In re Lernout & Hauspie Securities Litigation

214 F.Supp.2d 100

In re LERNOUT & HAUSPIE SECURITIES LITIGATION

No. CIV.A. 00-CV-11589-PBS.

United States District Court, D. Massachusetts.

July 26, 2002.

Michael G. Lange, Berman, DeValerio & Pease, Boston, MA, Steven E. Cauley, Cauley, Geller, Bowman & Coates, Little Rock, AK, W. Todd W. Todd Ver Weire, Cauley Geller Bowman & Coates, LLP, Little Rock, AR, Glen DeValerio, Berman DeValerio Pease Tabacco, Burt & Pucillo, Boston, MA, Curtis L. Bowman, Cauley Geller Bowman & Coates, LLP, James P. Bonner, Shalov Stone & Bonner, New York City, Alicia M. Duff, Berman, DeValerio & Pease, Boston, MA, Kenneth A. Ricken, Shalov Stone & Bonner, New York City, Jeffrey C. Block, Berman DeValerio Pease Tabacco, Burt & Pucillo, Boston, MA, Ralph M. Stone, Lee S. Shalov, Shalov Stone & Bonner LLP, New York City, Paul J. Geller, Gene Cauley, Cauley Geller Bowman & Coates, LLP, Little Rock, AR, Robert P. Frutkin, Savett Frutkin Podell & Ryan, PC, Philadelphia, PA, Bernard M. Gross, Deborah R. Gross, Law Offices of Bernard M. Gross, P.C., Philadelphia, PA, Thomas G. Shapiro, Shapiro, Haber & Urmy LLP, Boston, MA, Barbara A. Podell, Savett, Frutkin, Podell & Ryan, P.C., Philadelphia, PA, Richard A. Lockridge Grindal Nauen P.L.L.P., Minneapolis, MN, Lisa J. Rodriguez, Rodriguez & Richards, LLC, Haddonfield, NJ, Thomas L. Earp, Earp Cohn P.C., Westmont, NJ, Michael D. Donovan, David A. Searles, Donovan Searles, LLC, Philadelphia, PA, for Plaintiffs.

William R. Moorman, Stephen Wald, Craig & Macauley, P.C., Kevin J. Lesinski, Arnold P. Messing, Choate, Hall & Stewart, Boston, MA, Michael P. Carroll, Davis, Polk & Wardwell, William Fenrich, Davis Polk & Wardwell, Diem-Suong T. Nguyen, Davis Polk & Wardwell, New York City, John B. Missing, Herbert Thomas, Ellen D. Marcus, Debevoise & Plimpton, Washington, DC, James S. Dittmar, Sanjit S. Korde, Hutchins, Wheeler & Dittmar, Michael A. Collora, Dwyer & Collora, David M. Osborne, Dwyer & Collora, Boston, MA, Donald Chase, Franklin R. Weissberg, David A. Piedra, Peter D. Weinstein, Morrison Cohen Singer & Weinstein, LLP, New York City, James O. Fleckner, Hutchins, Wheeler, & Dittmar, David M. Osburne, Dwyer & Collora, Boston, MA, Rachelle L. DeGregory, Morrison Cohen Singer & Weinstein, LLP, New York City, William Shields, Jonathan I. Handler, Day, Berry & Howard, Boston, MA, Bruce A. Baird, Covington & Burling, Paul W. Schmidt, Jason A. Levine, Covington & Burling, William D. Iverson, Covington & Burling, Andrew Good, Silverglate & Good, Roger E. Zuckerman, Zuckerman Spaeder LLP, Steven M. Salky, Zuckerman Spaeder LLP, Washington, DC, Michael P. Connolly, Murtha Cullina Roche Carens & DeGiacomo, Boston, MA, Frank Rozzano, Dickstein Shapiro Morin & Oshinsky, LLP, Tara J. Holubar, Dickstein Shapiro Morin & Oshinsky, LLP, Washington, DC, Robert J. Kaler, Gadsby & Hannah LLP, Boston, MA, Douglas H. Meal, Ropes & Gray, Boston, MA, David H. Braff, Bradley A. Harsch, Sullivan & Cromwell, New York City, Emily F. Klineman Ropes & Gray, Boston, MA, Philip L. Graham, Jr., Stephanie G. Wheeler, Sullivan & Cromwell, New York City, Theodore Edelman, Sullivan & Cromwell, London EC4A 1AN, England, Erick Lund, Posternak, Blankstein & Lund, Boston, MA, David N. Ellenhorn, Louis M. Solomon, Teresa A. Gonsalves, Solomon, Zauderer Ellenhorn, Frischer & Sharp, New York City, Thomas W. Evans, Cohen & Fierman, LLP, Boston, MA, Janet B. Fierman, Cohen & Fierman, LP, Boston, MA, John W. Polk, Baker & McKenzie, Washington, DC, Robert M. Cohen, Cohen & Fireman, LLP, Boston, MA, John A. Gilmore, Nelson Callahan, Hill & Barlow, Boston, MA, George A. Salter, John A. Redmon, Nicholas W.C. Corson, Hogan & Hartson, LLP, New York City, Sarah E. Walters, Gus P. Coldebella, Anthony M. Feeherry, Goodwin Procter LLP, Boston, MA, for Defendants.

Michael L. Hirschfeld, Jeffrey Barist, Douglas W. Henkin, Milbank, Tweed, Hadley & McCloy, New York City, Sherrie R. Savett, Berger & Montague, Philadelphia, PA, Jonathan Shapiro, Stern, Shapiro, Weissberg & Garin, Boston, MA, Joseph H. Weiss, Jack I. Zwick, David C. Katz, Weiss & Yourman, New York City, for Interested Parties.

MEMORANDUM AND ORDER

SARIS, District Judge.

I. Introduction

This proposed securities fraud class action raises a novel question under the Private Securities Litigation Reform Act ("PSLRA"), 15 U.S.C. § 78u-4(b)(3)(B), which stays discovery while any motion to dismiss is pending unless certain circumstances exist.¹ In a class action against multiple defendants, does the PSLRA stay discovery against a defendant whose motion to dismiss has been denied during the pendency of other defendants' motions to dismiss?

After extensive briefing and a lengthy hearing, this Court recently denied motions to dismiss brought by four senior officer defendants in this proposed class action. Several other defendants' motions to dismiss remain pending. Defendants now seek to stay discovery until all motions to dismiss are resolved. After reviewing the submissions, this Court DENIES defendants' motions to stay discovery and orders that discovery may proceed against the senior officers. However, I limit the scope of that discovery.

II. BACKGROUND

This case involves allegations of massive accounting fraud at now-bankrupt Lernout & Hauspie Speech Products, N.V. ("L & H"), a Belgian speech recognition software corporation.

Lead plaintiffs in the proposed consolidated class action purchased L & H common stock and stock options between April 28, 1998 and November 8, 2000 (the "Class Period"). Plaintiffs brought this action against twenty-eight defendants, including L & H senior officers, members of the company's board of directors, L & H's outside auditors KPMG, and several other individuals and related entities that allegedly injured purchasers of L & H common stock and stock options on the NASDAQ exchange during the Class Period.² The Amended Complaint alleges that defendants participated in massive accounting and securities fraud, giving rise to claims under sections 10(b) and 20(a) of the Securities and Exchange Act of 1934, and subjecting the action to the requirements of the PSLRA.³

In addition to the consolidated class action, this Court has before it three related actions transferred from the District of Delaware involving many of the same defendants named in the class action. Two of the actions, Filler v. Lernout and Bamburg v. Lernout, were brought by former shareholders of Dragon Systems, Inc. who acquired shares in L & H pursuant to a June 2000 agreement to merge Dragon into a U.S. subsidiary of L & H, known as L & H Holdings USA, Inc.⁴ The plaintiffs in the third action, Stonington Partners, Inc. v. Dammekens, purchased L & H stock in a May 2000 merger of Dictaphone Corporation into a subsidiary of L & H. As in the class action, plaintiffs in the three related actions allege 10(b) and 20(a) claims, but add a set of common law fraud and fraudulent misrepresentation claims not present in the class action Amended Complaint.⁵

Defendants in the class action and related actions have moved to dismiss for failure to state a claim under Fed.R.Civ.P. 12(b)(6) and the heightened pleading requirements of the PSLRA. To address the multiple motions to dismiss, this Court divided the defendants into functional groups and established a schedule to hear each group's motions in turn: senior officers (April 24, 2002); KPMG entities (June 13, 2002); individual board members, Microsoft, and RVD Securities (July 23, 2002); related entities (September 12, 2002); remaining motions to dismiss (October 10, 2002). In its June 19, 2002 Opinion, this Court denied the senior officers' motions to dismiss in the proposed class action.⁶

Defendants move, pursuant to § 78u-4(b)(3)(B), for an order staying all discovery — including discovery against the senior officers — until all motions to dismiss have been resolved. Lead plaintiffs oppose this motion and have filed an affidavit stating their intent to begin limited discovery following any denial of a motion to dismiss.⁷

III. DISCUSSION

A. Applicability of Stay Provision

The PSLRA contains the following stay of discovery provision:

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.

§ 78u-4(b)(3)(B). The narrow question presented is whether this provision, and specifically the language "during the pendency of any motion to dismiss," stays discovery against four defendants whose motions to dismiss have been denied while motions to dismiss by other defendants are pending.

This is a question of first impression, but one that joins an ongoing debate over how broadly or narrowly to interpret § 78u-4(b)(3)(B) in various settings. Compare Medhekar v. United States Dist. Court for the N. Dist. of Cal., 99 F.3d 325, 328 (9th Cir.1996) (per curiam) (holding that the terms "discovery and other proceedings" include initial disclosures) and In re Carnegie Int'l Corp. Sec. Litig., 107 F.Supp.2d 676, 679, 683 (D.Md.2000) (holding that "all discovery" includes discovery from non-parties as well as parties, and that a motion to dismiss is "pending" even if parties have not yet filed, but intend to file, a motion to dismiss) and Powers v. Eichen, 961 F.Supp. 233, 236 (S.D.Cal. 1997) (extending "pendency" to the period during which a court is reconsidering its ruling on a motion to dismiss) with In re Comdisco Sec. Litig., 166 F.Supp.2d 1260, 1261-62 (N.D.Ill.2001) (doubting whether the stay provision was intended to apply to initial disclosures and ordering the production of officers' and directors' insurance policies) and Tobias Holdings, Inc. v. Bank United Corp., 177 F.Supp.2d 162, 169 (S.D.N.Y.2001) (holding that "any private action arising under this chapter" excludes plaintiff's non-fraud state...