The Private Litigation Securities Reform Act of 1995 was passed (over Bill Clinton’s veto) in order to limit frivolous federal securities fraud lawsuits. The Act established strict pleading requirements, and, in order to reduce the costs of litigation, barred discovery during the pendency of a motion to dismiss, which is the routine first line of defense to securities lawsuits. A plaintiff can obtain discovery if a motion to dismiss is pending only if the discovery is necessary to preserve evidence or prevent “undue prejudice.”
In In Re GMR Securities Litigation, Magistrate-Judge Netburn was faced with plaintiff’s claim that he was the only “stakeholder” in the litigation without access to documents, and therefore was suffering undue prejudice. Judge Netburn noted that the Second Circuit has not yet addressed the meaning of “undue prejudice” under the PLSRA, but found that the fact that other individuals have access to the documents plaintiff wants is not “controlling.” Rather, plaintiff would have to show that those other “stakeholders” were bringing ongoing litigation that competed with plaintiff’s own PLSRA claims, thereby putting plaintiff at a disadvantage. Absent that specific showing, the Judge found no undue prejudice to plaintiff arising from the automatic stay, and denied discovery pending a decision on defendants’ previously filed motion to dismiss.