In re Carnegie Intern. Corp. Securities Litigation

• Decision Date: 11 April 2000
• Docket Number: No. L-99-1688.,L-99-1688.
• Citation: 107 F.Supp.2d 676
• Parties: In re CARNEGIE INTERNATIONAL CORPORATION SECURITIES LITIGATION
• Court: U.S. District Court — District of Maryland

107 F.Supp.2d 676

In re CARNEGIE INTERNATIONAL CORPORATION SECURITIES LITIGATION

No. L-99-1688.

United States District Court, D. Maryland.

April 11, 2000.

Charles J. Piven, Law Offices of Charles J. Piven, P.A., of Baltimore, Maryland; Fred T. Isquith, Wolf, Haldenstein, Adler, Freeman & Herz, of New York, New York; Stanley M. Grossman, Pomerantz, Block, Grossman & Gross, of New York, New York; and William P. Butterfield, of Washington, D.C., for Plaintiffs.

D. Christopher Ohley, Blank, Rome, Comisky & McCauley, Baltimore, Maryland, for defendants.

MEMORANDUM OPINION

GAUVEY, United States Magistrate Judge.

Currently pending before this Court are five related securities class action cases against Carnegie International Corporation (Carnegie) and several of its officers and members of its board of directors. Plaintiffs allege that Carnegie "deceive[d] the investing public including them, through the issuance of false and misleading statements concerning the company's financial condition and operations" and that Carnegie thereby "artificially inflated the modest price of Carnegie's securities" and "cause[d] plaintiff and other members of the class to purchase Carnegie's securities at inflated prices." Alan Genut v. Carnegie International Corp., Civil No. L-99-1688 (D.Md.1999). Pursuant to court order, the cases were consolidated on September 1, 1999. Subsequently, the plaintiffs were ordered to file an amended, consolidated complaint by March 21, 2000, which they did. The defendants have not yet filed an answer or other response (which answer or response is not due until 45 days after the filing of the complaint), although defendants represented to the Court that they planned to "assert, in a Motion to Dismiss that they will file, that these ... allegations in the Complaint do not state a cause of action on which relief may be granted." (Paper No. 14, 2). In a letter to the Court dated March 30, 2000 (the date of the scheduled further hearing), defendants softened their position, informing the Court that it was "probable" that they will file a motion to dismiss the consolidated complaint. (Paper No. 21).

By Order of Reference dated February 2, 2000, the Honorable J. Frederick Motz, for the Honorable Benson E. Legg, referred to the undersigned magistrate judge the resolution of the pending Motion to Quash. A telephone hearing was held on February 18, 2000; no further argument is necessary.

The present dispute stems from a subpoena duces tecum Carnegie served on Grant Thornton, LLP, Carnegie's former accountant and auditor. That subpoena requested 21 document categories and calls for testimony on 32 separate subjects, including such sweeping subjects for examination as "all work done by [Grant Thornton] for [Carnegie]," (Paper No. 11, Ex. A, at 7, ¶ 4), or "all work done by [Grant Thornton] for any of [40] ... persons." Grant Thornton is not a named party to the lawsuit. However, Carnegie has made it clear that should the lawsuit go forward, it will assert that it "relied, in good faith, upon the advice given by... Grant Thornton." (Paper No. 14 at 12.) Moreover, Carnegie's submissions relative to this motion make clear its now contentious relationship with Grant Thornton, leaving little doubt that Carnegie will seek to implead Grant Thornton as a third party defendant if the case goes forward on the merits. Carnegie served the disputed subpoena after the Court entered an Order authorizing the parties to agree among themselves to waive the protections provided in the Private Securities Litigation Reform Act (PSLRA or the Reform Act) and engage in discovery among third parties. (Paper No. 10). However, the Order specifically did "not preclude any nonparties from filing a motion for a Protective Order." (Id.)

Grant Thornton asserts that the Court should either quash the subpoena or, in the alternative, issue a protective order on the grounds that: (1) third parties are protected by the automatic stay provisions of the PSLRA; and (2) the discovery is over broad, unduly burdensome, and encompasses protected materials. (Paper No. 11 at 2). Carnegie concedes that "courts routinely have enforced the stay provisions in cases where a motion to dismiss has been filed or may be filed in the future" (Paper No. 14, 14), but argues that "[t]he PSLRA was created to shield defendants from frivolous lawsuits and other abuses by shareholders ... to protect plaintiffs or third parties." (Paper No. 14, 15). Additionally, Carnegie argues that it will be unfairly prejudiced if Grant Thornton does not comply with the discovery requests, thereby entitling it to the discovery under the statute, 15 U.S.C. § 78u-4(b)(3)(B). Plaintiffs argue that the PSLRA does not bar the discovery of Grant Thornton as no motion to dismiss is in fact pending and the automatic stay protections are afforded only to defendants, not third parties.

Under the following analysis, the Court finds that Grant Thornton is protected by the automatic stay provisions of the PSLRA, that Carnegie has failed to show a particularized need, and therefore grants Grant Thornton's Motion to Quash.¹ However, since the PSLRA provision on preservation of evidence during a stay only expressly applies to a named party, the Court orders, as Grant Thornton offered to do, that Grant Thornton preserve all documents subject to Carnegie's subpoena pursuant to 15 U.S.C. § 78u-4(b)(3)(c).

ANALYSIS

The Reform Act of 1995 provides, in pertinent part, that "[i]n 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).

The Reform Act was passed to address the perceived widespread abuse of the securities laws by overzealous attorneys and investors. Congress found that the federal securities laws are frequently misused by the filing of frivolous suits "alleging violations of the federal securities laws in the hope that defendants will quickly settle to avoid the expense of litigation. These suits, which unnecessarily increase the cost of raising capital and chill corporate disclosure, are often based on nothing more than a company's announcement of bad news, not evidence of fraud." S. Rep. 104-98, 1995 WL 372783 (Leg.Hist.), at 4, 1995 U.S.Code Cong. & Admin. News 679, 683. Congress also found that 93 percent of these suits are settled and that many are "settled based not on the merits but on the size of the defendant's pocketbook." Id. at 8, 1995 U.S.Code Cong. & Admin. News at 688.

Congress was particularly concerned with the high costs associated with discovery, which accounts for approximately 80 percent of total litigation costs in securities fraud actions. Id. at 14, 1995 U.S.Code Cong. & Admin. News at 693. Testimony before the Securities Subcommittee indicated that discovery in securities actions often "resembles a fishing expedition." Id. The Subcommittee determined that "discovery should be permitted in securities class actions only after the court has sustained the legal sufficiency of the complaint." Id.

A. Grant Thornton, As A Third Party, is Entitled to the Protective Stay Provisions of the PSLRA

Defendants challenge Grant Thornton's standing to protection under the stay provisions of the PSLRA. They argue that Congress intended to protect only named defendants from discovery until the sufficiency of the complaint was tested, not non-parties or potential defendants.

It is well settled that when interpreting any statute, a court must first look to the plain meaning of the language, used by Congress. See Robinson v. Shell Oil Co., 519 U.S. 337, 340, 117 S.Ct. 843, 136 L.Ed.2d 808 (1997); Alexander S. v. Boyd, 113 F.3d 1373, 1383 (4th Cir.1997). "[I]f the statutory language is unambiguous and `the statutory scheme is coherent and consistent,'" judicial inquiry ends. Robinson, 519 U.S. at 340, 117 S.Ct. 843. "The plainness or ambiguity of the statutory language is determined by the reference to the language itself, the specific context in which the language is used, and the broader context of the statute as a whole." Id.

Here, the Act clearly states: "In any private action arising under this chapter, all discovery and other proceedings shall be stayed during the pendency of any motion to dismiss ..." 15 U.S.C. § 78u-4(b)(3)(B) (emphasis added). There is no distinction between discovery of non-parties and parties. See Powers v. Eichen, 961 F.Supp. 233, 235 (S.D.Cal.1997) ("By its language, the Reform Act addresses `all discovery' with no distinction between that sought from nonparties as opposed to parties.") Thus, the Court's inquiry could stop based on the plain language of the statute on this point. See Robinson, 519 U.S. at 340, 117 S.Ct. 843. Once the stay is triggered, all discovery and proceedings cease.

The defendants, however, ignore the plain language of the statute and argue legislative intent: "The PSLRA was created to shield defendants from frivolous lawsuits and other abuses by shareholders. It was not created to protect plaintiffs or third parties." (Paper No. 14 at 15). The Court rejects defendants' reading of the Act and their reliance on the underlying legislative history, and holds instead that Congress manifest intent was to protect all potential targets of securities actions from abusive litigation practices. That intent is first and foremost manifest by the unequivocal language of the act. It is also clear when considered in "the broader context of the statute as a whole," or, as defendants' urge, when resort is made to legislative history.

Even though the congressional reports employ the word "defendant," it is clear that Congress intended to protect not just named defendants in securities actions, but potential defendants (or third party defendants)...