otherwise-unrelated securities made through or at the direction of a defendant merely to generate commissions; and 3) purchases of, and payments of commissions for, stock in future offerings underwritten by one or more of the defendants, including "follow-on" offerings of Fatbrain stock.*fn26 Based on these facts, LaSala pleads three causes of action — breach of contract,*fn27 unjust enrichment,*fn28 and breach of fiduciary duty.*fn29

  LaSala filed this action pursuant to the conditional assignment for the purpose of obtaining a stay and avoiding the expiration of the statute of limitations for these Assigned Claims.*fn30 A failure to obtain a stay voids LaSala's assignment.*fn31 As it is now more than six years since the Fatbrain IPO, the statute of limitations for the Assigned Claims has now expired. LaSala argues that a stay is necessary "to prevent the harm that may result if the statutes of limitations [for the Assigned Claims] expire."*fn32

  Defendants respond that any hardship is self-imposed, because the parties to the Issuers Settlement chose to wait to file these claims until the end of the limitations period, and also chose the very limited structure of the conditional assignment to LaSala.*fn33 As such, defendants assert, this is not the sort of hardship that would justify denying defendants "the right to a prompt resolution of their claims."*fn34 Similarly, defendants argue that granting a stay would contravene the judicial policy requiring plaintiffs to diligently prosecute claims,*fn35 characterizing this motion as "essentially a request that this Court give the plaintiff a license not to diligently prosecute this action."*fn36 II. LEGAL STANDARD

  "The power to stay proceedings is incidental to the power inherent in every court to control the disposition of the causes on its own docket with economy of time and effort for itself, for counsel, and for litigants."*fn37 It follows that the decision whether to issue a stay is "firmly within a district court's discretion."*fn38 There are several reasons why a court might decide to stay proceedings in a lawsuit.*fn39 For example, a court might, in the interest of judicial economy, enter a stay pending the outcome of proceedings which bear upon the case, even if such proceedings are not necessarily controlling of the action that is to be stayed.*fn40

  To be sure, the movant "bears the burden of establishing its need" for such a stay.*fn41 In particular, "if there is even a fair possibility that the stay for which he prays will work damage to some one else," the movant "must make out a clear case of hardship or inequity in being required to go forward"*fn42 The factors considered in deciding whether to grant a stay were summarized in Kappel v. Comfort:

(1) the private interests of the plaintiffs in proceeding expeditiously with the civil litigation as balanced against the prejudice to the plaintiffs if delayed; (2) the private interests of and burden on the defendants; (3) the interests of the courts; (4) the interests of persons not parties to the civil litigation; and (5) the public interest.*fn43
  These Kappel factors have been applied, inter alia, "to stay a federal action in light of a concurrently pending federal action (either because the claim arises from the same nucleus of facts or because the pending action would resolve a controlling point of law)."*fn44 In balancing these Kappel factors on a case-by-case basis, "the basic goal is to avoid prejudice."*fn45


  After considering the five Kappel factors, I find that a stay of the LaSala Actions until the Issuers Settlement is approved or rejected is warranted. The interests of non-parties to this litigation (specifically the prospective beneficiaries of the Litigation Trust), the public interest, and the courts' interest outweigh the defendants' nonspecific claims of prejudice resulting from a stay.

  As an initial matter, I note that the first Kappel factor (weighing plaintiff's interest in proceeding against the prejudice it would suffer if the action is stayed) does not apply because here the plaintiff is requesting the stay.*fn46 Courts are generally reluctant to stay proceedings because they are concerned with vindicating the plaintiff's right to proceed with its case.*fn47 Therefore, when a plaintiff seeks a stay, a court is not concerned with plaintiff's need to vindicate its rights.

  A. The Kappel Factors Favor Granting a Stay

  Three of the four remaining Kappel factors militate in favor of granting a stay. First, and most importantly, a stay protects the interests of many non-parties to this litigation (factor four) — the intended beneficiaries of the Litigation Trust that would be created by final approval of the Issuers Settlement. The statute of limitations continues to run on all the Issuers' Assigned Claims pending court approval of the Issuers Settlement. However, the Litigation Trust cannot be created until mid-2006 at the earliest, after notice is sent to class members and a fairness hearing is held.*fn48 It would be unjust for this court to allow the statute of limitations on these claims to expire because the procedural safeguards accorded class-action settlements place these claims in a kind of limbo where the settling plaintiffs cannot yet vindicate the claims they obtained through the settlement.

  In this vein, I note that any jurisdictional defect in the LaSala Actions (either in terms of standing or diversity jurisdiction) would be resolved if the Issuers Settlement is approved and the claims are then reassigned to the Litigation Trust. A somewhat similar situation was presented in Ken-N.K., Inc. v. Vernon Township.*fn49 In that case, plaintiffs challenging a town ordinance prohibiting topless dancing did not meet the "redressibility" requirement of Article III standing, because the relief plaintiff sought in federal court was, at that point in time, entirely contingent on the outcome of ongoing related state proceedings.*fn50 However, the Sixth Circuit recognized that if plaintiffs prevailed in the state court proceedings, the federal court would then be able to grant relief:

[G]iven the extraordinary circumstances of this case, we believe that the best course of action is to stay, rather than dismiss, the plaintiffs' claims . . . [w]hile our general practice is to dismiss claims if there is no standing, in this case, it is the ongoing state court proceedings that render the plaintiffs' standing . . . uncertain. By staying the plaintiffs' claims against the state defendants until the conclusion of the state court proceedings, we ensure that, if the plaintiffs can [prevail] in the state court proceedings, there will be a federal forum available for their then-proper constitutional claims against the state defendants.*fn51
  Similarly, the jurisdictional concerns present in this action result entirely from the fact that the statute of limitations on the Assigned Claims expired before the Issuers Settlement could be approved or rejected, and once that process runs its course such concerns will disappear.

  The interests of both the court and the public are also furthered by granting a stay (factors three and five). By preventing the loss of part of the valuable consideration exchanged in the settlement, granting a stay furthers the long-recognized public and judicial policy in favor of the settlement of disputes.*fn52 While it may be true that the settling parties have in a sense created the constraints that currently impede litigation of the Assigned Claims, those constraints were part of a complex settlement. As just noted, courts should encourage the voluntary resolution of disputes whenever possible.

  For this reason, this case is easily distinguished from Arden Way Associates v. Boesky,*fn53 a case on which defendants place heavy reliance.*fn54 In that case, Ivan Boesky sought a stay of civil proceedings against him, claiming that those proceedings would interfere with the terms of a plea agreement he had entered into in a related criminal case. The court denied the stay, noting that "[i]t is plainly ludicrous for Mr. Boesky to argue that it is "unfair" to compel him to face the civil law suits against him which are the creations of his own alleged misconduct."*fn55 Parties settling a civil lawsuit surely should not be compared to a party who the court found was attempting to "seek privileged litigating status because of his own delinquencies."*fn56

  B. Prejudice to Defendants

  Defendants maintain that "LaSala should not be allowed to charge Defendants with unlawful conduct, force the Defendants to report to the public a threat of liability, but then deprive Defendants of the chance to address these charges promptly."*fn57 However, "it does not suffice for any party — plaintiff, defendant, or otherwise — to assert . . . an inherent right [to proceed in litigation] and rest its case on that bald, abstract proposition, without articulating in concrete terms the practical, real life effects of the potential deprivation of that right under the circumstances of the particular case at bar."*fn58

  The only allegation of prejudice raised by defendants is the requirement that they "report to the public a threat of liability" resulting from the LaSala Actions.*fn59 Aside from the fact that this threat of liability would exist whether or not the action is stayed, this claim of prejudice is somewhat insubstantial considering that defendants have already reported a much larger potential threat of liability in the related IPO Litigation.*fn60 Moreover, if these defendants had entered into tolling agreements, as did the vast majority of the Underwriters, the LaSala Actions would not have been filed, thereby eliminating the need to report the potential liability in the first place.

  Finally, none of the other concerns that commonly arise when a stay is sought are present here. For example, this is not a case where "a litigant . . . [is] be[ing] compelled to stand aside while a litigant in another [case] settles the rule of law that will define the rights of both."*fn61 Similarly, this stay does not delay the Assigned Claims indefinitely. Rather, the stay will be lifted upon approval or rejection of the Issuers Settlement, at which time the court will resolve the remaining motions in the LaSala Actions (i.e. defendants' motion to dismiss and plaintiff's cross-motion for consolidation).*fn62 Moreover, defendants have not yet incurred significant cost or expended much effort in this action, as proceedings have barely begun.*fn63


  For the foregoing reasons, I find that the relevant factors favor granting the stay. Accordingly, LaSala's motion is granted. The stay is in effect until the court decides to approve or reject the pending settlement between the Issuers and plaintiffs in the IPO Litigation. The Clerk is directed to close plaintiff's motion to stay [number 2 on the docket]. In addition, as noted above, this motion governs the resolution of the identical motions brought in the other "LaSala Actions" which are listed in Appendix I.



Appendix I — Actions Covered by the Resolution of Issues in this Opinion
The Clerk is directed to close Plaintiff's Motion to Stay in the following actions:
Case Name Docket Sheet Number
1. LaSala (as assignee of v. J.P. Morgan Sec., 04 Civ. 8957 2 2. LaSala ( v. Needham & Co., 04 Civ. 9237 2 3. LaSala (Ticketmaster) v. Allen & Co., 04 Civ. 9529 3 4. LaSala (Concur Techs.) v. J.P. Morgan Sec., 04 Civ. 9912 3 5. LaSala (CBS Marketwatch) v. Morgan Stanley, 05 Civ. 0382 3 6. LaSala (Covad Communications Group) v. J.P. Morgan Sec., 05 Civ. 0760 3 7. LaSala (Perot Systems Corp.) v. Morgan Stanley, 05 Civ. 1060 3 8. LaSala (Pacific Internet Ltd.) v. J.P. Morgan Sec., 05 Civ. 1553 3 9. LaSala (Modem Media) v. Morgan Stanley, 05 Civ. 1554 3 10. LaSala (SBCIS/Prodigy Communications) v. Prudential, 05 Civ. 1987 3 11. LaSala (Verticalnet) v. J.P. Morgan Sec., 05 Civ. 1988 3 12. LaSala (WebMD Corp.) v. Morgan Stanley, 05 Civ. 1989 3 13. LaSala (Bottomline Tech.) v. J.P. Morgan Sec., 05 Civ. 2039 3 14. LaSala (Vignette Corp.) v. Morgan Stanley, 05 Civ. 2243 3 15. LaSala (Intraware) v. J.P. Morgan Sec. 05 Civ. 2393 3 16. LaSala (iVillage, Inc.) v. J.P. Morgan Sec., 05 Civ. 2983 2 17. LaSala ( v. Morgan Stanley, 05 Civ. 3167 2 18. LaSala ( v. Morgan Stanley, 05 Civ. 3222 3 19. LaSala (Critical Path) v. J.P. Morgan Sec., 05 Civ. 3322 2 20. LaSala (Ziff-Davis) v. J.P. Morgan Sec., 05 Civ. 3389 3 21. LaSala ( v. Morgan Stanley, 05 Civ. 3390 3 22. LaSala (Extreme Networks) v. Morgan Stanley, 05 Civ. 3649 5 23. LaSala (Net Perceptions) v. J.P. Morgan Sec., 05 Civ. 4075 3 24. LaSala (Marimba) v. Morgan Stanley, 05 Civ. 4267 3 25. LaSala (Portal Software) v. J.P. Morgan Sec., 05 Civ. 4431 3 26. LaSala (Radio One) v. Prudential Equity Group, 05 Civ. 4474 3 27. LaSala ( v. J.P. Morgan Sec., 05 Civ. 4573 3 28. LaSala (Copper Mountain Networks) v. Morgan Stanley, 05 Civ. 4659 3 29. LaSala (Alloy Online) v. Prudential Equity Group, 05 Civ. 4682 3 30. LaSala (Redback Networks) v. Morgan Stanley, 05 Civ. 4762 2 31. LaSala (Brocade Communications) v. Morgan Stanley, 05 Civ. 4955 3 32. LaSala (F5 Networks) v. J.P. Morgan Sec., 05 Civ. 5291 3 33. LaSala (High Speed Access Corp.) v. J.P. Morgan Sec., 05 Civ. 5292 3 34. LaSala (Openware Servs.) v. J.P. Morgan Sec., 05 Civ. 5506 3 35. LaSala (Overture Servs.) v. J.P. Morgan Sec., 05 Civ. 5665 3 36. LaSala (Ariba) v. Morgan Stanley, 05 Civ. 5858 N/A 37. LaSala (Cybersource) v. J.P. Morgan Sec., 05 Civ. 5859 N/A 38. LaSala (Juniper Networks) v. J.P. Morgan Sec., 05 Civ. 5877 3 39. LaSala ( v. Prudential Equity Group, 05 Civ. 5878 3 40. LaSala (E-Loan) v. J.P. Morgan Sec., 05 Civ. 6019 3 41. LaSala (AskJeeves) v. Morgan Stanley, 05 Civ. 6172 3 42. LaSala (Primus Knowledge Solutions) v. J.P. Morgan Sec. 05 Civ. 6173 3 43. LaSala (Axeda Systems) v. Prudential Equity Group, 05 Civ. 6454 3 44. LaSala (Paradyne Networks) v. J.P. Morgan Sec., 05 Civ. 6455 3 45. LaSala (Audible) v. J.P. Morgan Sec., 05 Civ. 6456 3 46. LaSala ( v. Morgan Stanley, 05 Civ. 6625 3 47. LaSala (NexPrise) v. Morgan Stanley, 05 Civ. 6626 3 48. LaSala (Net2Phone) v. Morgan Stanley, 05 Civ. 6627 3 49. LaSala (Internet Initiative) v. Morgan Stanley, 05 Civ. 6916 3 50. LaSala (Fair Isaac) v. J.P. Morgan Sec., 05 Civ. 7099 3 51. LaSala (Red Hat) v. J.P. Morgan Sec., 05 Civ. 7135 3 52. LaSala (Silverstream Software) v. Morgan Stanley, 05 Civ. 7246 3 53. LaSala (Agile Software) v. Morgan Stanley, 05 Civ. 7353 3 54. LaSala (Lionbridge Techs.) v. Prudential Equity Group, 05 Civ. 7354 3 55. LaSala (Wink Communications) v. J.P. Morgan Sec., 05 Civ. 7364 3


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