Willis et al v. Morgan Keegan & Company, Inc. et al

Filing 138

ORDER DENYING WITHOUT PREJUDICE DEFENDANTS' MOTION TO STAY DISCOVERY IN LOUISIANA STATE COURT ACTION. Signed by Judge Samuel H. Mays, Jr., on February 16, 2010. (Mays, Samuel)

IN THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF TENNESSEE WESTERN DIVISION IN RE: REGIONS MORGAN KEEGAN SECURITIES, DERIVATIVE, AND ERISA LITIGATION ELIZABETH P. WILLIS, et al., Plaintiffs, v. MORGAN KEEGAN & CO., INC., et al. Defendants. ) ) ) ) ) ) ) ) ) ) ) ) ) )

Case Nos. 07-02830 MDL 2009

ORDER DENYING WITHOUT PREJUDICE DEFENDANTS' MOTION TO STAY DISCOVERY IN LOUISIANA STATE COURT ACTION Defendants Morgan Keegan & Co., Inc.; Morgan Asset Management, Inc.; Motion and on MK Holding, 21, Inc. 2009, ("Defendants") seeking an filed the present the

August

injunction

under

Securities Litigation Uniform Standards Act of 1998 ("SLUSA"), 15 U.S.C. § 77u-4(b)(3)(D), blocking discovery in the Louisiana state court case styled Firefighters' Retirement System v. (See

Regions Bank, No. 567874 (19th Jud. Dist. Parish Ct.). Dkt. No. 126.) responded to

Firefighters' Retirement System ("FRS") has not Defendants' memorandum on Motion, but Defendants 15, 2009, filed a

supplemental

September

asserting For the

additional grounds to enjoin the Louisiana action.

following

reasons,

the

Court

DENIES

WITHOUT

PREJUDICE

the

Defendants' Motion. I. FACTUAL BACKGROUND On June 12, 2008, FRS filed suit against Defendants in Louisiana state court. (Defendants' Supplemental Memo in

Support of Motion, Dkt. No. 133, Ex. 1 (FRS Complaint) at 1.) ("Defs.' chartered statewide Supp." or "FRS Compl.") FRS is with a legislatively operating the

government retirement

corporation system for

charged all

Louisiana

firefighters

outside New Orleans.

See La. Rev. Stat. Ann. §§ 11:2251 - 2265.

As part of its task to manage the firefighters' retirement trust fund, the board of directors of FRS met with officials from Defendants about potential investment options for its more than $1 billion in assets. (FRS Compl. ¶ 7.) FRS alleges that the

Defendants improperly recommended that FRS invest a substantial sum in the Morgan Keegan High Income Fund ("Fund"), an open-end mutual fund specializing in high-yield, and therefore higherrisk, corporate bonds. (FRS Compl. ¶ 10.) FRS' total

investment, including dividends it reinvested, was nearly $62 million. (FRS Compl. ¶ 37.) On May 28, 2008, when FRS sold its

holdings in the Fund, it sustained losses of nearly $50 million. (FRS Compl. ¶ 68.) FRS' suit lists nine causes of action against Defendants, including violation of the Louisiana Blue Sky Laws, La. Rev. 2

Stat.

Ann.

§

51:714;

breach

of

fiduciary

duties;

breach

of

contract; and negligent misrepresentation. 129.)

(FRS Compl. ¶¶ 80-

The Complaint's basic allegations are that Defendants that FRS invest in the Fund, whose assets were

recommended

heavily invested in mortgage-backed securities for which there was only a limited market. (Id. ¶¶ 82-85.) The Fund's purchase

of those highly risky securities allegedly violated the Fund's own investment restrictions. The resulting collapse in the

Fund's share price after the implosion of the credit markets in 2007-2008 resulted in FRS' sustaining massive investment losses. (Id. ¶¶ 47-48.) to inform FRS FRS asserts that Defendants violated their duty of the true nature of the Fund's investment (Id.

portfolio and thereby caused FRS to lose its investment. ¶¶ 53-65.)

Defendants removed FRS' suit to the United States District Court for the Middle District of Louisiana on July 10, 2008. Firefighters' Ret. Sys. v. Regions Bank, No. 08-429-C-M2, 2008 U.S. Dist. LEXIS 108606, at *6-7 (M.D. La. Sept. 10, 2008), adopted by 598 F. Supp. 2d 785, 787 (M.D. La. 2008). The

district court determined that it did not have subject-matter jurisdiction over FRS' suit and remanded the case to Louisiana state court. at *43. See Firefighters', 2008 U.S. Dist. LEXIS 108606,

In remanding the case, the district court specifically

found that: 3

FRS has not alleged any violations of federal securities law or SEC rules on the face of its petition. Furthermore, while some of the allegations in the petition concerning valuation, liquidity, and the requirements for a prospectus may call upon federal law for guidance as to the applicable standards, those allegations that "merely provide a factual basis" for FRS's state law claims and which could "independently support either a state law claim or a federal law claim" are not sufficient to create a substantial question of federal law or to confer jurisdiction to the federal courts. Id. at *37 (footnotes omitted). Once back in Louisiana state court, FRS sought wide-ranging discovery pleading from titled the Defendants. First Specifically, Request for FRS filed a of

"Plaintiff's

Production

Documents to Defendants" requiring Defendants to produce eightyfour different categories of documents. (Defs.' Supp. Ex. 3.)

This discovery request prompted Defendants to file the present Motion seeking to enjoin FRS from proceeding with any discovery in its state suit until this Court has ruled upon a motion to dismiss in the consolidated MDL litigation. of Law in Support of Motion at 1-2.) II. ANALYSIS (Defs.' Memorandum

("Defs.' Memo")

Defendants argue that this Court should use its authority under SLUSA to enjoin FRS from engaging in any discovery unless it coordinates its discovery timetable with the timetable in the consolidated federal MDL proceedings. Litigation Reform Act of 1995 The Private Securities generally prohibits

("PSLRA")

4

taking

discovery

until

a

federal

court

has

ruled

on

a

defendant's motion to dismiss.

See 15 U.S.C. § 78u-4(b)(3)(B).

Defendants assert that FRS' "aggressive and improper pursuit of discovery" will result in information leaking to the federal plaintiffs in violation of the PSLRA's automatic stay. Memo at 2, 8-13.) For support, Defendants argue (Defs.' FRS'

that

claims in the Louisiana litigation substantially overlap with those the federal plaintiffs are pursuing in the MDL. Memo at 6-8.) Defendants also allege that the (Defs.' discovery

requested by FRS will place an unreasonable and onerous burden on them, which they assert SLUSA and the PSLRA prohibit. FRS

has failed to file any pleadings in response to Defendants' Motion. A. SLUSA Empowers Action This Court to Enjoin Any Related

The PSLRA provides that "[i]n any private action arising under [the federal securities laws], 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 . . . ." 15 U.S.C. § 78u-

4(b)(3)(B).

This provision, however, applies only to discovery See In re FirstEnergy S'holder 584, 586 (N.D. Ohio 2004).

proceedings in federal court. Derivative Litig., 219 F.R.D.

5

Litigants have sought to evade this prohibition on discovery by shifting their securities suits to state courts, where discovery could continue uninhibited by the PSLRA. See Merrill Lynch,

Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 88 (2006) (noting that before passage of the PSLRA, litigants filed "no significant courts). securities class action litigation" in state

To stop this circumvention, Congress enacted SLUSA.

Among other provisions, SLUSA states that "[u]pon a proper showing, a court may stay discovery proceedings in any private action in a State court, as necessary in aid of its

jurisdiction, or to protect or effectuate its judgments, in an action subject to a stay of discovery pursuant to [the PSLRA]." 15 U.S.C. § 78u-4(b)(3)(D). The text of the statute is clear:

this Court has the power to enjoin discovery proceedings in any state court suit that might interfere with the ability of this Court to manage a federal action efficiently subject to the provisions of the PSLRA. See Newby v. Enron Corp., 338 F.3d

467, 473 (5th Cir. 2003) (SLUSA's injunction provision is broad and covers "any private, class or nonclass, action in state court."); In re DPL Inc., Sec. Litig., 247 F. Supp. 2d 946, 948 (S.D. Ohio 2003) (finding the SLUSA's injunction provision is broader in scope than its removal provision); City of Austin Police Ret. Sys. v. ITT Educ. Servs., Inc., No. 1:04-cv-0380DFH-TAB, 2005 U.S. Dist. LEXIS 1646, at *11 (S.D. Ind. Feb. 2, 6

2005)

("[T]he . .

language . is not

authorizing limited to

stays state

of

state

court fraud

discovery

securities

actions."). The consolidated MDL action currently pending before this Court is subject to the PSLRA's automatic stay. 78u-4(b)(3)(B). See 15 U.S.C. §

FRS' Louisiana suit arises from the same course Compare FRS addresses

of conduct that forms the basis for the MDL action. Compl. ¶¶ 47-48, 82-85 (noting that FRS' suit

Defendants' failure to disclose the nature of and risk involved in the assets held by the Fund), with Atkinson v. Morgan Asset Mgmt., Inc., No. 07-2784, Dkt. No. 154, Order Granting in Part and Denying in Part Motions, at 4-7 (W.D. Tenn. Sept. 23, 2008) (noting that federal plaintiffs allege Defendants failed to

disclose nature of Fund's assets).

SLUSA thus empowers this

Court to enjoin the proceedings in the Louisiana suit if the Defendants can demonstrate an entitlement to relief. U.S.C. § 78u-4(b)(3)(D). B. The Defendants Have Injunctive Relief Although SLUSA allows Not Met Court the to Standard enjoin for state See 15

this

proceedings, the mere pendency of a related state court action does not entitle Defendants to injunctive relief. City of

Austin, 2005 U.S. Dist. LEXIS 1646, at *25-26.

Courts in this

circuit weigh three primary factors when considering whether to

7

stay a state court proceeding under SLUSA: 1) whether there is a risk of the federal plaintiffs' obtaining discovery from the state plaintiffs; 2) whether the federal and state actions

involve overlapping facts and legal claims; and 3) the burden the state court discovery will place on the Defendants. In re

Cardinal Health, Inc. Sec. Litig., 365 F. Supp. 2d 866, 872 (S.D. Ohio 2005) (citing In re Gilead Sciences Sec. Litig., No. 03-4999, 2004 U.S. Dist. LEXIS 27309, at *8-9 (N.D. Cal. Nov. 22, 2004)). While demonstrating that a state court plaintiff

has an intent to circumvent the PSLRA's automatic stay would strongly support a court's enjoining the state proceedings, Id. at 873.

showing intent is neither required nor dispositive.

The twin purposes of the PSLRA's stay should guide a court when determining whether an injunction is proper; namely, preventing plaintiffs from placing an "unreasonable burden" on Defendants and barring discovery from resuscitating an initially frivolous complaint. Id. at 872 n.6; see also Newby, 338 F.3d at 471; In

re DPL, Inc., 247 F. Supp. 2d at 950. 1. One of the The Risk of Circumvention primary factors the Court must consider is

whether there is a risk that federal plaintiffs could obtain materials turned over under FRS' discovery request and thus

circumvent the PSLRA's automatic stay. 365 F. Supp. 2d at 875.

In re Cardinal Health,

When considering the likelihood of 8

circumvention of the stay, this Court must consider whether a properly drafted confidentiality Id. when agreement at 872. for could The the prevent risk of

unauthorized circumvention

disclosures. is greatest

counsel

state

court See

plaintiffs also represent plaintiffs in the federal action. In re DPL Inc., 247 F. Supp. 2d at 950.

Defendants argue that the risk of circumvention is high in the present case for three reasons. First, FRS' counsel have

already coordinated with counsel for plaintiffs in a related arbitration proceeding to serve one of Defendants' employees

with a subpoena to testify.

The Defendants reason that it is a

small step from such coordination in service of process to the sharing of discovery materials. (Defs.' Memo at 18-19.)

Second, the fact that FRS' counsel also represents plaintiffs in four related Alabama suits raises Defendants' circumvention

concerns.

(Id. at 10.)

Third, Defendants note the aggressive

nature of FRS' discovery requests as emblematic of a take-noprisoners litigation strategy that further suggests a likelihood of improper discovery sharing. Although concern, allayed each of the they than (Id. at 19.) factors are not Defendants dispositive relief. raise and FRS causes can has be on

collectively by means

other

injunctive

multiple occasions stated that it would consent to the entry of a protective order prohibiting the sharing of discovery with 9

non-parties to the state-court suit.

Indeed, the correspondence

submitted by Defendants indicates the parties have considered several drafts of a proposed order. 8 (noting that FRS "offered to (See Defs.' Supp. Ex. 7 at into a stipulation of

enter

confidentiality"); Id. Ex. 17 at 2 ("The parties will enter into a stipulation of confidentiality," and noting that a proposal is attached); Id. Ex. 19 at 2 (stating that Defendants have

attached a copy of a proposed protective order).)1

Defendants

have failed to explain why a properly drafted order would not prevent disclosure. at 872. FRS' See In re Cardinal Health, 365 F. Supp. 2d to enter into a confidentiality Cf. In re DPL

willingness

agreement lessens the risk of circumvention.

Inc., 247 F. Supp. 2d at 950 (granting an injunction where state counsel told court he intended to share discovery with federal plaintiffs). Further alleviating the risk is the fact that FRS' counsel is not involved in the federal litigation. Counsel's

involvement in similar Alabama state suits is inapposite where those suits do not share plaintiffs with the federal action. Cf. id. (injunction granted where same attorney represented both federal and state plaintiffs). Similarly, Defendants cannot

complain about hardball litigation tactics, such as coordinating

1

Although the exhibits mention attached proposed protective Defendants have not provided the text of the proposals.

orders,

the

10

service of process, when their first response is to seek to enjoin FRS' state suit rather than continue what appear to be potentially disputes. fruitful negotiations to solve the discovery

The Court is unconvinced that the parties cannot

ensure the confidentiality of the discovery materials with the entry and enforcement of a proper protective order in the

Louisiana state court. injunction. 2.

Factor one weighs against granting an

Overlapping Claims

The second factor the Court must consider is whether FRS' claims overlap legally or factually with those of the federal plaintiffs. In re Cardinal Health, 365 F. Supp. 2d at 872. The

Defendants are correct that the claims FRS raises substantially overlap with the claims in the MDL litigation. Both suits

allege that Defendants misrepresented the risk involved with the Fund by overvaluing mortgage-backed assets for which there was only a limited market. Atkinson, Order at 4-7. state-law contract, claims and of Compare FRS Compl. ¶¶ 47-48, 82-85, with That FRS has couched its arguments as of the fiduciary Louisiana duties, Blue breach Laws of is See

breach of

violation

Sky

immaterial when the gravamen of the complaint is the same. In re Cardinal Health, 365 F. Supp. 2d at 875-76.

The second

factor weighs in favor of enjoining the Louisiana litigation.

11

3. The burden final

Burden on the Defendants factor would of that this on Court the must consider is FRS the has of

discovery a

place

Defendants. separate

requested discovery. this

total

eighty-four

categories

(Defs.' Supp. Ex. 3.) would place an

Responding to a request of burden upon the

magnitude

unreasonable

Defendants.

Cf. In re Cardinal Health, 365 F. Supp. 2d at 876.

However, the Louisiana court thus far has refused to grant a motion to compel that would require Defendants to produce the documents in toto. (Defs.' Supp. at 2 n.2 (noting that the Following that refusal, FRS

trial court denied FRS' motion).)

has offered to confine its discovery requests and to pursue them in "waves," limiting the number of documents Defendants must produce at any one time. (See id. Ex. 17 at 2 (listing

categories in the "first `wave'").) discovery Defendants. process would go far

If approved, this graduated to limit the burden on

Given the state trial court's decision to deny FRS'

motion to compel and the potential for a negotiated agreement to reduce the discovery burden Defendants will face, the third

factor weighs against enjoining the Louisiana action at this time. Cf. City of Austin, 2005 U.S. Dist. LEXIS 1646, at *29

(noting that federalism and comity concerns require that courts not automatically grant SLUSA injunctions).

12

III. CONCLUSION The three factors do not weigh in favor of granting

injunctive relief at this time. demonstrate that no reasonable

The Defendants have failed to means exist to remedy their

concerns about the potential for discovery sharing short of the drastic step of enjoining an ongoing state-court proceeding.

See id. at *25-26 (rejecting the notion that a court should issue a stay anytime state court discovery coincides with a related federal securities suit). The Court, therefore, DENIES

the Defendants' Motion WITHOUT PREJUDICE to the filing of a future motion should the status of the proceedings in the

Louisiana action change substantially. So ordered this 16th day of February, 2010.

s/ Samuel H. Mays, Jr. SAMUEL H. MAYS, JR. UNITED STATES DISTRICT JUDGE

13