In re Tyco Internt’l Securities 00-MD-1335-B 07/27/00

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE

In re Tyco International, Ltd. MDL N o . 00-MD-1335-B Securities Litigation ALL CASES Opinion N o .

MEMORANDUM AND ORDER

This multidistrict litigation consolidates for pretrial

purposes securities fraud actions brought in multiple federal

districts. A group of four plaintiffs (the “Tyco Shareholder

Group” or “TSG”), who together seek appointment as lead

plaintiff, have moved for an order that (1) memorializes the

parties’ agreement as to the preservation of documents and data

in the possession of the defendants, and (2) grants the

plaintiffs authority to serve subpoenas on certain third parties

for the limited purpose of putting those third parties on notice

of this action and placing them under an obligation to preserve

relevant evidence in their possession.

As explained below, I deny the TSG’s request for a

preservation order directed at the defendants. I f , however, the

TSG presents this court with preservation subpoenas that

1 appropriately particularize the relevant evidence to be

preserved, I will grant the TSG leave to serve such subpoenas on

specified third parties.

I. The Statutory Framework: The PSLRA of 1995

This action is subject to the Private Securities Litigation

Reform Act of 1995, 15 U.S.C. § 78u-4 (the “PSLRA” or the “Act”).

Congress enacted the PSLRA to redress certain perceived abuses in

securities class actions, including “the abuse of the discovery

process to coerce settlement.” SG Cowen Secs. Corp. v . United

States Dist. Court for the N . Dist. of California,

,

911 (9th Cir. 1999) (quoting In re Advanta Corp. Secs. Lit.,

(3d Cir. 1999)). Congress was reacting to

testimony that “[t]he cost of discovery often forces innocent

parties to settle frivolous securities class actions.” H.R.

Conf. Rep. N o . 104-369, at 37 (1995), reprinted in 1995

U.S.C.C.A.N. 730, 736. Congress also was concerned that

“plaintiffs sometimes file frivolous lawsuits in order to conduct

discovery in the hopes of finding a sustainable claim not alleged

in the complaint.” S. Rep. N o . 104-98, at 14 (1995), reprinted

2 in 1995 U.S.C.C.A.N. 679, 693.

Congress sought to remedy these abuses of the discovery

process by including within the PSLRA a stay provision, codified

at 15 U.S.C. § 78u-4(b)(3)(B), which provides that

In any private action arising under this chapter, all discovery and other proceedings shall be stayed during the pendency of any motion to dismiss, unless the court finds upon the motion of any party that particularized discovery is necessary to preserve evidence or to prevent undue prejudice to that party.

15 U.S.C. § 78u-4(b)(3)(B) (Supp. 1996). Accordingly, unless

certain exceptional circumstances are present, discovery in

securities class actions is permitted “only after the court has

sustained the legal sufficiency of the complaint.”1 SG Cowen,

1 Courts applying the PSLRA’s stay provision have reached different conclusions as to whether it applies before a motion to dismiss is filed. See, e.g., In re Carnegie Int’l Corp. Secs. Lit., Civil N o . L-99-1688,

(D. Md. Apr. 1 1 , 2000) (“[T]his Court rejects plaintiffs’ argument that the automatic stay provision of the PSLRA does not apply because the defense has not yet filed its motion to dismiss. Until the deadline for filing a motion to dismiss passes, or the defendants otherwise waive their rights to file a motion, or the Court rules on a motion to dismiss, the stay provisions are available.”); Dartley v . Ergobilt, Inc., 3-98-CV-1442-G,

, at *2-3 (N.D. Tex. Nov. 3 , 1998) (“In interpreting the mandatory stay provision of the Reform Act, courts have stayed discovery against defendants where the filing of a motion to dismiss is imminent. However, under the plain language of the statute no stay is mandated where a motion to dismiss has yet to be filed. Therefore, in my opinion whether a

3 189 F.3d at 913 (quoting S . Rep. N o . 104-98, at 14 (1995),

reprinted in 1995 U.S.C.C.A.N. 679, 693) (internal quotation

marks omitted).

At the same time, Congress included a preservation provision

in the PSLRA “in recognition that ‘the imposition of a stay of

discovery may increase the likelihood that relevant evidence may

be lost.’” In re Grand Casinos, Inc. Secs. Lit.,

(D. Minn. 1997) (quoting S . Rep. N o . 104-98, at 14

(1995), reprinted in 1995 U.S.C.C.A.N. 679, 6 9 3 ) . The

preservation provision mandates that

stay should be granted under such circumstances is addressed to the broad discretion of the court.”), appeal denied by

(N.D. Tex. Nov. 4 , 1998); In re Trump Hotel Shareholder Derivative Lit., N o . 96CIV.7820 (DAB)(HBP),

, at *2 (S.D.N.Y. Aug. 5 , 1997) (finding that stay provision applies where dismissal motion had not yet been filed solely as a result of parties’ pleading schedule). In the present action, motions to dismiss had been filed in some of the individual actions prior to consolidation, the parties and the court have established a schedule for the filing of an amended consolidated complaint and a motion to dismiss that complaint, and the defendants have indicated that they intend to file such dismissal motion. Under these circumstances, the stay provision applies even though a motion to dismiss is not pending. Cf. Powers v . Eichen,

(S.D. Cal. 1997) (“[I]t is clear that Congress did not contemplate a restrictive reading of the term ‘pendency’ in [the PSLRA’ stay provision].”).

4 During the pendency of any stay of discovery pursuant to this paragraph, unless otherwise ordered by the court, any party to the action with actual notice of the allegations contained in the complaint shall treat all documents, data compilations (including electronically recorded or stored data), and tangible objects that are in the custody or control of such person and that are relevant to the allegations, as if they were the subject of a continuing request for production of documents from an opposing party under the Federal Rules of Civil Procedure.

15 U.S.C. § 78u-4(b)(3)(C)(i) (Supp. 1996). The statute provides

for the possibility of court-ordered sanctions for a party’s

“willful failure” to comply with the duty to preserve relevant

evidence. Id. § 78u-4(b)(3)(C)(ii) (Supp. 1996).

These provisions reflect a careful balance between

Congress’s effort to shield defendants facing frivolous claims

from the burdens of discovery, on the one hand, and its desire to

ensure the preservation of evidence relevant to legally

cognizable claims, on the other. As one court has noted, in

crafting the stay and preservation provisions of the PSLRA

“Congress’s intent was to preserve the status quo, pending a

judicial determination of the legal sufficiency of [the

complaint].” In re Grand Casinos, Inc. Secs. Lit.,

.

5 II. The TSG’s Request for a Preservation Order Directed At Defendants

The TSG’s first request is that I enter an order

memorializing the parties’ agreement regarding the preservation

of documents and data in the custody or control of the

defendants. I deny this request because such an order would

either unnecessarily duplicate or improperly alter the

obligations created under the PSLRA.

As indicated above, the PSLRA imposes a duty on any party to

a securities class action with actual notice of the allegations

contained in a complaint to preserve all relevant evidence in the

custody or control of that party. See 15 U.S.C. § 78u-

4(b)(3)(C)(i). As parties to the present action, defendants Tyco

International Ltd., L. Dennis Kozlowski, and Mark H. Swartz are

subject to this statutory duty. The defendants have indicated

that they “are aware of this obligation under the PSLRA and

intend to comply with it.” Defs.’ Mem. in Opp’n (Doc. #21) at 5 ;

see also Transcript of Oral Argument (Doc. #26) at 121. Absent a

showing that defendants are not acting in accordance with their

statutory duty, the PSLRA’s preservation provision should be

sufficient to ensure the preservation of relevant evidence in the

6 defendants’ custody or control. See In re Grand Casinos, Inc.

Secs. Lit.,

(denying request for

preservation order as to evidence possessed by parties because

“the preservation of evidence in the possession of the parties is

statutorily automatic”).

The TSG has suggested that a preservation order directed at

the defendants is necessary because without such an order,

defendants will lack notice of which types of evidence the

plaintiffs consider relevant to their claims. See Mem. in Supp.

of TSG’s Mot. (Doc. #16) at 2 ; TSG’s Supplemental Mot. (Doc. #19)

¶ 2 ; Transcript of Oral Argument (Doc. #26) at 109. While I

recognize the importance of such notice, I conclude that in the

present case the defendants have received sufficient notice.

First, although an amended consolidated complaint has yet to be

filed, defendants are aware of the allegations contained in the

complaints filed in the individual actions. Moreover, after

engaging in a process of negotiation, the parties have reached

agreement on the preservation of virtually all of the types of

documents and data in which the TSG has expressed an interest.2

2 The parties remaining disagreement appears to concern the preservation of “state sales and property tax returns and

7 See Defs.’ Mem. in Opp’n (Doc. #21) at 1-2, 5 ; TSG’s Supplemental

Mot. (Doc. #19) ¶¶ 1 , 5 ; Transcript of Oral Argument (Doc. #26)

at 112. In the course of these negotiations, the TSG has

provided defendants with specific descriptions of the documents

and data that it considers relevant to its claims. See TSG’s

Mot. (Doc. # 1 6 ) , Ex. A . Under the circumstances, I conclude that

the defendants are on actual notice both of the allegations

against them and of the types of documents and data that the TSG

considers relevant to those allegations.

Accordingly, I deny the TSG’s request for a preservation

order directed at the defendants.

III. Preservation Subpoenas To Third Parties

The TSG’s second request is that I grant them authority to

serve subpoenas on specified third parties for the limited

purpose of providing them with notice of the action and placing

them under an obligation to preserve relevant evidence. I

payments.” TSG’s Supplemental Mot. (Doc. #19) ¶ 5 ; Defs.’ Mem. in Opp’n (Doc. #21) at 2-3 n.2. I need not settle this dispute; to the extent that such documents are relevant to the claims advanced in this action, the defendants must preserve them or face the possibility of sanctions.

8 conclude that the service of a limited number of particularized

preservation subpoenas on third parties is consistent with the

language and purpose of the PSLRA.

The stay of discovery provided for by the PSLRA protects

nonparties as well as parties. See In re Carnegie Int’l Corp.

Secs. Lit., Civil N o . L-99-1688,

(D. Md. Apr. 1 1 , 2000). To obtain relief from this

mandatory stay, a party must (1) request “particularized

discovery,” and (2) show that such discovery is necessary either

“to preserve evidence or to prevent undue prejudice to that

party.” 15 U.S.C. § 78u-4(b)(3)(B). I consider these

requirements in reverse order.

A. Necessary to Preserve Evidence or Avoid Undue Prejudice

In the circumstances of this case, I find that the TSG has

demonstrated that service of appropriately tailored preservation

subpoenas on specified third parties is necessary to preserve

evidence. The claims in this consolidated securities fraud

action are based in part on allegations that the defendants

manipulated the accounting for a series of acquisitions by Tyco

International in order to overstate the corporation’s earnings

and thereby inflate its stock price. See Compl. filed in

9 Greenberg v . Tyco Int’l, Ltd., 99 CIV. 11930, ¶¶ 25-27, Ex. A to

Affidavit of Kenneth J. Vianale in Supp. of Proposed Tyco Lead

Pls.’ Mot. (S.D.N.Y. Doc. # 8 ) . The third parties identified by

the TSG mainly appear to be accountants, auditors, and/or

consultants that may possess relevant evidence of the

acquisitions and accounting practices at issue. See Schedule of

Third Parties to Be Served With Doc. Preservation Subpoenas (Doc.

#25) at 1-2. Unlike the defendants, these third parties have not

necessarily received actual notice of this action. Further, the

TSG has produced evidence that large corporations typically

overwrite and thereby destroy electronic data in the course of

performing routine backup procedures. See Decl. of Joan Feldman,

¶¶ 7 , 8 , Ex. C to TSG’s Mot. (Doc. # 1 6 ) ; c f . Applied Telematics,

Inc. v . Sprint Communications Co., L.P., N o . 94-4603,

, at *5 (E.D. P a . Sept. 1 7 , 1996) (“In

accordance with defendant’s normal operating procedures, every

week the computer system is backed up and saved, thereby deleting

the backup from the prior week. After one week, therefore,

historical information is unavailable from the computer

system.”). The TSG has therefore offered more than ungrounded

speculation that relevant evidence may be destroyed. Cf. In re

10 Fluor Corp. Secs. Lit., N o . SA CV 97-734 AHS EEX,

,

at *3 (C.D. Cal. Jan. 1 5 , 1999) (“Plaintiffs . . . fail to make

any credible showing that discovery is necessary to preserve

evidence beyond generalizations of fading memories and

allegations of possible loss or destruction.”).

Although the TSG need only establish that one of the two

exceptional circumstances identified in the stay provision

applies, I also find that the TSG has made a sufficient showing

of undue prejudice. One of the courts to have considered the

meaning of the PSLRA’s “undue prejudice” standard concluded that

“[i]n contrast to ‘irreparable harm,’ ‘undue prejudice’ means

improper or unfair detriment.” Medical Imaging Cents. of Am.,

Inc. v . Lichtenstein,

1 7 , 720 (S.D. Cal. 1996).

The same court suggested that a stay of discovery would cause

undue prejudice to a plaintiff if it would effectively “shield .

. . [defendants] from eventual liability for any material

violations of the securities laws.”

at 721 n.3; see also

Global Intellicom, Inc. v . Thomson Kernagahan & Co., 99 CIV. 342

(DLC),

, at *4-5 (S.D.N.Y. Apr. 1 5 ,

1999) (finding that plaintiff made sufficient showing of undue

prejudice by demonstrating that its ability to seek redress in

11 securities action might be foreclosed). Applying these

interpretations of undue prejudice, I conclude that the standard

is satisfied by the TSG’s showing that evidence relevant to

plaintiffs’ claims might be inadvertently destroyed by third

parties without notice of this action.

B. Particularized Discovery

In addition to demonstrating necessity, a party seeking an

exception to the PSLRA’s stay provision must request

“particularized discovery.” As interpreted in the relevant case

law, the “particularized discovery” requirement has at least two

dimensions. First, a discovery request is particularized to the

extent that it is directed at specific persons. Unlike cases in

which plaintiffs have sought leave to serve subpoenas on an

insufficiently specified group of third parties, see In re Fluor

Corp. Secs. Lit.,

, at * 3 ; Mishkin v . Ageloff,

(S.D.N.Y. 1998), the TSG has provided a list of

the thirteen third parties that it wishes to serve with

preservation subpoenas. See Schedule of Third Parties to Be

Served With Doc. Preservation Subpoenas (Doc. #25) at 1-2. The

TSG has thus satisfied this aspect of the “particularized

discovery” requirement.

12 Second, a discovery request is particularized to the extent

that it identifies specific types of evidence that fall within

its scope.3 Courts applying the PSLRA stay provision have

therefore rejected as insufficiently particularized requests for

discovery that were overly broad in scope. See In re Carnegie

Int’l Corp. Secs. Lit.,

, at * 2 4 ;

Mishkin,

.

In the present case, the briefs and proposed orders

submitted by the TSG do not sufficiently particularize the types

of evidence that the third parties in question would be called

upon to preserve. See TSG’s Mot. (Doc. #16); TSG’s Supplemental

Mot. (Doc. #19) and Ex. B (proposed order); Proposed Order R e :

Preservation of Discovery Material (appended to Doc. #5) ¶ 6.

The TSG is thus effectively requesting authority to serve upon

third parties subpoenas that call for the preservation of “an

open-ended, boundless universe” of materials. Mishkin, 220 B.R

at 793. Such a request fails to meet the “particularized

3 I do not accept the suggestion, offered in In re Grand Casinos, Inc. Secs. Lit., that a discovery request is sufficiently particularized simply because it calls for the preservation rather than the production of evidence. See

.

13 discovery” standard. I f , however, the TSG submits subpoenas to

this court within the next 14 days calling for the preservation

of relevant evidence that is described with the requisite

particularity (i.e., in terms comparable to the categories used

by the parties in their negotiations regarding documents and data

in the possession of defendants), I will grant them authority to

serve such subpoenas on some or all of the thirteen third parties

they have identified.4

C. Preservation Versus Production

In other cases, courts have concluded that the PSLRA does

not allow plaintiffs to obtain relief from the statutory stay to

discover facts necessary to satisfy the Act’s heightened pleading

requirements. See SG Cowen, 189 F.3d at 912; Medhekar v . United

States Dist. Court for the N . Dist. of California,

,

328 (9th Cir. 1996). These rulings seek to carry out Congress’s

intention “that complaints in these securities actions should

stand or fall based on the actual knowledge of the plaintiffs

rather than information produced by the defendants after the

4 Of course, any third party that eventually receives such a preservation subpoena may avail itself of the protections provided under Federal Rule of Civil Procedure 45(c).

14 action has been filed.” Medhekar, 99 F.3d at 328. However, as

other courts have concluded, granting a plaintiff leave to issue

subpoenas that give specified third parties notice of the action

and impose upon them only a duty to preserve certain relevant

evidence in their possession is consistent with the purposes

underlying the PSLRA. See, e.g., Neibert v . Monarch Dental

Corp., 3-88-CV-762-X, slip op. at 1-2 (N.D. Tex. Oct. 2 0 , 1999);

In re Grand Casinos, Inc. Secs. Lit.,

; but

see Asset Value Fund Ltd. Partnership v . Find/SVP, Inc., N o . 97

CIV. 3977(LAK),

, at *1 (S.D.N.Y. Sept. 1 9 , 1997).

IV. Conclusion

For the reasons provided above, the TSG’s request for a

preservation order directed at defendants is denied. If the TSG

submits preservation subpoenas to the court within the next 14

days that appropriately particularize the types of evidence to be

preserved, I will grant them the authority to serve such

subpoenas on specified third parties.

15 SO ORDERED.

Paul Barbadoro Chief Judge

July 2 7 , 2000

cc: Michael J. Beck, Judicial Panel on MDL Steven Schulman, Esq. Jeffrey Haber, Esq. Joseph Weiss, Esq. Norman Berman, Esq. Frederick E . Upshall, Jr., Esq. Paul Kfoury, Sr., Esq. Steven Madsen, Esq. Lewis Liman, Esq. Edward Haffer, Esq.

16