Anwar et al v. Fairfield Greenwich Limited et al

Filing 309

RESPONSE re: (307 in 1:09-cv-00118-VM-THK) Objection to Report and Recommendations,. Document filed by David I. Ferber, Frank E. Pierce, Frank E. Pierce Ira, Miguel Lomeli, Morning Mist Holdings Limited, David I. Ferber. (Attachments: #1 Exhibit A, #2 Exhibit B)Filed In Associated Cases: 1:09-cv-00118-VM-THK, 1:09-cv-02366-VM, 1:09-cv-02588-VM(Wallner, Robert)

Anwar et al v. Fairfield Greenwich Limited et al

Doc. 309 Att. 2

EXHIBITB

Dockets.Justia.com

SIMPSON THACHER & BARTI_ETT LLP
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DIAL NUMBER E.MAI An:R';
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BY HAND October 9, 2009
Re: PSLRA Stay in Anwar et al. v. Fairfield Greenwich Limited. et al., Docket No. 09 CV 0118 (VM)

Hon. Theodore H. Katz United States Magistrate Judge Daniel Patrick Moynihan
United States Courhouse

500 Pearl St. New York, NY 10007-1312
Dear Judge Katz:

Pursuant to the Joint Rule 26(f) Discovery Plan filed on May 29,2009, we wrte on behalf of Fairfield Greenwich Advisors LLC ("FGA") and certain other defendants regarding the application of the PSLRA stay of discovery in the above-captioned
consolidated action.

Class Plaintiffs ("Plaintiffs") have asserted federal securties claims in their Second Consolidated Amended Complaint ("SCAC") and therefore their case is subject to the Private Securities Litigation Reform Act ("PSLRA" or "the Act") and the automatic discovery stay mandated by the Act. Accordingly, unless Plaintiffs can meet their "heavy burden" of showing that "exceptional circumstances" are present, they are not entitled to discovery until afer this Court has resolved Defendants' fortcoming motions to dismiss. There are no exceptional circumstances warranting immediate discovery in this case.
The mandatory stay applies to all of the claims asserted by Plaintiffs in the SCAC. The PSLRA plainly states that in a securties fraud action "all discovery...shall be stayed

during the pendency of any motion to dismiss, unless... paricularized discovery is

necessar to preserve evidence or to prevent undue prejudice to that pary." 15 U.S.C. 78u4(b)(3)(B) (emphasis added). "There is simply nothing in either the text or the legislative

history of the PSLRA that suggests that Congress intended to except federal securities actions in which there happens to be.. . pendent state law claims." In re Smith Barney Transfer Agent Litig., No. 05 Civ. 7583,2006 WL 1738078, at *3 (S.D.N.Y. June 26, 2006)
(quoting In re Trump Hotel Shareholder Litig., No. 96 Civ. 7820, 1997 WL 442135, at *2

(S.D.N.Y. Aug. 5, 1997)).

Los

ANGELES

PALO ALTO

WASHINGTON, D.C.

BEIJIG

HONG KONG

LONDON

TOKYO

SIMPSON THACHER & BARTLETT LLP
Hon. Theodore H. Katz

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October 9, 2009

Moreover, the crux of the litigation is Plaintiffs' allegation that they relied on Defendants' alleged misstatements and omissions concerning due diligence and monitoring of Bernard L. Madoff and Bernard L. Madoff Investment Securities, Inc. (BMIS) in connection with the purchase of shares and/or equity in Fairfeld fuds. Virtually all of the discovery Plaintiffs are expected to seek wil concern whether actionable misstatements or

omissions occured - the very essence of federal securities liabiIíty.
Even if the PSLRA permitted lifting the stay on a c1aim-by-c1aim basis, such an arangement would be entiely unworkable here. Since all the causes of action arise out of the same nucleus of operative facts, discovery on Plaintiffs' state law claims necessarly will be identical to discovery on their federal securities claims. The facts of this case make it

impossible to parse discovery claim by claim. As required by the PSLRA, Defendants'

fortcoming motions to dismiss must be resolved before any discovery is commenced. i

FACTS
On September 29, 2009, Plaintiffs fied their Second Consolidated Amended Complaint. The SCAC alleges violations of Section '1 O(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated thereunder, as well as violations of Section 20(a) of the Exchange Act. These federal securities claims are directed against a subset of each of the three main groups of defendants named in the SCAC: the Fairfield defendants, the PricewaterhouseCoopers ("PwC") Defendants, and the Citco Defendants. The SCAC also contains a host of common law tort and contract claims. Although the SCAC is in excess of200 pages and contains 33 counts, the core factual allegations make it clear that federal securities claims are at the heart of the case. The central issue of fact raised by the SCAC is whether Defendants made material misstatements or omissions of fact in connection with Plaintiffs' purchase of shares and/or equity interests in one of the Fairfeld fuds. See, e.g., SCAC ~181 (alleging documents published by Fairfield defendants "contained uniform misrepresentations and material omissions that induced Plaintiffs to invest in the Funds and retain their investments in the Funds"); ~353(n) (alleging questions oflaw and fact common to the proposed Class including "( wJhether PwC Canada and PwC Netherlands made false representations and
omissions in connection with Plaintiffs' purchase of (alleging same question of

their interests in the Funds"); ~353(t)

fact exists with respect to the Citco Defendants other than Citco Group). This factual question is central to both Plaintiffs' federal securities claims and their
state law counterparts. See, e.g., SCAC ~355, ~365, ~373, ~383 (fraud claim, 10(b) and lOb-

5 claim, and negligent misrepresentation claim against certain Fairfield defendants all

Pursuant to the Stipulation Adjourning Deadline to Respond to the Complaint, Defendants have 45 days from the fiing of the SCAC to file their motions to dismiss. See Anwar, et al. v. Fairfield Greenwich Limited, et aL., No. 09 Civ. 0118 (Docket No. 168).

SIMPSON THACHER & BARTLETT LLP

Hon. Theodore H. Katz

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October 9, 2009

predicated on allegation that Plaintiffs relied on Defendants' allegedly false representations
and material omissions in making and retaining their investments in the Funds); SCAC
ir442, ir468 (same allegation used to support negligent misrepresentation claim and 1 O(b)

and lOb-5 claim against certain PwC defendants); SCAC ir526, ir539 (same allegation used
to support 10(b) and 10b-5 claim and negligent misrepresentation claim against certain Citco

defendants).

The overlapping nature of Plaintiffs' federal securities claims and their state law
counterpars is strking. For example, the fraud claims and the Section 10(b) and Rule 10b-5

claims agaist certain Fairfeld defendants are premised on the identical allegation that those defendants "knew facts or had access to information suggesting that their public statements were not accurate or failed to check information they had a duty to monitor and which would have demonstrated the falsity of their statements." See SCAC ir363; ir371. Similarly,
the negligent misrepresentation claim and the Section 1 O(b) and Rule 10b-5 claim against

certain PwC defendants are based on the exact same allegation that PwC falsely represented to Plaintiffs that it had "conducted the audits in accordance with GAAS or ISA" and that the "Funds' financial statements 'present(ed) fairly, in all material respects, the financial position of ¡the Funds). . . '" See SCAC ir440; il463.i Moreover, the negligent
misrepresentation claim and the Section lOeb) and Rule lOb-5 claim against certain Citco

Defendants overlap in that each is based on the allegation that those defendants acted recklessly because "they knew or had access to information suggesting that their statements were not accurate" and by failing to "verify the information received from BMIS despite a duty to scrutinize and verify independently the information related to the NA V and account
balances." See SCAC ir523-524; 1536-537.3

Plaintiffs cannot escape the fact that this is a federal securties case that includes closely related state law claims. The PSLRA controls and discovery must be stayed while Defendants' motions to dismiss are being resolved.

The negligent misrepresentation claim is asserted against all PwC Defendants whereas the Section lOeb) and Rule 10b-5 claims are asserted against only PwC Canada and PwC Netherlands.
The negligent misrepresentation claim is asserted against Citco Fund Services, Citco
Canada, and Citco Group whereas the Section 1 O(b) and Rule 10b-5 claims are asserted

against only Citco Fund Services and Citco Canada.

SIMPSON THACHER & BARTLETT LLP

Hon. Theodore H. Katz

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October 9, 2009

ARGUMENT
i. The PSLRA Bars DISCOVERY UNTIL THE MOTIONS To DISMISS ARE RESOLVED

The PSLRA provides, in relevant par, that:
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 cour finds upon the motion
of any pary that paricularized discovery is necessar to

preserve evidence or to prevent undue prejudice to that pary.
15 U.S.C. § 78u~4(b)(3)(B)(emphasis added).

The PSLRA thus reflects Congress' determination that cours should "make an initial the legal sufficiency of any claims" before discovery begins. Spielman v. Merril Lynch, Pierce, Fenner & Smith, Inc., 332 F.3d 116, 122 (2d Cir. 2003). Accordingly, "unless exceptional circumstances are present, discovery in securities actions the complaint." In re is permitted only afterthe court has sustained the legal suffciency of Vivendi Universal, s.A. Sec. Litig., 381 F. Supp. 2d 129, 130 (S.D.N.Y. 2003) (emphasis
assessment of

added) (citation and internal quotation marks omitted); accord In re AOL Time Warner, Inc.

Sec. & "ERISA" Litig., No. 02 Civ. 5575, 2003 WL 21729842, at * 1 (S.D.N.Y. July 25, the 2003). Moreover, "(tJhe plaintiffs bear the burden of establishing that lifting of mandatory stay is necessary" and the burden "is a heavy one." In re Fannie Mae Sec. Litg., 362 F. Supp. 2d 37, 38 (D.D.C. 2005). Here, there are no exceptional circumstances the PSLRA's automatic discovery stay and therefore all discovery must waranting a lift of wait until the motions to dismiss are decided.4

Á. The PSLRA Discovery Stay Applies to the Entire Action
Staying all discovery is consistent with the PSLRA's plain language, fuhers the
policy goals of

the PSLRA, and is particularly appropriate here because discovery on the

state law claims canot be taken separately from discovery on the federal securities claims.

4 Initial disclosures under Fed. R. Civ. P. 26(a)(1) are a subset of discovery, and as

such, they are subject to the PSLRA's automatic stay provision. See Medhekar v. United States Dist. Court, 99 F.3d 325, 328 (9th Cir. 1996) ("We hold that the initial disclosure requirements of Fed. R. Civ. P. 26(a) and related local rules are 'discovery' or 'other the Act's stay provision, and that such disclosures must be proceedings' for purposes of stayed pending the disposition of a motion to dismiss in an action covered by the Act."); see
also In re Initial Pub. Offering Sec. Litig., 236 F. Supp. 2d 286, 287 (S.D.N.Y. 2002) (citing

Medhekar with approval).

SIMPSON THACHER & BARTLETT LLP

Hon. Theodore H. Katz

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October 9, 2009

1. The Plain Language a/the PSLRA Requires that No Discovery Take

Place Before the Motions to Dismiss are Resolved

the PSLRA that suggests that Congress intended to except federal securties actions in which there happens to ~e.. .pendent state law claims." In re Smith Barney, 2006 WL 1738078, at *3
"There is simply nothing in either the text or the legislative history of

(quoting In re Trump Hotel, 1997 WL 442135, at *2). As several cours in this District have

noted, the plain language of the PSLRA - "all discovery. .. shall be stayed" - leaves no room for debate as to whether non-securities claims can be excepted from the mandatory discovery stay. See id.; see also Riggs v. Termeer, No. 03 Civ. 4014, 2003 WL 21345183, at * 1 (S.D.N.Y. June 9, 2003) (PLSRA stay "applies equally to related state law claims"); cf Winer Family Trust v. Queen, No. 03 Civ. 4318, 2004 WL 350181, at *4 (E.D. Par Feb. 6, 2004) ("the PSLRA stay of 'all discovery' encompasses the breach of fiduciary duty claims
set fort in the Amended Complaint,,).5 Consistent with the PSLRA's plain language, this

Court should stay all díscovery until the motions to dismiss are resolved.
2. Permitting Discovery on the State Law Claims Would Undermine the

PSLRA 's Legislative Purpose and Eviscerate the Stay Provision

By enacting the PSLRA discovery stay provision, Congress created a "strong presumption that no discovery should take place until a court has affirmatively decided that a complaint does state a claim under the securities laws, by denying a motion to dismiss." Podany v. Robertson Stephens, Inc., 350 F. Supp. 2d 375,378 (S.D.N.Y. 2004) (citing S. Rep. 104-98, at 14 (1995)). "(IJfplaintiffs could circumvent the stay by including nonsecurities claims in a complaint, the PSLRA's requirements would essentially be vitiated." Smith Barney, 2006 WL 1738078, at *3; see also SG Cowen Sec. Corp. v. U.S. Dist. Ct. for N Dist. of Cal., 189 F.3d 909,913 n.1 (9th Cir. 1999) (Congress' attempt to address premature discovery would be "rendered meaningless if securities plaintiffs could circumvent the stay simply by asserting pendent state law claims in federal cour in conjunction with their federal law claims."); Winer Family Trust, 2004 WL 350181, at *3
5 Tobias Holdings, Inc. v. Bank United Corp., 177 F. Supp. 2d 162 (S.D.N.Y. 2001)

(Scheindlin, 1.) is in tension with the prevailing view in this District that the mandatory stay applies to non-securities claims included in a securities complaint. Even so, as discussed infra, Tobias Holdings is distinguishable from the case at bar because it involved "separate and distinct" state law claims and was brought by a single plaintiff rather than as.a class action, which the court noted was "the main focus of the PSLRA." Id. at 166 n. 4. Seippel
v. Sidley, Austin, Brown & Wood LLP, No. 03 Civ. 6942, 2005 WL 388561 (S.D.N.Y. Feb. 17, 2005) (Scheindlin, J.) is inapposite because the cour in that case had already ruled on
the suffciency of furtered the policies of

the plaintiffs state law claims and therefore a stay would not have the Act. Id at *3.

SIMPSON THACHER & BARTLETT LLP

Hon. Theodore H. Katz

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October 9, 2009

(same). Plaintiffs should not be able to thwar Congress' intent in enacting the PSLRA through litigation tactics designed to evade the stay requirement. All discovery should be stayed until the motions to dismiss are. decided.
3. Discovery Cannot be Divided Based on Plaintif' Claims

Attempting to separate discovery based on Plaintiffs' claims would prove their legal theories rest on the same factual allegations. In analogous situations, federal district court around the country have concluded that discovery on both the federal securities and state law claims should be stáyed. See, e.g. Winer Family Trust, 2004 WL 350181, at *3 (holding discovery stay applies to breach of fiduciary duty claims fiduciary duty claims because "any discovery sought on the breach of wil very likely be relevant to the federal securties claims, as each set of claims is necessarily based on a 'common nucleus of operative fact. "'); see also Rampersad v. Deutsche Bank Securites Inc., 381 F. Supp. 2d 131,134 (S.D.N.Y. 2003) (staying all
unworkable because all of

discovery because, inter alia, all claims arose from the same allegations of fact); Benbow v.

Aspen Tech. Inc., No. 02 Civ. 2881, 2003 WL 1873910, at *5 (E.D. La. Apr. 11,2003) ("It is clear that plaintiffs' claims, state and federal, arise from precisely the same factual circumstances, and therefore require the same discovery generally. Thus, lifting the mandatory stay as to the closely related if not substatially similar State claims would be tatamount to lifting the stay as to the federal securties claim."); Angelllnvs., L.L.c. v.
Purizer Corp., No. 01 Civ. 6359,2001 WL 1345996, at *2 (N.D. IlL. Oct. 31,2001) (staying

discovery on plaintiffs negligent misrepresentation claim where discovery sought "would be precisely the same as what plaintiffs would seek on the securities violations claims absent the discovery stay.").
It is therefore not surprising that merits discovery has yet to occur in other so-called Madoff feeder fund cases where state law claims are pled alongside federal securities
claims. See, e.g., In re Tremont Sec. Law, State Law, and Ins. Litg., No. 08 Civ. i 11 i 7

(S.D.N.Y.); In re Banco Santander Sec.-Optimal Litig., No. 09 Civ. 20215 (S.D. Fla.); In re Beacon Associates Litg., No. 09 Civ. 0777 (S.D.N.Y.); Newman et aL. v. Family Management Corp. et aL., No. 08 Civ. 11215 (S.D.N.Y.); In re J Ezra Merkin and Gabriel
Capital Corp., No. 08 Civ. 10922 (S.D.N.Y.).

The similarty between Plaintiffs' federal securties claims and their state law claims distinguishes this case from those in which some cours have - incorrectly in the Fairfield defendants' view - held that the discovery stay applies only to the plaintiffs' federal securities claims. See, e.g., Tobias Holdings, 177 F. Supp. 2d at 169. In Tobias Holdings, for example, the state law claims were "separate and distinct" from and did not "mirror the
federal securities claims." 177 F. Supp. 2d at 166, 168. Courts have explicitly declined to

follow Tobias Holdings where, as here, the plaintiffs' state law claims parallel their federal securities claims. See, e.g., Benbow, 2003 WL 1873910, at *5 ("Assuming arguendo that
the rationale underpinning the holding of

the Tobias Holdings case stads on firm ground,

SIMPSON THACHER & BARTLETT LLP

Hon. Theodore H. Katz

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October 9,2009

the decision does not support plaintiffs' argument under the circumstances of

this paricular

case...It is apparent that, in large part, the cour's decision turned upon the fact that the

plaintiffs state law claims were distinct from and not merely state analogs to the plaintiffs alleged federal securities violations."); see also In re Altera Corp. Deriv. Litig., No. 06 Civ.
03447 JW, 2006 WL 2917578, at *1 (N.D. CaL. Oct. 11,2006) ("Here, Plaintiffs state law

claims are not wholly distinct, and Tobias Holdings is inapposite."); Rampersad, 381 F. Supp. 2d at 134 (distinguishing Tobias Holdings on similar grounds); Sarantakis v.
Gruttadauria, No. 02 Civ. 1609,2002 WL 1803750, at *3 (N.D. IlL. Aug. 5, 2002) (Tobias Holdings conflict( s) with the majority of federal courts,,).6

Tobias Holdings is furter distinguishable from this case because it involved a single plaintiff rather than putative class claims. The Tobias Holdings cour itself recognized the importance of this distinction, observing that "as this is not a class action, there is little, if any, coercive aspect to plaintiffs discovery demands." 177 F. Supp. 2d at 166; see also id. at 166 n. 4 ("Although the discovery stay provisions are not limited to federal securities class actions, the PSLRA's legislative history indicates that class actions were the main the PSLRA,") (emphasis in originai).7 focus of
B. There Are No Exceptional Circumstances Warranting the Lifting of the

Discovery Stay
The PSLRA's automatic discovery stay is absolute unless plaintiffs can establish that paricularized discovery is necessary to (1) preserve evidence or (2) prevent undue
prejudice. Smith Barney, 2006 WL 1738078, at * 1. "The plaintiffs bear the burden of
establishing that lifting of the mandatory stay is necessary" and "(t)he burden. . . is a heavy one." In re Fannie Mae Sec. Litg., 362 F. Supp. 2d at 38. As demonstrated below,

Several other cours have declined to follow Tobias Holdings on the grounds that the plaintiffs' state law claims were not distinct from their federal securities claims. See, e.g., Spears v. Metropolitan Life Ins., No. 2:07 Civ. 00088-RL-PRC, 2007 WL 1468697, at *4 (N.D. Ind. May 17,2007); see also Angell, 2001 WL 1345996, at *2.

Discovery on Plaintiffs' state law claims is also unwaranted given the likelihood of their dismissaL. First, Plaintiffs improperly have brought their claims directly rather than derivatively, despite the fact that the alleged injuries were sustained by the Fairfield funds and only indirectly, if at all, by Plaintiffs as a result of their equity holdings. Second, several
of Plaintiffs' claims, including breach of

fiduciar duty, negligent misrepresentation, and

gross negligence are preempted by the Marin Act. Finally, with respect to the common law fraud claims, Plaintiffs have failed to show, as they must, that the Fairfield defendants acted with scienter or that each putative class member relied on the misrepresentations alleged in the complaint. These and other grounds requiring dismissal wil, of course, be fully briefed in Defendants' motions to dismiss.

SIMPSON THACHER & BARTLETT LLP

Bon. Theodore H. Katz

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October 9,2009

Plaintiffs fail to carry their heavy burden here because lifting the discovery stay is not required to preserve evidence and they will not be unduly prejudiced if discovery is stayed until the motions to dismiss are resolved.
1. Lifing the Discovery Stay is Not Required to Preserve Evidence

"A pary alleging that discovery is 'necessar to preserve evidence' must ... make a specific showing that the 'loss of evidence is imminent as opposed to merely speculative'." In re Vivendi, 381 F. Supp. 2d at 130 (citation and internal quotation marks omitted). Here,
Plaintiffs canot legitimately claim that any evidence is in immediate periL. The Fairfield

defendants are obligated to preserve evidence that they "know, or should know, may be relevant to actual or foreseeable litigation." Taft v. Ackermans, No. 02 Civ. 7951, 2005 WL 850916, at *5 (S.D.N.Y. Apr. 13,2005) (citation and internal quotation marks omitted). The they PSLRA similarly obligates the Fairfield defendants to treat discoverable materials "as if were the subject of a continuing request for production of documents" while discovery is stayed. 15 U.S.C.A. § 78u-4(b)(3)(C)(i). The Fairfeld defendants, through their counsel, have acknowledged their document preservation obligations from the incipiency of this litigation. See Transcript of Januar 15,2009 Hearing in Pacifc West Health Medical Center Inc. Employees Retirement Trust, et aL. v. Fairfield Greenwich Group, et al., 09 Civ. 134,21 :3-5, attached as Exhibit A ("(DJefendants are prepared to say in court today that their obligations to maintain and not destroy documents."). Accordingly, they arc aware of Plaintiffs canot proceed on a "preservation of evidence" arguent.
2. Plaintif Wil Not be Unduly Prejudiced if Discovery is Stayed Until

the Motions to Dismiss are Resolved

"Undue prejudice" has been construed to mean "improper or unfair treatment rising
to a level somewhat less than irreparable harm." Faulkner v. Verizon Communications, Inc., 156 F. Supp. 2d 384, 402 (S.D.N.Y. 2001) (citation and internal quotation marks Omitted).

be grounds for a claim ofprcjudice because "delay is an inherent par of every stay of discovery required by the PSLRA." In re Inital Pub. Offering Sec. Litig., 236 F. Supp. 2d 286, 287 (S.D.N.Y. 2002); Gervis v. Berg, No. 00 Civ. 3362, 2005 WL 3299436, at *3 (E.D.N.Y. Oct. 20,2005) ("(PJlaintiffs have not shown anything more prejudicial than a delay - albeit a lengthy one - and therefore have failed to establish undue prejudice as a ground for granting limited discovery of documents submitted to (a
A delay in discovery cannot itself

third pary)."). In addition, "the mere fact that the discovery stay will prevent Plaintiffs

from collecting evidence to assist in potential settlement negotiations or plan their litigation
stategy does not constitute undue prejudice." 380544 Canada, Inc. v. Aspen Tech., Inc.,

No. 07 Civ. 1204,2007 WL 2049738, at *4 (S.D.N.Y. July 18,2007) (citing In re Refco, Inc. Sec. Litig., 05 Civ. 8626,2006 WL 2337212, at *1 (S.D.N.Y. Aug. 8,2006)); see also Smith Barney, 2006 WL 1738078, at *2 ('''Undue prejudice' does not arise from a delay in the gathering of evidence or the development of settlement postures"). As discussed below,

SIMPSON THACHER & BARTLETT LLP

Hon. Theodore H. Katz

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October 9, 2009

Plaintiffs have failed to demonstrate any undue prejudice would result from staying discovery while the motions to dismiss are being resolved.
(a) Plaintif Wil Not Suffer Undue Prejudice Merely because

Fairfield Has Already Produced Documents to Regulators
The PSLRA does not provide an exception to the mandatory discovery stay when the
information sought by private plaintiffs has already been provided to a governent agency,

and there is no justification here to read such an exception into the statute. In fact, numerous cours in this District have denied similar requests by plaintiffs to access documents previously supplied by defendants to governent investigators. See, e.g., 380544 Canada, 2007 WL 2049738, at * 5 ("The mere fact that the SEC and USAO have access to the documents that Plaintiffs seek to obtain does not constitute undue prejudice withi thc meanng of the PSLRA."); see also Refco, 2006 WL 2337212, at *2; Smith Barney, 2006 WL 1738078, at *3; In re Elan Corp. Sec. Litg., No. 02 Civ. 865,2004 WL 1303638, at *1 (S.D.N.Y. May 18,2004); Rampersad, 381 F. Supp. 2d at 133; In re AOL Time Warner, 2003 WL 21729842, at *2; In re Vivendi, 381 F. Supp. 2d at 130.8
Moreover, the issue of whether it would be burdensome for the Fairfield defendants to produce the documents they provided to certain regulators is simply not relevant. See, e.g., Smith Barney, 2006 WL 1738078, at *3 ("Plaintiffs also claim that because Defendants

The cases in which plaintiffs have been permitted access to documents previously produced to regulators have either rested on "unique circumstances" or were decided on grounds that subsequent cours in this District have found insufficient to lift the mandatory
stay. See, e.g., In re WorldCom, Inc. Sec. Litg., 234 F. Supp. 2d 301, 305-306 (S.D.N.Y.

2002); In re LaBranche Sec. Litg. 333 F. Supp. 2d 178, 184 (S.D.N. Y. 2004). In Worldcom, the stay was lifted because the cour had ordered both the ERISA plaintiffs and the PSLRA plaintiffs to paricipate in global settlement discussions with the insolvent defendant and if the discovery stay remained in place, the PSLRA plaintiffs would have been the "only major interested pary" without access to the documents, which would have
put them at a "severe(J disadvantage()" in settlement negotiations. WorldCom, 234 F. Supp. 2d at 305-306. Id. Several courts in this District have distinguished Worldcom as

facts. See, e.g., 380544 Canada, 2007 WL 2049738, at *3; see also Smith Barney, 2006 WL 1738078, at *2; Refco, 2006 WL 2337212, at *2-3. In In re LaBranche Sec. Litig. 333 F. Supp. 2d 178, 184 (S.D.N.Y. 2004), the court permitted plaintiffs to obtain documents produced to regulators in order to "determine their litigation strategy" and settlement position. However, as discussed supra, more recent cases have concluded that "the mere fact that the discovery stay wil prevent Plaintiffs from collecting evidence to assist in potential settlement negotiations or plan their litigation strategy does not constitute unduc prejudice." 380544 Canada, 2007 WL 2049738, at *4 (citng Refco,
turning on its unique set of

2006 WL 2337212, at *2).

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Hon. Theodore H. Katz

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October 9, 2009

the requested material to the SEC, Defendants could easily produce the same material to Plaintiffs. This consideration is irrelevant."); see also Ross v. Abercrombie & Fitch Co., No. 2:05 Civ. 0819, 2006 WL 2869588, at *2 (S.D. Ohio Oct. 5,2006) ("Congress did not decree that discovery would be permitted in private
have previously produced much of

securities cases if certin circumstances arose which would make the discovery either less burdensome to the defendants than ordinary discovery or, perhaps, not burdensome at alL.");

Elan Corp., 2004 WL 1303638, at *1 ("Plaintiffs' assertion that the stay should be lifted because the Defendants wil not suffer an undue burden. ..even if true, does not justify overriding the existing statutory stay.,,).9
(b) Fairfield's Settlement with the Massachusetts Securities

Division Does Not Warrant Lifing the Mandatory Stay

The decision by certain Fairfield defendants to settle an administative complaint fied by the Massachusetts Securities Division does not affect the mandatory discovery stay. Courts in this District have declined to lift the stay following a defendant's settlement with a
regulator. See, e.g., Brigham v. Royal Bank of Canada, et aI., No. 08 Civ. 4431, 2009 WL
935684, at *1 (S.D.N.Y. April

7, 2009) (denying motion to lift stay afer defendant reached

a settlement with the SEC and state regulators); Smith Barney, 2006 WL 1738078, at * 1

(holding discovery stay continued to apply after defendants settled with SEC for $208

milion).
Only where there is a "very real risk that (plaintiff) will be left to pursue its action against defendants who no longer have anything or at least as much to offer" have certain cours in this Distrct concluded that the stay should be lifted. See WorldCom, 234 F. Supp.
2d at 305 (S.D.N.Y.); cfIn re Vivendi, 381 F. Supp. 2d at 130-131 ("I find no evidence that

plaintiffs face the same prospect, as in Worldcom or Global Intellcom, that (plaintiffs) would be left without remedy in light of settlement discussions or other intervening events,
such as bankrptcy or attempt to tae control over plaintiff by acquisition.").

Here, Plaintiffs have failed to demonstrate why two Fairfeld defendants' $8 milion dollar settlement with the Massachusetts Securties Division necessitates the need for immediate discovery. No undue prejudice would result if discovery begins after

investigators is overly broad, even when exceptional circumstances warrant a parial

Courts also have held that a request for all documents supplied to governent lift of

the discovery stay. See, e.g., In re Vivendi, 381 F. Supp. 2d at 130 (request for documents
already produced to the DOJ, SEC, and foreign bodies was far from the "paricularzed

degree of discovery" that previous cours had permitted under an exception to the PSLRA discovery stay); see also In re Fannie Mae Sec. Litg., 362 F. Supp. 2d at 39 (denying request for documents produced to government because such documents were "voluminous and possibly irrelevant to the claims likely to be raised.").

SIMPSON THACHER & BARTLETT LLP

Hon. Theodore H. Katz

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October 9, 2009

Defendants' motions to dismiss are resolved.

10 The Fairfield defendants have not settled

with any private litigant or any other regulator and no additional Massachusetts tye settlements are on the horizon. Moreover, mere settlement discussions with third pares do notjustify lifting the stay. See, e.g., Refco, 2006 WL 2337212, at *3 ("If the stay of
discovery mandated by the PSLRA were lifted every time a third part, not subject to the

stay, was engaged in settlement discussions with the defendant, then the 'undue prejudice' provision would essentially eviscerate the stay requirement. That is not what Congress
intended. ").
II. Derivative Plaintiffs' Request for Discovery is Premature

Derivative Plaintiffs' contention that their claims are exempt from the PSLRA stay, even if the stay applies to the claims asserted by Class Plaintiffs, is premature and should be denied. This Cour has directed that the issue of discovery in the derivative cases be considered only afer Derivative Plaintiffs' remand motions are decided, which has not yet
occurred. See September 16,2009 Order (Docket No. 238), attached as Exhibit C.
the applicability of the PSLRA stay to the Derivative Plaintiffs' claims at the time directed by the Cour. It should be noted, however, that courts have stayed discovery in related derivative actions in order to furter the policy goals of the PSLRA. See, e.g., In re Dot Hil Systems Corp. Sec. Litig., 594 F. Supp. 2d 1150, 1167 Defendants will brief

10 The Massachusetts settlement has no bearng on the merits of any claim made by any
from introducing a consent decree as evidence of a defendant's liabilty in the instant litigation. See, e.g., United States v. Gilbert, 668 F.2d 94,97 (2d Cir. 1981) (holding that under Rule 408, a SEC consent decree signed by the defendant may not be introduced to prove underlying facts ofliability); see also Marshall Field & Co. v. kahn, No. 82 Civ. 0755, 1982 WL 1292, at *4 (S.D.N.Y. Mar. 22,1982) ("(Settlements with the SEC) admit no violations and are not themselves admissible as evidence of securities violations."). Moreover, a stipulation to facts in a complaint that expressly states it should not be construed as an admission canot be introduced under Fed. R. Evid. 80 1 (d)(2) as an admission by a pary opponent. Rather, the stipulation is inadmissible hearsay. See, e.g., United States v. Wheeler, No. 95 Civ. 15852,81 F.3d 171, 1996 WL 155139, at *3 (9th Cir. 2, 1996) (unpublished opinion) (SEC's findings of Apr. fact were inadmissible hearsay because the defendant neither admitted nor denied the allegations in the SEC's complaint but rather just consented to them). Here, the two Fairfield defendants who were respondents in the Massachusetts proceeding explicitly stated in their Prebearing Memoáindum that they "do not admit the allegations in the Complaint and consent to these findings offact solely for the purpose of ths proceeding." Respondents' Prehearing Memorandum at 5, attached hereto as Exhibit B (emphasis in original). This statement plainly is not an evidentiar admission.
plaintiff. Cours have repeatedly held that Fed. R. Evid. 408 precludes a plaintiff

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lIon. Theodore H. Katz

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October 9, 2009

the "very real possibility that the factual overlap wil force (the defendant) to provide discovery to the the plaintiffs in this case derivative plaintiffs on matters relating directly to the claims of while the PSLRA discovery stay is in effect.") (internal quotation marks and citation omitted); see also In re Crompton Corp. Sec. Litig., No. 3:03-1293,2005 WL 3797695, at *3 (D. Conn. Jul. 22, 2005); In re Cardinal Health, Inc. Sec. Litig., 365 F. Supp. 2d 866, 875 (S.D. Ohio 2005) (staying state derivative claim despite plaintiffs contention that the PSLRA stay would not be circumvented because securties plaintiffs had separate attorneys and derivative plaintiffs had signed a confidentiality agreement); In re DP L Inc. Sec. Litg., 247 F. Supp. 2d 946,947 (S.D. Ohio 2003); In re AOL Time Warner, Inc. Sec. & "ERISA" Litg., No. MDL No. 1500, No. 02 Civ. 8853,2003 WL 22227945, at *1 (S.D.N.Y. Sept. 26, 2003) (staying all non-ERISA specific discovery over the objections of ERISA plaintiffs where a "significant portion of (the requested discovery J concerns issues common to the Securities Action.").
(S.D. CaL. 2008) (staying discovery in state court derivative action because of

The likelihood that the derivative claims wil be dismissed also makes discovery unwarranted in those cases. None of the Derivative Plaintiffs have made a demand on the
funds they are purorting to represent. For example, the Derivative Plaintiffs who

the Fairfield funds) in the Morning Mist action failed to make a demand on the disinterested and independent Sentry liquidators who are now in control of that fund and who are prosecuting Sentry's claims independently. The Sentry liquidators are contesting the Derivative Plaintiffs' abilty to prosecute Sentry's claims in a related Morning Mist action presently being litigated in the Commercial Division of the Supreme Court of the State of New York. Similar litigation
purortedly represent the Sentry fund (by far the largest of ultimately is likely with respect to all of

the derivative claims.

CONCLUSION
Class Plaintiffs have asserted federal securities claims in their new complaint and "all discovery." Derivative Plaintiffs' contention that the PSLRA does not apply to their claims is premature and must be denied. All discovery in this consolidated action should continue to be stayed.
therefore their case is subject to the PSLRA-mandated stay of

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Hon. Theodore H. Katz

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October 9, 2009

cc: The Honorable Victor Marero (by hand)

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