Union Cent. Life Ins. Co. v. Ally Fin., Inc.: PSLRA Discovery Stay is Applicable to State Law Claims in Federal Securities Actions
In Union Cent. Life Ins. Co. v. Ally Fin., Inc., No. 11 Civ. 2890(GBD)(JCF), 2012 WL 3553052 (S.D.N.Y. Aug. 17, 2012), the United States District Court for the Southern District of New York denied the plaintiffs’ motion for commencement of limited discovery. The plaintiffs’ (Union Central Life Insurance Company, Ameritas Life Insurance Corporation, and Acacia Life Insurance Company) initially alleged that the defendants violated the Securities Exchange Act of 1934 (“Exchange Act”) and committed “state common law fraud in connection with the sale of twenty-one residential mortgage-backed securities.” Plaintiffs moved for limited discovery against three groups of defendants: Morgan Stanley, Washington Mutual, and UBS. The plaintiffs asserted only state law claims, and not claims under the Exchange Act, against these particular defendants.
Under the Private Securities Litigation Reform Act of 1995 (“PSLRA”), discovery is postponed in cases involving violations of the Exchange Act until all motions to dismiss are ruled upon. Defendants filed motions to dismiss, halting discovery. The plaintiffs put forth three arguments in support of their motion for limited discovery.
First, the plaintiffs asserted that the PSLRA discovery rule is not applicable to “state law claims where no parallel Exchange Act claim is asserted.” This argument broke down into two propositions: (1) “the question of whether the PSLRA stay applies should be resolved independently with respect to each defendant”; and (2) “[assuming the first proposition is true,] the stay does not apply with respect to those defendants against whom the plaintiffs have raised solely state law claims.”
The court accepted neither proposition. With respect to the first proposition, the court noted that the cited cases involved the commencement of discovery after the denial of a motion to dismiss. Because the motions were pending, the cases were inapposite.
The court resolved the second proposition by looking at the plain language of the PSLRA. The statute applied to “federal securities actions” [emphasis in original] and did not specify the need for a federal security claim against each particular defendant. The court reasoned that this language was broad enough to encompass these state law claims because they were within the federal securities action.
The plaintiffs’ second argument for limited discovery was that “the presence of Exchange Act claims against other defendants is not a valid basis for extending the stay to include defendants against whom they assert only state law claims.” The court concluded that a discovery stay was inapplicable to state law claims that were unrelated to fraud. The actions in the instant case were related to fraud and therefore inseparable from the Exchange Act claims. Furthermore, the court explained that extending the PSLRA to state law claims was essential in cases such as this where coordination among the defendants is required.
The plaintiffs’ final argument was “that the PSLRA’s stay provision was not intended to apply to individual, rather than class action, securities claims.” The court again looked to the language of the statute and found no limitation on the scope, holding that the PSLRA applies to individual actions.
The primary materials for this case may be found on the DU Corporate Governance website.