discovery.” Vacold, 2001 WL 167704, at *6; see In re CFS, 179 F. Supp. 2d at 1266-67; see also
Global Intellicom, Inc. v. Thomson Kernaghan & Co., No. 99 CIV 342, 1999 WL 223158, at *1-2
(S.D.N.Y. Apr. 16, 1999) (allowing the plaintiff corporation to obtain discovery related to the
defendants’ efforts to take over the plaintiff, because those actions, if successful, would moot the
plaintiff's Jawsuit).

Even if exceptional circumstances exist, the movant must also show that particularized
discovery is necessary to remedy the problem. General requests to open all discovery do not satisiy
this burden. See Mishkin v. Ageloff, 220 B.R. 784, 792-93 (S.D.N.Y. 1998) (noting that a non-
specific motion asking for production of “an open-ended, boundless universe of discovery . .. is
basically a request to continue any and all discovery that may arise” and does not satisfy the
particularized discovery requirement); Faulkner, 156 F, Supp. 2d at 402 (holding that a subpoena
secking all documents already produced or to be produced in the future is not “particularized"). The
movant must specifically identify the needed discovery in its motion to lift the automatic stay. See

Mishkin, 220 B.R. at 794 n.6.

The plaintiffs argue that the automatic stay under the PSLRA should be lifted both to
preserve evidence and to prevent undue prejudice, First, the passage of time in waiting for a ruling
on the motion to dismiss increases the risk that memories will fade and documents will disappear.
Second, the plaintiffs will suffer undue prejudice if the stay is not lifted, because plaintiff Sarantakis
is 80 years old and her life savings were depleted; and plaintiff Coyle is 52 years old, has a limited
ability to work due to fibromyalgia, and has lost all the money in her account. The plaintiffs also
contend that lifting the stay will not prejudice the defendants because the defendants have been
producing the requested documents in other cases and investigations, and because an arbitration
panel will allow a certain amount of discovery if the defendants’ pending motion is successful and
the case goes lo arbitration. The plaintiffs rely primarily on two cases in which an automatic stay

was lifted: Fazio v. Lehman Brothers, Inc., No. 1:02CV157 et al., slip op. (N.D. Ohio May 16,

4.


CONCLUSION
For the foregoing reasons, Plaintiffs’ Motion to Lift Automatic Stay on Discovery is

DENIED. The matter is set for status on October 31, 2002 at 9:00 a.m..

ENTER:

United States Magistrate Judge

Datea( Ly a, aoe a.

~7J-


The purposes of the automatic stay provision are (1) to prevent the imposition of any
unreasonable burden on a defendant before disposition ofa motion to dismiss the complaint; and (2)
to avoid the situation in which a plaintiff sues without possessing the requisite information to satisfy
the PSLRA’s heightened pleading requirements, then uses discovery to acquire that information and
resuscitate a complaint that would otherwise be dismissed. See Jn re Comdisco See. Litig., 166 F.

Supp. 2d 1260, 1263 (N.D. Ill. 2001).

The mandatory stay under the PSLRA may be lifted only in exceptional circumstances, i.e.,
when “patticularized discovery is necessary to preserve evidence or to prevent undue prejudice to
that party.” 15 U.S.C. § 78u-4(b)(3)(B); see Vacold LLC v. Cerami, No. 00 Civ. 4024, 2001 WL
167704, at *6 (S.D.N.Y. Feb. 16, 2001); see also Faulkner v. Verizon Communications, Inc., 156
F. Supp. 2d 384, 402 (S.D.N.Y. 2001) (“The sole example proffered by Congress as to what justifies
lifting the stay is ‘the terminal illness of an important witness,’ which might ‘necessitate the
deposition of the witness prior to ruling on the motion to dismiss.””) (citation to Senate Rpt.

omitted),

A party alleging that discovery is “necessary to preserve evidence” must present more than
mere “generalizations of fading memories and allegations of possible loss or destruction.” Jn re
Fluor Corp. Sec. Litig., No. SA CV 97-734 AHS EEX, 1999 WL 817206, at *3 (C.D. Cal. Jan. 15,
1999), The movant is required to make a specific showing that “the loss of evidence is imminent
as opposed to merely speculative.” Jn re CFS-Related Sec. Fraud Litig., 179 F. Supp. 2d 1260, 1265
{N.D. Okla. 2001).

rn

“Undue prejudice” has been defined as “‘improper or unfair treatment’ amounting to
something less than irreparable harm.’” Vacold, 2001 WL 167704, at *6 (quoting Med. Imaging
Crs. of Am., Inc, v. Lichtenstein, 917 F. Supp. 717, 720 (S.D. Cal. 1996)). “Prejudice caused by the
delay inherent in the PSLRA’s discovery stay cannot be ‘undue’ prejudice because it is prejudice
which is ncither improper nor unfair.” Jn re CFS, 179 F. Supp. 2d at 1265. Undue prejudice has

been found “where defendants might be shielded from liability in the absence of the requested

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2002), a case similar to the present one and involving many of the same defendants; and Tobias

Holdings, Inc. v. Bank United Corp., 177 F. Supp. 2d 162 (S.D.N.Y, 2001).

The defendants respond that the plaintiffs have not established that exceptional circumstances
exist in this case; the plaintiffs do not seck particularized discovery; the rulings in Fazio and Tobias
floldings conflict with the majority of federal courts; granting plaintiffs’ motion will effectively
operate as a denial of the defendants’ motions to stay the case pending arbitration; and ordering

discovery will eliminate the potential benefits of non-judicial resolution of this matter.

The Court concludes that the plaintiffs have not met their burden of showing it is necessary
to lift the stay to preserve evidence or to prevent undue prejudice. First, there is no dispute that the
PSLRA’s mandatory stay provision applies in this case, a private action arising under the 1934
Securities Act in which a motion to dismiss is pending.

Second, the plaintiffs have not shown that either of the exceptional circumstances exists in
this case, Lifting the stay is not “necessary to preserve evidence.” All of those from whom the
plaintiffs seek discovery are parties and therefore are obligated under the PSLRA to preserve
evidence during the stay as if it were the subject of a pending discovery request. See In re CFS, 179
F, Supp. 2d at 1265, Moreover, lifting the stay is not necessary to preserve evidence when, as in this
case, the party from whom discovery is sought has represented to the court that it will maintain the
evidence at issue. See In re Carnegie Int'l Corp. Sec. Litig., 107 F. Supp. 2d 676, 684 (D. Md.
2000). Most importantly, the plaintiffs do not claim that any evidence is in immediate and/or
probable peril. The plaintiffs’ general concern about the “risk” that evidence will be lost or
memories will fade is not an exceptional circumstance and does not demonstrate that discovery is

necessary to preserve evidence. See In re Fluor, 1999 WL 817206, at *3.

The plaintiffs also have not demonstrated that lifting the stay is necessary to prevent undue
prejudice. The plaintiffs do not allege any prejudice other than that inherent in litigation, e.g., the
delay in ruling on the motion to dismiss and the delay in obtaining a final judgment in the case. The
plaintiffs’ argument that lifting the stay will not prejudice the defendants is irrelevant and does not

5-


+ Minute Order Form (0697)

United States District Court, Northern District of Mlinois

Name of Assigned Jud! ‘li ‘ Sitting Judge if Other
or Magisrrate udge William J. Hibbler than Assigned Judge Nan R. Nolan
CASE NUMBER 02 C 1609 DATE 8/2/2002
CASE Georgia G. Sarantakis, et al. vs, Frank Dominic Gruttadauria, et al.
TITLE
[In the following box (a) indicate the purty filing the motion, e.g., plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature
MOTION: of the motion being presonted.]
DOCKET ENTRY:
(dy o Filed motion of [ use listing in “Motion” box above.)
(2) Oo Brief in support of motion due
(3) Oo Answer brief to motion due . Reply to answer bricf due. .
(4) a Ruling/Hearingon____sset for at__.
(5) a Status hearing set for 10/31/2002 at 9:00 A.M.
(6) oO Pretrial conference[held/continucd to] [set for/re-set for] on set for at .
(7) a Trial[set for/re-set for] on at
(8) aq [Bench/Jury trial] [Hearing] held/continued to at
(9) im) This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to]
OFRCP4(m) O General Rule 21 OFRCP41(a)(1) [ FRCP41(a)(2).
do) of [Other docket entry] Enter Memorandum Opinion and Order: Plaintiffs’ Motion to Lift Automatic

Stay on Discovery [37-1] is denied,

(1) ff

[For further detail see order attached to the original minute order.]

No notices required, advised in open court.

Tudse 47

No notices required.

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05 2002

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relieve the plaintiffs of their burden to establish that they will suffer undue prejudice if the stay is

not lifted.

Even if the plaintiffs had shown that exceptional circumstances exist, their motion would be
denied because it does not seek “particularized discovery.” The motion does not list any specific
discovery or categories of discovery that are in danger of being destroyed or must be produced in
otder to prevent undue prejudice. The plaintiffs’ alternative request to discover information that
would be produced to them in an arbitration proceeding is also not sufficiently specific. The
plaintiffs do not state what discovery would be allowed in arbitration or explain how it differs from
the litigation discovery.

Finally, the Court notes that the plaintiffs’ arguments are not supported by either of the cases
on which they rely. First, Fazio is in conflict with the majority of other courts that have examined
the PSLRA’s mandatory stay provision and appears to disregard the language of the statute. See
Fazio v. Lehman Brothers, Inc., No. 1:02CV157 et al., slip op. (N.D, Ohio May 16, 2002). Second,
Tobias Holdings does not support the plaintiffs’ argument even if the Court presumes its reasoning
issound. That case held that the automatic stay provision does not apply to distinct state law claims
for which jurisdiction is based on diversity of citizenship. See Tobias Holdings, 177 F. Supp. 2d at
166-67. In this case, the complaint does not plead diversity jurisdiction, and it does not even allege
the defendants’ citizenship. Moreover, the plaintiffs acknowledge that “[a]!! of plaintiffs’ claims
arise from the same factual circumstances and therefore require the same discovery.” (Mem. in
Supp. of Pls.’ Mot. to Lift Stay of Disc. at 2.) Thus, lifting the mandatory stay as to the closely
related state claims would be equivalent to lifting the stay for the federal claims and “would be an
improper end run around the PSLRA.” Angell Invs., L.L.C. v. Purizer Corp., No. 01 C 6359, 2001
WL 1345996, at *2 (N.D. Ill. Oct. 31, 2001).


IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

GEORGIA G. SARANTAKIS and CAROL
ANN COYLE,

Plaintiffs,

ve No. 02 C 1609
FRANK DOMINIC GRUTTADAURIA;
LEHMAN BROTHERS, INC.; LEHMAN
BROTHERS HOLDINGS, INC.; 8.G. COWEN
SECURITIES; SOCIETE GENERALE SA;
COWEN & COMPANY; HAMBRECHT &
QUIST, INC.; J.P. MORGAN SECURITIES,
INC.; DeGRANDIS & DeGRANDIS, Certified
Public Accountants; and JOSEPH
DeGRANDIS, JR,

District Judge William J. Hibbler

Magistrate Judge Nan R. Nolan

Defendants.

eee

MEMORANDUM OPINION AND ORDER

Tn this securities fraud case, discovery was automatically stayed pursuant to the Private
Securities Litigation Reform Act after several of the defendants moved to dismiss the complaint.
The matter is now before this Court on Plaintiffs’ Motion to Lift Automatic Stay. In their motion,
the plaintiffs argue that the stay should be lifted in order to preserve evidence and to prevent unduc

prejudice. For the reasons that follow, the plaintiffs’ motion is DENIED.

BACKGROUND

Plaintiffs Georgia Sarantakis and Carol Ann Coyleallege, among other things, that defendant
Frank Gruttadaria defrauded them and violated a number of securities laws while he was acting as
their investment broker. The other defendants are the plaintiffs’ accountants and anumber of broker-
dealers (or their parent companies) for which Gruttadaria worked while the allegedly fraudulent

activities took place. In May 2002, several defendants filed a motion to stay the action pending

-1-

DOCKETER

AUG 0 5 2002


arbitration or to dismiss,’ which is now pending in the district court. The defendants argue that the
litigation should be stayed pending the outcome of arbitration. Specifically, the defendants claim
that the plaintiffs signed agreements containing arbitration clauses providing that any controversy
arising out of the plaintiffs’ accounts shall be settled by arbitration. In addition, the motion seeks
to dismiss four counts (violation of the Illinois Securities Law; violation of fiduciary duty under
NASD and NYSE rules; common law fraud; and promissory estoppel) pursuant to Federal Rule of
Civil Procedure 12(b)(6).”

Discovery in the case is stayed pending resolution of the motion to dismiss, bul the
defendants have voluntarily produced and continue to produce a number of documents that are
relevant to several of the plaintiffs’ document requests. The plaintiffs’ motion asks the Court to lift
the stay as to all documents identified in their discovery requests, or in the alternative, to allow such
discovery as would be pennitted in an arbitration proceeding.

DISCUSSION

After the defendants’ motion to dismiss was filed, discovery was automatically stayed

pursuant to the PSLRA, which provides:

Tn 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).

This motion was filed by defendant SG Cowen, joined by defendants Lehman Brothers,
Inc. and Lehman Brothers Holdings, Inc. Two other broker-dealer defendants, Hambrecht &
Quist and J.P. Morgan Sccurities, Inc., filed a motion to stay pending arbitration but did not file a
motion to dismiss any of the claims. A month later, the accountant defendants filed a motion to
dismiss based on a lack of personal jurisdiction and improper venue.

2An additional basis for the motion, that Counts I and II fail to state a claim under the
federal securities laws, was withdrawn after a Supreme Court case decided on June 3, 2002
invalidated the defendants’ argument.

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