First Department Concludes the Automatic Stay of Discovery Under the PSLRA Does Not Apply During the Pendency of an Appeal

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Posted on: Nov 8 2023

Under the Private Securities Litigation Reform Act of 1995 (“PSLRA), a mandatory stay of discovery is imposed “[i]n any private action arising under” the Securities Act of 1933 (“Securities Act”) “during the pendency of any motion to dismiss.” 15 U.S.C. § 77z-1(b)(1). In Camelot Event Driven Fund v. Morgan Stanley & Co. LLC, 2023 N.Y. Slip Op. 05534 (1st Dept. Nov. 2, 2023) (here), the Appellate Division, First Department was asked to determine whether the automatic stay under the PSLRA remains in effect “during the pendency” of an interlocutory appeal from the denial of a motion to dismiss. As discussed below, the Court held that it does not.

Plaintiff, Camelot Event Driven Fund (“Camelot”), commenced the action in August 2021, against Defendants for violations of the Securities Act in connection with public offerings of preferred and common stock of ViacomCBS Inc. (“Viacom”) in March 2021. Following proceedings for the appointment of a lead plaintiff, Plaintiffs filed the operative complaint. Thereafter, in December 2021, Defendants and Viacom filed motions to dismiss.

On February 7, 2023, the motion court denied the motion as to Defendants but granted Viacom’s motion. Thereafter, discovery commenced. Five months after the motion court issued its decision, Defendants filed an order to show cause that discovery be stayed pending their appeal of the motion court’s order denying their motions. The motion court denied the motion. In doing so, the motion court concluded that “[i]nasmuch as [the] Court has already issued a decision with respect to the motion to dismiss, and there is no longer a pending motion to dismiss, it would be contrary to and inconsistent with the express language of the PSLRA for the Court to further stay discovery.” Defendants appealed.

[Eds. Note: the facts and arguments discussed herein were taken from the record and briefing on appeal.]

On appeal, the First Department unanimously affirmed.

As an initial matter, the Court held that the section of the PSLRA relating to the automatic stay of discovery (i.e., 15 U.S.C. § 77z-1(b)(1)), “applies to any private action, whether brought in state or federal court”¹ as opposed to subsection (a) of 15 U.S.C. § 77z-1, which “applies only to actions in federal court.” This ruling was significant because an issue was raised by the parties as to whether the stay of discovery under the PSLRA applied in state court proceedings and, therefore, whether the question presented was properly before the Court (i.e., whether the automatic stay under the PSLRA remains in effect “during the pendency” of an interlocutory appeal from the denial of a motion to dismiss).²

Having concluded that 15 U.S.C. § 77z-1(b)(1) applied in state court proceedings, the Court turned its attention to the question presented. In that regard, the Court held that 15 U.S.C. § 77z-1(b)(1) “does not apply to stay discovery pending appeals from denials of motions to dismiss.” Looking at the “plain language” of the statute, the Court held that the stay did not apply to pending appeals:

As noted, 15 USC § 77z-1(b)(1) states that discovery shall be stayed “during the pendency of any motion to dismiss.”³ Thus, its plain language provides for a stay of discovery only while a motion to dismiss is awaiting disposition. Here, because defendants’ motions to dismiss have been decided, the stay no longer applies. They are not entitled to a stay of discovery pending their appeals from the denial of the motions.⁴

The Court said that its “determination [was] consistent with the statute’s purpose, which ‘is to prevent abusive, expensive discovery in frivolous lawsuits by postponing discovery until after the Court has sustained the legal sufficiency of the complaint.’”⁵ Thus, concluded the Court, “[i]n a case where the court already has sustained the legal sufficiency of the complaint,” as in Camelot, “this purpose has been served.”⁶

Footnotes

Slip Op. at *1.
Plaintiffs maintained that 15 U.S.C. § 77z-1(b)(1) was a procedural rule that applied only in federal court. Defendants maintained that the plain meaning of the statute mandated the application of the automatic stay in both state and federal court.
Id.
Id.
Id. (quoting In re Salomon Analyst Litig., 373 F. Supp. 2d 252, 254-255 (S.D.N.Y. 2005) (internal quotation marks and citation omitted); see also In re Lernout & Hauspie Sec. Litig., 214 F. Supp. 2d 100, 106 (D. Mass. 2000)).
Id.

Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.