Under the Private Securities Litigation Reform Act (PSLRA), a discovery stay is automatically triggered by a defendant’s motion to dismiss. Here, the plaintiffs, who initiated a stockholder derivative suit against Sunrise Senior Living, Inc., sought to lift the automatic stay following defendant’s motion to dismiss. The court noted that in order to overcome the stay, the PSLRA requires the moving party to show that particularized discovery is necessary to preserve evidence or prevent undue prejudice.
The court denied plaintiffs’ motion, holding that it had not made the requisite showing. The court first ruled that preservation of evidence was not a concern in this case. While the stay could be lifted to allow access to evidence that is at risk of being destroyed or lost, plaintiffs failed to show that such a risk existed with respect to the documents they were requesting. To the contrary, because those documents had all been produced in other litigations, the court ruled that they were not at risk. The court then ruled that the plaintiffs also would not suffer undue prejudice if the discovery stay remained in place. The court recognized that a plaintiff might suffer undue prejudice if the defendant was simultaneously defending numerous legal actions that were not subject to the stay—because the resolution of those actions could deplete the defendant’s assets before a plaintiff subject to a PSLRA discovery stay could effectively plan and execute its settlement and litigation strategy. However, the court ruled that the pending actions against the defendant—a separate shareholder derivative lawsuit and an SEC investigation—did not create the requisite prejudice. Because the separate derivative action, like plaintiffs’ actions, sought a recovery on behalf of the corporation, the court was not concerned that its resolution would deplete assets sought by plaintiffs. Further, because it was customary for SEC investigations to occur contemporaneously with private litigations, the court ruled that the pendency of a routine SEC litigation did not constitute the type of “undue prejudice” required to lift the stay. (In re Sunrise Senior Living, Inc., 2008 WL 4726050 (D.D.C. October 28, 2008))