Public Employees' Retirement System of Mississippi v. Stanley et al

Filing 248

OPINION & ORDER: This is a securities action brought on behalf of a putative class in which the plaintiffs assert claims relating to the marketing and sale of mortgage-backed security pass-through certificates issued by Morgan Stanley Capital I, Inc. The case involves 13 Offerings, which occurred between March 27, 2006 and October 26, 2006. It alleges strict liability and negligence claims brought pursuant to the Securities Act of 1933 (the "1933 Act"). The Court assumes the parties� 39; familiarity with the issues. Following a conference at which multiple discovery disputes were addressed, the Court directed the parties to submit letter motions related to any outstanding matters that were not resolved by the Court or agreed to b y the parties following the conference. Among other letter motions, the plaintiffs filed an application concerning the scope of defendants' electronic search protocol. The parties have reached agreement on the search terms (more than 30,000 sear ch term combinations, a list spanning over 1,600 pages), but are unable to agree on the custodians or the search period. This dispute is governed by both Rule 1 and Rule 26 of the Federal Rules of Civil Procedure... Custodians: Plaintiffs have identi fied 80 custodians who should be subject to the search protocol... Accordingly, defendants must include Ms. Gilly as a custodian in their search protocol... Search Periods: The parties also disagree on the appropriate search periods... Shorting Acti vities: Finally, plaintiffs seek documents related to Morgan Stanley's purported shorting of its own residential mortgage- backed securities ("RMBS")... Accordingly, the Court holds that even if traders at Morgan Stanley shorted one or more of the Offerings, such conduct is not properly subject to discovery given the claims alleged in this case. (Of course, if discovery reveals that one of the custodians involved in the Offerings at issue was in contact with Morgan Stanley traders regarding the nature or adequacy of the due diligence process, then Plaintiffs are free to renew their request for discovery on this issue.) SO ORDERED. (See Order). (Signed by Magistrate Judge Sarah Netburn on 9/11/2013) (ja)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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IN RE MORGAN STANLEY MORTGATE
PASS-THROUGH CERTIFICATES
LITIGATION

9/11/2013

09-CV-02137 (LTS)(SN)
OPINION & ORDER

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SARAH NETBURN, United States Magistrate Judge:
This is a securities action brought on behalf of a putative class in which the plaintiffs
assert claims relating to the marketing and sale of mortgage-backed security pass-through
certificates issued by Morgan Stanley Capital I, Inc. The case involves 13 Offerings, which
occurred between March 27, 2006 and October 26, 2006. It alleges strict liability and negligence
claims brought pursuant to the Securities Act of 1933 (the “1933 Act”). The Court assumes the
parties’ familiarity with the issues.
Following a conference at which multiple discovery disputes were addressed, the Court
directed the parties to submit letter motions related to any outstanding matters that were not
resolved by the Court or agreed to by the parties following the conference. Among other letter
motions, the plaintiffs filed an application concerning the scope of defendants’ electronic search
protocol. The parties have reached agreement on the search terms (more than 30,000 search term
combinations, a list spanning over 1,600 pages), but are unable to agree on the custodians or the
search period.
This dispute is governed by both Rule 1 and Rule 26 of the Federal Rules of Civil
Procedure. Rule 1 guides the Court’s application of all the federal rules, and directs that such
rules “should be construed and administered to secure the just, speedy, and inexpensive

determination of every action and proceeding.” Fed. R. Civ. P. 1. Rule 26 extends that concept to
the specific issues raised in discovery disputes. That rule provides:
the court must limit the frequency or extent of discovery otherwise allowed by these rules
or by local rule if it determines that:
(i) the discovery sought is unreasonably cumulative or duplicative, or can be
obtained from some other source that is more convenient, less burdensome, or less
expensive;
(ii) the party seeking discovery has had ample opportunity to obtain the
information by discovery in the action; or
(iii) the burden or expense of the proposed discovery outweighs its likely benefit,
considering the needs of the case, the amount in controversy, the parties’
resources, the importance of the issues at stake in the action, and the importance
of discovery in resolving the issues.
Fed. R. Civ. P. 26(b)(2)(C). “The ‘metrics’ set forth in Rule 26(b)(2)(C)(iii) provide courts
significant flexibility and discretion to assess the circumstances of the case and limit discovery
accordingly to ensure that the scope and duration of discovery is reasonably proportional to the
value of the requested information, the needs of the case, and the parties’ resources.” The Sedona
Conference, The Sedona Conference Commentary on Proportionality in Electronic Discovery, 11
Sedona Conf. J. 289, 294 (2010); accord Chen–Oster v. Goldman, Sachs & Co., 285 F.R.D. 294,
303 (S.D.N.Y. 2012).
Mindful of the requirements of Rule 1 and Rule 26, the Court rules as follows:
Custodians
Plaintiffs have identified 80 custodians who should be subject to the search protocol.
Defendants have agreed to 33 custodians and object to 47. Of those 47, defendants object to eight
custodians because they “largely, if not entirely, worked on subprime offerings” and no subprime
securitizations are at issue here. Defendants object to the remaining 39 custodians as

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“unnecessary and duplicative because they were too senior to have been involved in the day-today of the securitization process or because they are duplicative of already proposed custodians.”
The defendants have agreed to search the files of all but one of the individuals identified
on any of the working group lists for any of the Offerings or disclosed by defendants in their
initial disclosures or responses to interrogatories. The exception is Kris Gilly, Executive
Director, SPG-Collateral. Defendants contend that Ms. Gilly “focused” on subprime offerings
and therefore is not an appropriate custodian. But Ms. Gilly appears on the working group lists
for the Offerings. Defendants cannot say with certainty that she would not have relevant
information; to the contrary, her inclusion on the working group lists suggests she does.
Accordingly, defendants must include Ms. Gilly as a custodian in their search protocol.
This does not, however, mean that all custodians who worked entirely in the subprime
business are appropriate custodians. The Offerings at issue are non-subprime, and defendants,
through counsel, have represented to the Court that there are no subprime offerings in this case.
Plaintiffs’ counsel does not contest this. Defense counsel has further represented that, to the
extent there is any overlap in the “due diligence process and procedures” between subprime
loans and originators and the loans and originators at issue in these Offerings, documents
concerning the due diligence process and procedures employed with respect to the loans and
originators in this case will be produced. Thus, a search of the files of additional custodians who
work primarily, if not exclusively, on subprime loans or with subprime originators will not
generate new relevant documents. Moreover, plaintiffs have not made a particularized showing
that specific subprime custodians will be the exclusive custodian of relevant information; the fact
that such custodians may have generally “performed work on the Offerings or with the
originators whose loans are in the Offerings” is not a sufficient basis to justify the substantial

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work and expense of expanding the scope of custodians. Accordingly, the files of the remaining
seven subprime custodians identified by plaintiffs and objected to by defendants should not be
included in the search protocol.1
The remaining disputed custodians are split into two categories: individuals who
defendants assert are unlikely to have relevant documents by virtue of their level of seniority;
and individuals who are likely to be duplicative custodians and for whom at least one custodian
(and often multiple) has been identified to have responsive documents. While it is true that
seniority, standing alone, is not a basis to preclude the search for responsive documents,
plaintiffs have not demonstrated that these custodians are likely to be the exclusive holders of
responsive documents. Thus, with the exception of Ms. Gilly, custodians rejected by defendants
on the basis of seniority shall not be searched.
The Court has also reviewed defendants’ Exhibit D, which identifies those custodians
deemed “irrelevant” and/or “duplicative,” against plaintiffs’ Exhibit 2, which identifies each
“rejected custodian” and the reason plaintiffs seek inclusion of that custodian. Based on these
charts, the Court cannot discern any specialized documents or information that the rejected
custodians will hold that is not likely to be held by defendants’ proposed (or agreed to)
custodians identified in defendants’ Exhibit E. Plaintiffs’ counsel contends that “many of the
rejected custodians had different roles and responsibilities than other designated custodians in the
same business group because they covered or were responsible for different Originators or
geographic regions, or worked on different loan pools or securitization.” Based on the record
presented, the Court cannot predict who these custodians are or why, specifically, they are likely
to have unique responsive documents. Moreover, the fact that a rejected custodian’s role was
The Court believes that these custodians are: Howard Hubler, SPG-Trading; Steven Shapiro, SPGFinance; Frank Telesca, SPG-Finance; Vanessa Vanacker, SPG-Repurchases & Structuring; Eric Kaplan,
SPG-Collateral; James Supple, SPG-Collateral; and Tom Daula, Chief Risk Officer.
1

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immaterially different than a designated custodian’s role is not a legitimate basis to justify
expanding the list of custodians. Plaintiffs do not need, and are not entitled under the rules of
proportionality, to every single document related to the loans and originators involved in the
Offerings. Accordingly, plaintiffs have not made a sufficient showing that the burden of review –
including the burden of reviewing false search hits – would justify expanding the search to
include these dozens of additional custodians.
Search Periods
The parties also disagree on the appropriate search periods. With respect to the agreed
“Search A Terms,” the most narrowly-tailored list of terms, which will result in the fewest false
hits, plaintiffs seek to search from January 1, 2005 through December 31, 2010 (plaintiffs also
seek to apply these searches to custodians that the Court has rejected above). Defendants propose
the date range for Search A Terms of January 1, 2005 through December 2, 2008 (the date the
first complaint was filed in this action). Defendants have further agreed to extend the date range
for Search A terms of 11 custodians, effectively searching these custodians’ files from January 1,
2005 through June 30, 2010 (defendants’ so-called “Search C”).
Like other courts, I conclude that the post-closing period can prove to be fertile ground
for relevant discovery. See Assured Guar. Mun. Corp. v. UBS Real Estate Securities Inc., 12
Civ. 1579 (HB) (JCF), 2012 WL 5927379, at *2 (S.D.N.Y. Nov. 21, 2012). Accordingly, and in
light of the Court’s substantial limiting of the number of custodians to be searched and the fact
that Search A Terms are Offering-specific and therefore will produce few, if any, false hits,
discovery through December 31, 2010 is appropriate for Search A.
By contrast, Search B includes more than 30,000 search term combinations. Plaintiffs
seek to search custodians’ files using these terms from January 1, 2005 through June 30, 2009;

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whereas defendants agree to search through only June 30, 2007, approximately six months after
the last Offering closed. Neither side makes a particularly persuasive argument as to why the cutoff date should be in 2007 or 2009, though at least defendants tether their proposal to a relevant
event. The Court is mindful that it has limited the number of custodians to be searched and has
otherwise limited plaintiffs’ access to discovery they have sought that has been produced in other
litigation. But, the extraordinary scope of Search B Terms gives the Court pause. Accordingly,
defendants shall search those 34 custodians identified above for Search B Terms from January 1,
2005 through June 30, 2008.
Shorting Activities
Finally, plaintiffs seek documents related to Morgan Stanley’s purported shorting of its
own residential mortgage-backed securities (“RMBS”). Such activity is not relevant to plaintiffs’
claims, which assert strict liability and negligence claims under the 1933 Act. Defendants’ state
of mind is simply not an element of plaintiffs’ claims. See Herman & MacLean v. Huddleston,
459 U.S. 375, 382 (1983).
Plaintiffs further argue that if a trader or traders at Morgan Stanley shorted one of the
Offerings at issue here, such conduct would be relevant to rebut defendants’ due diligence
defense. Defendants respond with the somewhat conclusory statement that “[a]lleged ‘shorting
activity’ does not speak to the nature of defendants’ due diligence, nor does it mean that” the
trader who shorted the security did so “because of a subjective belief that an offering document
for [the] particular security was materially misstated.”
Based on the information submitted to me, I agree with defendants. A trader’s decision
whether to short an offering might depend on market factors entirely unrelated to the accuracy of
material included in the offering document (in other words, everything in the prospectus could be

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true, but a trader still might short the offering). Moreover, plaintiffs have failed to articulate a
sufficient basis for the Court to conclude that a trader would have been aware of the underwriting
process for a particular offering or that a trader would have had communications with any person
responsible for exercising due diligence in preparing the offering statement. Accordingly, the
Court holds that even if traders at Morgan Stanley shorted one or more of the Offerings, such
conduct is not properly subject to discovery given the claims alleged in this case. (Of course, if
discovery reveals that one of the custodians involved in the Offerings at issue was in contact with
Morgan Stanley traders regarding the nature or adequacy of the due diligence process, then
Plaintiffs are free to renew their request for discovery on this issue.)
SO ORDERED.

DATED: New York, New York
September 11, 2013

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