United States District Court, S.D. New York
October 14, 2005.
SEDONA CORPORATION, Plaintiff,
LADENBURG THALMANN, et al., Defendants.
The opinion of the court was delivered by: THEODORE KATZ, Magistrate Judge
MEMORANDUM OPINION AND ORDER
This action, which alleges, inter alia, violations of
various federal and state securities laws, has been referred to
this Court for general pretrial supervision and for resolution of
the current application by Defendants for an order confirming
that all discovery is stayed in this case, pursuant to the
Private Securities Litigation Reform Act ("PSLRA"), or, in the
alternative, requesting a protective order or an order to quash a
subpoena recently issued by Plaintiff. For the reasons set forth
below, the Court confirms that discovery is stayed until all
motions to dismiss the Second Amended Complaint have been
I. Procedural History
Plaintiff filed its First Amended Complaint on July 15, 2003.
On August 8, 2005, the Honorable Laura T. Swain, U.S.D.J.,
granted in part and denied in part Defendants' motions to dismiss the First Amended Complaint. See Sedona v. Ladenburg, No. 03
Civ. 3120 (LTS) (THK), 2005 WL 1902780 (S.D.N.Y. Aug. 9, 2005).
Specifically, the Opinion and Order partially dismissed
Plaintiff's claims against sixteen of the seventeen Defendants,
and entirely dismissed claims against a seventeenth Defendant.
Id. at *24. Thus, at least one cause of action against sixteen
of the Defendants remains viable. The Opinion and Order also
granted Plaintiff leave to file a Second Amended Complaint
repleading those causes of action dismissed without prejudice.
Plaintiff has expressed its intention to file a Second Amended
Complaint and Defendants' expect to move again to dismiss.
Several Defendants have also filed Motions for Reconsideration of
the Opinion and Order.
During the pendency of Defendants' initial motions to dismiss,
the parties adhered to the PSLRA's automatic stay of discovery.
See 15 U.S.C. § 78u-4(b)(3)(B). Plaintiff did, however, submit
three motions requesting a partial lift of the PSLRA's automatic
stay while Defendants' motions to dismiss were still pending, in
order to 1) send preservation letters to non-party
broker-dealers, 2) obtain discovery of Defendant Ladenburg
Thalmann's records that were included in a submission to the
National Association of Securities Dealers ("NASD") in response
to a "Wells Letter," and 3) serve a subpoena on non-party Refco Group Ltd./Refco Finance, Inc. ("Refco") for records that were
included in a "Wells" submission to the SEC and Attorney General.
The August 8, 2005 Order and Opinion, deciding Defendants'
motions to dismiss, denied as moot Plaintiff's motions for a lift
of the PSLRA discovery stay because all pending motions to
dismiss had been resolved. Sedona, 2005 WL 1902780, at *12.
Subsequently, Plaintiff sent preservation letters to
approximately ten broker-dealers and served a subpoena on
non-party Refco. Plaintiff has also indicated that it intends to
propound further discovery requests and, in a letter dated
September 20, 2005, Plaintiff requested permission to send a
preservation letter to Defendant Ladenburg Thalmann, one of
Defendants whose motion to dismiss was granted in part and denied
in part. The Court (Swain, J.) allowed Plaintiff to issue a
preservation letter to Ladenburg Thalmann, but ordered that
Plaintiff refrain from issuing subpoenas or document requests
until the instant application to lift the discovery stay is
II. The PSLRA's Automatic Stay of Discovery
The PSLRA's discovery stay provision provides:
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. 15 U.S.C. § 78u-4(b)(3)(B) (emphasis added).
As the parties recognize, the case law is unsettled as to
whether the PSLRA's automatic discovery stay applies after
initial motions to dismiss have been decided, where at least some
claims against the defendants have survived, and where future
amendments of the complaint and motions to dismiss are
On this and other issues, "the Second
Circuit has yet to provide the district courts with guidance
regarding the PSLRA's discovery stay provision." Taft v.
Ackermans, No. 02 Civ. 7951 (PKL), 2005 WL 850916, at *4
(S.D.N.Y. Apr. 13, 2005).
The Court is aware of two decisions in which federal courts
have concluded that the language of the PSLRA stay provision, as
it pertains to subsequent motions to dismiss, is ambiguous. See
Lernout & Hauspie Sec. Litig., 214 F. Supp. 2d 100, 105 (D.
Mass. 2002); In re Global Crossing, Ltd. Sec. Litig.,
322 F. Supp. 2d 319, 352 (S.D.N.Y. 2004). In the Lernout decision, the court found that the statute
lends itself to "two competing reasonable interpretations." Id.
In that court's view, "any motion" could be viewed as meaning
"all" motions to dismiss by all parties, or could be read to mean
that discovery should be stayed against a party "during the
pendency of any motion to dismiss filed by that party." Id. The
court therefore looked to the legislative history of the statute,
finding evidence that Congress was concerned with the cost of
discovery forcing settlement of frivolous lawsuits, and with
fishing expeditions for discovery in the hope of "finding a
sustainable claim not alleged in the complaint." Id. at 106
(quoting S. Rep. No. 104-98, at 14 (1965), reprinted in 1995
U.S.C.C.A.N. 679, 693.) Despite the fact that there were pending
motions to dismiss brought by several of the defendants in
Lernout, the complaint had survived a motion to dismiss brought
by four of the defendants. The court therefore concluded that the
purpose of the stay provision would not be undermined by
permitting discovery to proceed against those defendants whose
motions to dismiss were denied. See id. at 109; see also
In re Salomon Analyst Litig., 373 F. Supp. 2d 252, 254-55
(S.D.N.Y. 2005) ("The purpose of the statutory stay is to prevent
abusive, expensive discovery in frivolous lawsuits by postponing
discovery until after the Court has sustained the legal
sufficiency of the complaint. In a case where the court has
already sustained the legal sufficiency of the complaint, this purpose has been served.
To permit defendants indefinitely to renew the stay simply by
filing successive motions to dismiss would be to invite abuse.
Some judicial discretion to evaluate the desirability of a
renewed stay appears to be necessary.") (emphasis in original)
(internal quotation marks and citation omitted).
In the Global Crossing decision, Judge Lynch, of this Court,
found the statute ambiguous, but did not resolve the ambiguity
because the party seeking discovery was able to satisfy the
statute's exception to the discovery stay by demonstrating that
it would be unduly prejudiced if the stay was not partially
lifted. See Global Crossing, 322 F. Supp. 2d at 352-53.
Other courts do not appear to have been troubled by any
ambiguity in the statute, and have concluded both that the stay
applies to successive motions to dismiss, and that discovery
should be stayed as to all defendants, even though motions to
dismiss were filed by only some of the defendants. See, e.g.,
In re Lantronix, Inc. Sec. Litig., No. CV 02-03899 PA, 2003 WL
22462393, at *2 (C.D. Cal. Sept. 26, 2003) (although lead
defendant did not challenge the sufficiency of a portion of
securities law violation claim, discovery stay kept in effect
during pendency of other defendants' motions to dismiss and
motion to dismiss by lead defendant addressed to a portion of the
complaint); Fazio v. Lehman Bros., Inc., Nos. 1:02CV157, 1:02CV370, 1:02CV382, 2002 WL 32121836, at *2 (N.D. Ohio May 16,
2002) ("The reference in the statute to a stay of `all discovery'
is to be interpreted broadly. It applies even as to discovery
against co-defendants who have not filed motions to dismiss.");
Faulkner v. Verizon Commc'n, Inc., 156 F. Supp. 2d 384, 406
(S.D.N.Y. 2001) (denying motion to lift discovery stay after
motion to dismiss was granted, where plaintiff intended to file
an amended complaint and defendant sought permission to move to
dismiss); CFS-Related Sec. Fraud Litig., 179 F. Supp. 2d 1260,
1263 (N.D. Okla. 2001) ("As long as any defendant has filed a
motion to dismiss claims arising under Chapter 2B of the 1934
Securities Act, the PSLRA stays `all discovery,' even discovery
against answering, non-moving defendants."); S. Pac. Funding
Corp. Sec. Litig., 83 F. Supp. 2d 1172, 1175 n. 1 (D. Or. 1999)
(court stays discovery during pendency of third set of motions to
dismiss); Powers, 961 F. Supp. at 236 (even after district
court denied motion to dismiss in part and granted it in part,
court maintained stay of discovery because defendants moved for
In this Court's view, there is no ambiguity in the plain
language of the PSLRA's stay provision; the automatic stay
applies while "any motion to dismiss" is pending, just as the
statute permits "any" party to seek particularized discovery upon
a showing of need. Thus, the stay would apply where there is a pending motion to dismiss brought by either one or all of the
defendants, and regardless of whether the motion is brought
initially to dismiss a complaint, or subsequently, in response to
an amended complaint. Although a court need not consider
legislative history and intent when the language of a statute is
unambiguous, courts have noted that one purpose of the stay
provision is to prevent a plaintiff from utilizing discovery to
formulate a claim. See SG Cowen Sec. Corp. v. United States
Dist. Court for the N. Dist. of California, 189 F.3d 909, 912
(9th Cir. 1999) ("[T]he district court granted plaintiffs leave
to conduct discovery so that they might uncover facts sufficient
to satisfy the Act's pleading requirements. This is not a
permissible reason for lifting the discovery stay under the
Act."); Medhekar v. United States Dist. Court for the N. Dist.
of California, 99 F.3d 325, 328 (9th Cir. 1996) ("Congress
clearly intended that complaints in these securities actions
should stand or fall based on the actual knowledge of the
plaintiffs rather than information produced by the defendants
after the action has been filed."); AOL Time Warner, Inc. Sec. &
"ERISA" Litig., No. 02 Civ. 5575 (SWK), 2003 WL 21729842, at *1
(S.D.N.Y. July 25, 2003) (in denying motion to lift PSLRA
discovery stay, court notes: "Nor can it be assured that
plaintiffs will not attempt to use the discovery materials in
opposition to the recently filed motion [to dismiss].");
Faulkner, 156 F. Supp. 2d at 402-03 (denying request to lift stay of discovery where sole purpose was to
uncover facts to support fraud allegations in the complaint);
Tyco Int'l Ltd. Sec. Litig., No. 00MD1335, 2000 WL 33654141, at
*5 (D.N.H. July 27, 2000) ("courts have concluded that the PSLRA
does not allow plaintiffs to obtain relief from the statutory
stay to discover facts necessary to satisfy the Act's heightened
Plaintiff intends to replead some of its claims, and the Court
has yet to determine the sufficiency of the repleaded claims. As
contemplated by the PSLRA, Plaintiff must replead its claims
without the benefit of pretrial discovery. Cf. Rampersad v.
Deutsche Bank Sec. Inc., 381 F. Supp. 2d 131, 134 (S.D.N.Y.
2003) ("discovery should be permitted in securities actions only
after the court has sustained the legal sufficiency of the
complaint") (quoting Faulkner,
156 F. Supp. 2d at 403).*fn2
Nevertheless, the PSLRA's discovery stay is not absolute. The
stay provision provides exceptions where there is a likelihood of
undue prejudice, or a need to preserve evidence is demonstrated.
Here, the Court does not perceive any risk of a loss of evidence or substantial prejudice to Plaintiff if the
PSLRA discovery stay remains in effect. Plaintiff's argument,
that a lift of the discovery stay is necessary to preserve
evidence, no longer has force since Plaintiff sent preservation
letters to ten broker-dealers, and Judge Swain granted Plaintiff
permission, on September 21, 2005, to send a preservation letter
to Defendant Ladenburg Thalmann. See Trump Hotel S'holder
Derivative Litig., 1997 WL 442135, at *2 (denying the
plaintiff's motion for lift of PSLRA stay, but granting order to
preserve documents). Unlike other cases where a PSLRA stay has
been lifted, Plaintiff has not shown exigent circumstances that
risk substantially prejudicing Plaintiff. See e.g., In re
Global Crossing, 322 F. Supp. 2d at 352-353 (granting lift of
PSLRA stay as to discovery from defendant Arthur Andersen, while
other defendants' motions to dismiss remained pending, because
the other motions presented distinct factual allegations and
legal issues, Andersen's motion to dismiss was resolved almost
entirely in favor of plaintiff, and Andersen as an entity was in
the process of winding down); In re WorldCom, Inc. Sec. Litig.,
234 F. Supp. 2d 301, 305-306 (S.D.N.Y. 2002) (lifting PSLRA stay
where the plaintiffs made a showing that requested documents had
been produced to multiple government agencies in response to
several investigations, and as the only parties that did not have
the documents, plaintiffs would have been put at a disadvantage for purposes of litigation and settlement negotiations). Nor does
the fact that some of the documents that Plaintiff seeks have
been produced to the government justify lifting the PSLRA's
automatic discovery stay. See Rampersad,
381 F. Supp. 2d at 133-134 (noting that there is no categorical exception to the
PSLRA's discovery stay provision for information that has been
provided to a government agency).
Accordingly, the Court confirms that discovery is stayed until
all motions to dismiss the Second Amended Complaint have been
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