PSLRA Discovery Stay Does Not Preclude Discovery Sought Before Stay Was in Effect

The Private Securities Litigation Reform Act (PSLRA) imposes a discovery stay while a motion to dismiss is pending (15 U.S.C. §78u-4(b)(3)(B)). The intent of the statute was to avoid unnecessary discovery costs and ensure  plaintiff’s securities claims are based solely on information known at the time of filing. In Petrie v. Electronic Game Card, Inc. (2014 WL 3733596), the Ninth Circuit held that the stay does not affect discovery requests issued before the stay applied but received thereafter. The Defendants here produced electronic gaming machines. In 2009, the company reported millions in assets, only to file for bankruptcy a year later. Investors filed suit for violations of 10(b) and 20(a) of the Securities Exchange Act, based on false reports of subsidiary revenue attributed to the company and the withdrawal of questionable audit opinions. After the court denied a motion to dismiss the second amended complaint, the investors subpoenaed the company’s auditor. Shortly after, one defendant announced his intent to move for judgment on the pleadings. The plaintiffs then received the subpoenaed information, which they utilized in the third amended complaint (TAC). The defendant moved to strike pursuant to a violation of the PSLRA stay. The district court granted the motion, dismissed the TAC, and entered judgment for the defendants.

On appeal, the Ninth Circuit reversed. Although the plaintiffs received the information during a stay, no stay operated when the investors subpoenaed the auditor. The court also held that either the auditor could have objected to the costs of the subpoena, or the defendant could have objected to the violation at the time the subpoena was issued; neither did so because no basis existed. Defense counsel even conceded at oral argument that no stay operated when the auditor was subpoenaed.

The Court found the complaint sufficient, reversed decision to strike portions of the TAC, and remanded for further proceedings.