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A series of post-Enron cases has begun to puncture a barrier to plaintiffs’ discovery that Congress erected in an overhaul of securities class actions in 1995. In the latest, Judge Robert W. Sweet followed the trend by ruling in a Southern District of New York case last month that when plaintiffs seek documents that have already been handed over to government investigators, the prohibition under the 1995 act may not apply. In re LaBranche Securities Litigation, 03 Civ. 8201 (Aug. 25). In the 1995 Private Securities Litigation Reform Act, Congress hoped to curb what it considered frivolous class actions. The legislation implemented several measures for this purpose including severe limitations on discovery. One portion of the act aimed to curb “fishing expeditions” in which plaintiffs would sue companies with little information about any alleged wrongdoing and then go searching for inculpatory facts during discovery. The act stopped discovery dead in its tracks while a court considered whether a case could proceed. It forced plaintiffs to produce detailed complaints to pass the higher pleading standards. Only after passing this stage of the trial, could plaintiffs begin the discovery process. The cases modifying the absolute prohibition of discovery before a ruling on a motion to dismiss still represent a tiny fraction of class actions. They have come about under a particular set of circumstances: when defendants have already handed over the desired documents to government investigators. The courts have opened the door for plaintiffs to access these documents expeditiously. When passing the 1995 act over President Clinton’s veto, Congress offered two reasons for its restrictions on discovery. It wanted to prevent plaintiffs from forcing coercive settlements through the threat of costly and burdensome discovery, often the most expensive stage of a trial. And it wanted to block plaintiffs from using discovery to uncover claims not alleged in their complaints. Critics of plaintiffs’ firms believed that class action lawyers filed cases with little existing proof of wrongdoing, hoping to find it during discovery. Courts have generally upheld the congressional mandate, regularly rejecting plaintiffs’ requests to modify the ban on discovery and leading plaintiffs to forgo such attempts in most instances, said Marc Willner of Schiffrin & Barroway, co-lead plaintiffs’ counsel in the LaBranche case. Congress did allow exceptions. When plaintiffs successfully argued that discovery was necessary to preserve evidence or would prevent undue prejudice, a court could grant its request in limited circumstances. Plaintiffs have used this exception to get access to documents before the initial ruling on the viability of their claims. The first important exception involved Enron. In Texas in August 2002, District Court Judge Melinda Harmon gave plaintiffs suing Enron for securities violations access to documents produced by the company to government investigators. Judge Harmon found that the defendant had already expended its time and money in producing these documents to the government. Reproducing them for plaintiffs would add little to this burden, she ruled. Months later, Judge Denise Cote of the Southern District handed down a similar ruling in a class action case involving WorldCom, another bankrupt company at the center of a scandal. Judge Cote rejected defendant’s accusation of a fishing expedition on the part of plaintiffs. WorldCom’s well-publicized misdeeds legitimated a securities fraud claim without the need for plaintiffs to rely on discovery to find actionable claims. This type of decision “is reserved for those rare instances … where the goals of Congress are not implicated,” — that is, when there is an obvious fraud and the documents have been gathered and produced for other parties — said John P. Coffey, a partner at Bernstein Litowitz Berger & Grossmann representing plaintiffs in the WorldCom litigation. With the Securities and Exchange Commission, the U.S. Department of Justice and WorldCom’s creditors committee benefiting from having access to these documents, the judge ruled, the class would be the only major party involved in WorldCom litigation operating without the benefit of this information. “This is especially troubling,” Cote wrote, “given the likelihood that settlement discussions will begin.” Judge Sweet, who mediated settlement talks in the WorldCom suit, applied similar logic in the LaBranche case. The NYSE and SEC investigated LaBranche, ultimately leading to disciplinary action and a settlement for $63.5 million in March. In a case still in court, plaintiffs last fall accused LaBranche, a trading firm on the New York Stock Exchange, of overstating its financial results by failing to disclose illegal trading schemes it had conducted. The plaintiffs asked that the discovery stay be lifted for documents already given to the government. The court granted it. “If the stay remains in place, Lead Plaintiffs will be the only interested party without access to those documents and will be prejudiced by their inability to make informed decisions about their litigation strategy in this rapidly shifting landscape,” Sweet wrote. The result would lead to “undue prejudice,” an exception listed in the 1995 act. The discovery order did not violate congressional concerns, the judge said. The plaintiffs agreed to pay the nominal costs of reproducing documents already gathered for regulatory bodies, the court held, thereby imposing no additional burdens on LaBranche. “The linchpin of this argument” relied on concurrent regulatory actions, said Willner, the plaintiffs’ lawyer. All of the cases cited by the court in support of its decision involved governmental investigations alongside private actions. “You don’t really have a leg to stand on without a contemporaneous government investigation,” Willner said. Still, a significant portion of securities class actions are filed in unison with government investigations. The number of such dual filings jumped from 40 to 85 in 2002 before dropping back last year. Government involvement is a mixed blessing, according to Coffey. Sometimes, the government can be helpful. In the HealthSouth case, plaintiffs received access to the government’s top witness before filing a complaint, he said. But government officials may hinder plaintiffs’ lawyers if they feel that the private suit will interfere with their investigation, he said, in citing the Cendant class action that settled for $3.2 billion in 1999. With government investigation on the rise and precedents in publicized cases, “this rationale is being applied more and more by courts,” said Robert Rothman of the Melville office of San Diego’s Lerach Coughlin Stoia Geller Rudman & Robbins, co-lead counsel in the LaBranche case. Judges have been more willing to grant discovery in recent years and he expects them to continue this trend, he said. The discovery exception is not the only place where the goals of the 1995 act have not been fully met. Another provision called for large investors to head class actions in the hopes that they would reel in the leading class action firms like Milberg Weiss Bershad Hynes & Lerach. Eight years later, Milberg Weiss, along with a handful of elite firms, continue to prosper by representing institutional investors. (Such firms today include Lerach Coughlin, which split from Milberg Weiss — now Milberg Weiss Bershad & Schulman — this year.) Despite higher pleading standards and other limitations imposed by the act, securities class actions rose after an initial depression after passage of the act. The number of suits filed and average settlement amounts also climbed in recent years.

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