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380544 Canada, Inc. v. Aspen Technology

July 18, 2007

380544 CANADA, INC., WAYNE SIM, AND SALVATORE CLAVE PLAINTIFFS,
v.
ASPEN TECHNOLOGY, INC., LAWRENCE EVANS, DAVID MCQULLIN, AND LISA ZAPPALA, DEFENDANTS.



The opinion of the court was delivered by: John F. Keenan, United States District Judge

OPINION & ORDER

BACKGROUND

This securities action relates to alleged fraudulent misstatements made by the defendants regarding the revenues of Defendant Aspen Technologies ("Aspen"). Plaintiffs 380544 Canada, Inc., Wayne Sim, and Salvatore Clave (collectively, the "Plaintiffs") claim that, as a result of the defendants' false portrayal of Aspen's financial health in both public statements and private correspondence with the plaintiffs, Plaintiffs were induced to enter into a Securities Purchase Agreement, under which they bought approximately $6.6 million of Aspen's stock. When the defendants' fraud was exposed, Aspen's stock price plummeted, resulting in Plaintiffs' financial losses. The individual defendants Evans, McQuillin, and Zappala (collectively, the "Individual Defendants") are former executives of Aspen.

This action commenced on February 15, 2007. One month earlier, in January 2007, the Securities Exchange Commission ("SEC") brought a civil enforcement suit for securities fraud against the Individual Defendants, in the District of Massachusetts. The SEC's suit remains pending. Also in January 2007, the Office of the United States Attorney for the Southern District of New York ("USAO") filed criminal securities fraud charges against Defendant McQuillin. McQuillin pleaded guilty to the charges in March 2007.

Pursuant to the Private Securities Litigation Reform Act of 1995 ("PSLRA"), discovery in this action was stayed by the filing of the Individual Defendants' pre-answer motions to dismiss Plaintiffs' Complaint. Plaintiffs have moved to lift the stay to obtain particularized discovery of "documents previously produced by [the defendants] to regulators including" the SEC and the USAO. (Plaintiffs' Letter of May 25, 2007 ("Pl. Mem.") at 1.) At the Court's direction, the parties submitted contemporaneous letters setting forth their respective positions. For the following reasons, Plaintiffs' motion is denied.

DISCUSSION

The PSLRA states in relevant part that "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). The evidence preservation exception is not applicable here. Thus, the question before the Court is whether Plaintiffs will suffer "undue prejudice" if discovery is stayed until the outcome of the Individual Defendants' motions to dismiss.

"Our Court of Appeals has not provided guidance on what constitutes 'undue prejudice' in the context of a PSLRA discovery stay." In re Refco, Inc. Sec. Litig., No. 05 Civ. 8626 (GEL), 2006 U.S. Dist. LEXIS 55639, at *3 (S.D.N.Y. Aug. 8, 2006). The Southern District has defined "'[u]ndue prejudice' in the context of a discovery stay [to] mean[] improper or unfair treatment amounting to something less than irreparable harm." In re Smith Barney Transfer Agent Litig., No. 05 Civ. 7583 (WHP), 2006 U.S. Dist. LEXIS 42646, at *6 (S.D.N.Y. June 26, 2006) (citations omitted).

Plaintiffs advance two arguments for lifting the stay. First, Plaintiffs argue that the stay should be lifted because to do so would not frustrate the goals of the PSLRA and would impose only a de minimis burden on the defendants. Second, Plaintiffs contend that lifting the stay is necessary to prevent undue prejudice to the plaintiffs. Neither argument has merit.

Plaintiffs correctly observe that Congress' two-fold purpose in enacting the PSLRA's stay provision was "to prevent plaintiffs from filing securities class actions with the intent of using the discovery process to force a coercive settlement," and "to prevent plaintiffs from filing securities fraud lawsuits as a vehicle in order to conduct discovery in the hopes of finding a sustainable claims not alleged in the complaint." In re LaBranche Sec. Litig., 333 F. Supp. 2d 178, 181 (S.D.N.Y. 2004) (internal quotation marks and citations omitted). Here, Plaintiffs argue, neither goal would be frustrated by the lifting of the stay, because "Plaintiffs are not on a 'fishing expedition' to locate sustainable claims or to coerce Defendants to settle." (Pl. Mem. at 2.) Plaintiffs also point out that, because discovery is limited to documents that already have been produced to the SEC and USAO, the burden of production on the defendants is minimal. Plaintiffs conclude that, where the "goals of the PSLRA are not frustrated and the discovery request is limited to documents already produced to regulators, Courts generally allow the discovery." (Id.)

Although courts have considered the goals of the PSLRA and the burden of production on defendants in determining whether to lift stays of discovery, the mere fact that the PSLRA's goals would not be frustrated by the lifting of the stay and the documents at issue already have been provided to the SEC and USAO is not sufficient to warrant lifting the stay. According to express statutory language, the PSLRA's discovery stay may be lifted only if a court finds that doing so is necessary to preserve evidence or prevent undue prejudice. See 15 U.S.C. § 78u-4(b)(3)(B). Counter to Plaintiffs' contention, even where the goals of the PSLRA are not frustrated and a plaintiff's discovery request is limited to documents already produced to government regulators, courts have refused to lift the discovery stay if the narrow statutory exceptions of evidence preservation or undue prejudice have not been met. See, e.g., In re Vivendi Universal S.A. Sec. Litig., 381 F. Supp. 2d 129, 129 (S.D.N.Y. 2003) (denying motion to lift PSLRA stay where documents at issue were "already produced by defendants to the United States Department of Justice, Securities and Exchange Commission," and other regulatory agencies "in connection with civil and criminal investigations for misconduct by defendants"); Rampersad v. Deutsche Bank Sec. Inc., 381 F. Supp. 2d 131, 133 (S.D.N.Y. 2003) (denying motion to lift the PSLRA stay with respect to documents provided to the government and rejecting plaintiffs' contention that "the PSLRA stay of discovery does not apply when the information sought has already been provided to a government agency"); In re AOL Time Warner Sec. & "ERISA" Litig., No. 02 Civ. 5575 (SWK), 2003 U.S. Dist. LEXIS 12846, at *6 (S.D.N.Y. July 21, 2003) (denying lift of stay after finding that "Lead Plaintiff has not demonstrated that exceptional circumstances are present in this case requiring production of documents previously produced to various government agencies"). The one case from this Circuit cited by Plaintiff to support its contention that courts "generally" allow discovery to proceed where the PSLRA's goals are not frustrated and documents have already been provided to governmental authorities, In re Branche, 333 F. Supp. 2d at 178, does not carve out an additional exception to the PSLRA discovery stay requirement. In Branche, the court lifted the stay only after first determining that the plaintiffs would be unduly prejudiced from not having access to discovery, where the defendants had already settled with regulatory authorities and plaintiffs were in danger of being the only interested party without access to the documents at issue. 333 F. Supp. 2d at 183. Although the court noted that the PSLRA's goals would not be frustrated by a lifting of the stay and that the burden of production on the defendants would be minimal, the court lifted the stay only after finding that the plaintiffs would suffer undue prejudice. Id.

In this case, the stay of discovery will not result in undue prejudice to Plaintiffs. Plaintiffs insist that lifting the stay is necessary to prevent undue prejudice because discovery already has been produced to the USAO, in connection with its prosecution of McQuillin, and to the SEC, in connection with its pending suit against the Individual Defendants. Therefore, Plaintiffs contend, they "are at a disadvantage because they are the only interested party to whom the PSLRA applies." (Pl. Mem. at 3.) The discovery at issue, Plaintiffs assert, "will help [them] evaluate the strength of their case, as well as their settlement prospects." (Pl. Mem. at 3.) Plaintiffs cite In re WorldCom, Inc. Sec. Litig., 234 F. Supp. 2d 301(S.D.N.Y. 2002), for the proposition that the discovery stay is unduly prejudicial because it would cause Plaintiffs to be unable "to make informed decisions about [their] litigation strategy in a rapidly shifting landscape.'" (Pl. Mem. at 2, quoting In re WorldCom, 234 F. Supp. 2d at 305) (alterations in Pl. Mem.). Plaintiffs assert that the "concerns raised by the WorldCom court are present here." (Pl. Mem. at 3.)

Plaintiffs' reliance on WorldCom is misplaced. In that case, Judge Cote lifted the PSLRA discovery stay because of undue prejudice arising from the "unique circumstances" of that case. In re WorldCom, 234 F. Supp. 2d at 305. Specifically, in WorldCom, the PSLRA plaintiffs had been ordered by the court to participate with the insolvent defendant in coordinated settlement discussions, along with plaintiffs in a related ERISA litigation. The ERISA plaintiffs, unhampered by the requirements of the PSLRA, were in the process of obtaining discovery. The court found that without access to the documents available to the ERISA plaintiffs, the PSLRA plaintiffs would have been at a disadvantage in competing with the ERISA litigants for the limited pool of the bankrupt defendants' assets. Id. at 306. Because the PSLRA plaintiffs were competing with the ERISA plaintiffs to recover from an insolvent defendant, the court observed that imposing a stay of discovery would result in the "very real risk" that the WorldCom plaintiffs would "be left to pursue its action against defendants who no longer have anything or at least as much to offer." Id.

The "unique circumstances" that were present in WorldCom do not exist here. The plaintiffs in this case are not poised to participate in Court-ordered settlement discussions alongside non-PSLRA plaintiffs. Plaintiffs have not claimed that settlement discussions, between the defendants and Plaintiffs or between the defendants and non-PSLRA plaintiffs, are underway or even imminent. "Mere speculation about highly contingent possibilities of future prejudice does not demonstrate that lifting the stay is necessary . . . to prevent undue prejudice that would otherwise result." In re Refco, 2006 U.S. Dist. LEXIS 55639, at *10 (internal quotation marks and citation omitted); see also In re AOL Time Warner, 2003 U.S. Dist. LEXIS 12846, at *6 (refusing to lift stay, despite plaintiffs' assertion that "settlement discussions between various Defendants and the government are currently on-going," because plaintiffs' assertion, "in contrast to In re Worldcom. . . where court-ordered settlement discussions had been scheduled and defendant had filed for bankruptcy,. . . [is] ...


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