No Violation of PSLRA Discovery Stay for Use of Documents Received After Stay Allegedly in Effect

Posted on: September 3rd, 2014 by Mark Friel
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The central question in the Ninth Circuit’s recent opinion in Petrie v. Electronic Game Card, Inc., No. 12-55620, slip op. (9th Cir. July 30, 2014), was whether plaintiffs who issued subpoenas during a time in which no Private Securities Litigation Reform Act (“PSLRA”) discovery stay was in effect violated the PSLRA by using responsive documents received after a stay allegedly had come into existence. The court answered with an unqualified “no.”

When the investor plaintiffs in Petrie issued subpoenas to third-party auditors in the summer of 2011, they had already survived, in part, two rounds of motions to dismiss, and the court had issued a scheduling order allowing the parties to proceed with discovery. After the subpoenas were issued, but before the documents were received by the investors, two of the control person defendants informed the investors of their intention to file dispositive motions against the Second Amended Complaint. The district court granted the dispositive motions, and in the investors’ Third Amended Complaint, they included allegations based on the third party documents, as well as copies of some of the documents themselves. As part of its dismissal of the Third Amended Complaint, the district court struck the new allegations and documents, finding the investors to have violated the PSLRA’s discovery stay, and ruled that the remaining allegations were insufficient to sustain the complaint.

Without deciding whether the mere announcement of an intention to file a dispositive motion triggers the automatic stay of discovery under the PSLRA, the Ninth Circuit held that, because the subpoenas were properly issued initially, the timing of their receipt was irrelevant. Thus, the investors were entitled to use that discovery in support of their Third Amended Complaint.