documents Time Warner has produced in the primary securities class action and the Ohio and
California actions creates an improper advantage for [the Opt-Out] Plaintiffs and negatively impacts
Time Warner's abitity to effectively defend itself." /d. at *3. The court agreed, noting that in the
absence of relief from the discovery stay, “Plaintiffs here enjoy the substantial benefits of discovery,
while Time Warner must wait on the resolution of any motions to dismiss.” The court found that
“[u]nder the unique circumstances of this case, prohibiting Time Warner's discovery of [the Opt-
Out] Plaintiffs while [the Opt-Out] Plaintiffs are able to formulate their litigation and settlement
strategy on the basis of the massive discovery Time Warner has already produced constitutes
undue prejudice.” /d.

The facts of AOL Time Warner are easily distinguishable from those presented here. In this
case, there is no parallel litigation proceeding in which Plaintiffs have access to millions of pages
of documents while Defendants are not permitted to engage in any discovery at all. Significantly,
the AOL Time Warner court expressly cautioned that discovery would be limited to ensure that
those defendants who had not engaged in discovery in other jurisdictions were “still protected by
the PSLRA discovery stay and not deprived of its protection while the balance between [the Opt-
Out] Plaintiffs and Time Warner is restored.” /d. at *31n.2. The court appreciates that discovery
in securities cases is inherently one-sided, as the defendants typically are in possession of the
majority of relevant information. The court is also aware of Defendants’ decision to stipulate to
class certification.' Nevertheless, Defendants have not demonstrated any unique circumstances,
undue prejudice, or due process concerns that would justify allowing them to depose the named

Plaintiffs and their financial advisors prior to a determination of class-wide liability.

' Most of the cases allowing plaintiff depositions to proceed have been at the pre-

class certification stage. See, e.g., In re SciMed Life Sec. Litig., No. Civ. 3-91-575, 1992 WL
413867 (D. Minn. Nov. 20, 1992); Barry B, Roseman, D.M.D., M.D., Profit Sharing Plan v. Sports
& Recreation, 165 F.R.D. 108 (M.D. Fla. 1996); Feldman v. Motorola, Inc., No. 90 C 5887, 1992
WL 137163 (N.D. tll. June 10, 1992).


CONCLUSION
For the reasons stated above, Defendants’ motion to depose the named Plaintiffs and their
financial advisors prior to a determination of class-wide liability is denied.
ENTER:

NAN R. NOLAN
United States Magistrate Judge

Dated: November 13, 2006



information. Thus, the truth on the market defense is not a valid basis for allowing Defendants to
depose the named Plaintiffs prior to a determination of class-wide liability.
B. Fairness

Defendants next argue that fairness requires that they be allowed to depose the named
Plaintiffs during the course of discovery. They note, for example, that the PSLRA seeks to
discourage disparities in the parties’ ability to conduct discovery and to ensure that representative
plaintiffs “authentically seek to oversee the litigation and represent the class.” (Def. Mem., at 6
(quoting Burke v. Ruttenberg, 102 F. Supp. 2d 1280, 1320 (N.D. Ala. 2000).) In support of this
assertion, Defendants cite In re AOL Time Warner, Inc. Sec. Litig., No. MDL 1500, 06 CIV. 695,
2006 WL 1997704 (S.D.N.Y. July 13, 2006), in which the court lifted a stay of discovery mandated
by the PSLRA where plaintiffs had access to some 14 million documents produced by the
defendants. id. at *3. Several plaintiffs had filed some 29 class action complaints against Time
Warner alleging a variety of claims for fraudulent accounting in the company’s AOL business unit.
Id. at*1. See also In re AOL Time Warner Inc. Sec. and “ERISA” Litig., 381 F. Supp. 2d 192, 202
(S.D.N.Y. 2004). Those cases were ultimately consolidated into a “primary securities class action,”
but a number of institutional investors opted-out of that litigation to become plaintiffs in a separate
consolidated action. /d. Those plaintiffs (the “Opt-Out Plaintiffs”) retained the law firm of Lerach
Coughlin Stoia Geller Rudman & Robbins LLP — the firm representing Plaintiffs here — to pursue
identical lawsuits on their behalf. The Opt-Out Plaintiffs’ counsel also actively prosecuted
substantially similar lawsuits in the Ohio and California state courts. /d.

Shortly after the district court granted in part and denied in part a motion to dismiss the
primary securities class action, Time Warner moved to lift the PSLRA stay on discovery to obtain
discovery from the Opt-Out Plaintiffs. /d.; AOL Time Warner, 381 F. Supp. 2d at 248. Time

Warner argued that “[Opt-Out] Plaintiff's Counsel's access to the approximately fourteen million


Cc. The April 18, 2005 Decision

Defendants finally urge that the court should reconsider its April 18, 2005 decision. A
motion to reconsider is appropriate where (1) the court has patently misunderstood a party; (2) the
court has made a decision outside the adversarial issues presented to the court by the parties; (3)
the court has made an error not of reasoning but of apprehension; (4) there has been a controlling
or significant change in law since the submission of the issue to the court; or (5) there has been
a controlling or significant change in the facts since the submission of the issue to the court.
Oange v. Burge, __ F. Supp. 2d __, 2006 WL 2349933, at *2 (N.D. Ill. Aug. 11, 2006). The only
grounds Defendants cite for reconsideration is the court’s purported error in distinguishing the facts
of fn re Harcourt Brace Jovanovich, Inc. Sec. Litig., 838 F. Supp. 109 (S.D.N.Y. 1993). This is not,
however, an acceptable basis for reconsideration, as it involves no new facts, arguments, or law,
and could easily have been raised back in 2005. See, e.g., Baldwin Graphic Sys., Inc. v. Siebert,
Inc., No. 03 C 7713, 2005 WL 4034698, at *1 (N.D. Ill. Dec. 21, 2005) (“Motions to reconsider are
not vehicles for rehashing old arguments that have already been rejected . . . Nor should [they] be
used to raise new arguments that could have been previously raised.”) In any event, the court did
not err in its interpretation of Harcourt.

The defendants in Harcourt served the plaintiffs with a discovery request seeking, among
other things, documents concerning other securities litigation to which the named plaintiffs were
or had been a party, and information concerning publicly traded securities owned or controlled by
the named plaintiffs during the relevant time period. /d. at 111. The plaintiffs insisted that their use
of the fraud on the market theory of reliance precluded discovery concerning their investment
histories and prior involvement in other securities and class action suits. /d. at 112. The

defendants noted that the plaintiffs were also alleging traditional direct reliance on the alleged


UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

LAWRENCE E. JAFFE PENSION PLAN,
On Behalf of Itself and All Others Similarly
Situated,
Plaintiffs,
v. No. 02 C 5893

HOUSEHOLD INTERNATIONAL, INC., et al., Judge Nan R. Nolan

wee eS SS SS SS

Defendants.
MEMORANDUM OPINION AND ORDER

Plaintiffs have filed this securities fraud class action alleging that Defendants Household
International, Inc., Household Finance Corporation (collectively, “Household”), and certain
individuals engaged in predatory lending practices between July 30, 1999 and October 11, 2002
(the “Class Period”). On December 6, 2004, Defendants served 14 third-party subpoenas seeking
documents and deposition testimony from investment advisors to Plaintiff PACE Industry Union
Management Pension Fund (“PACE”), one of the named class representatives. On April 18, 2005,
this court granted Plaintiffs’ motion to quash those subpoenas “without prejudice to reassertion, if
necessary, after a determination of class-wide liability.”. Lawrence E. Jaffe Pension Plan v.
Household int'l, Inc., No. 02 C 5893, 2005 WL 3801463, at “5 (N.D. Ill. Apr. 18, 2005). In reaching
this conclusion, the court observed that, “[given Plaintiffs’ reliance on the fraud on the market
theory, resolution of individualized issues is not necessary to establishing class-wide liability.” /d.
at “4. The court thus found that “bifurcating discovery regarding class-wide liability issues and
discovery regarding individualized reliance issues is the most orderly, efficient, and economical way

to proceed.” /d. Defendants did not appeal this ruling to the district court.
In the meantime, Defendants issued Rule 30(b)(6) deposition notices to all of the named

class representatives, including PACE, Glickenhaus and Co., and the International Union of


misrepresentations and omissions, and argued that they should be permitted to take discovery to
assist in rebutting the presumption of reliance created by the fraud on the market theory. /d.

The court agreed with the defendants, holding that “the investment history of a named
plaintiff is relevant to a defense of non-reliance on the integrity of the market, and therefore
discoverable.” /d. at 114. This conclusion, however, largely turns on the fact that the plaintiffs were
alleging traditional direct reliance in addition to fraud on the market. The court noted, for example,
that “[a] named plaintiff who is subject to an arguable defense of non-reliance on the market has
been held subject to a unique defense, and therefore, atypical of the class under Rule 23(a)(3).”
Id. at 113 (citing Greenspan v. Brassler, 78 F.R.D. 130, 132 (S.D.N.Y. 1978)). The court also
expressly stated that “discovery relating to investment history is proper where direct reliance is
alleged.” Id.

Defendants make much of the fact that the Harcourt court cited the following proposition
from the Supreme Court's decision in Basic Inc. v. Levinson, 485 U.S. 224 (1988):

The causal connection between the defendants’ fraud and the plaintiffs’ purchase

of stock in such a case is no less significant than in a case of direct reliance on

misrepresentations.
838 F. Supp. at 112-13 (quoting Basic, 485 U.S. at 242). This statement, however, merely
confirms the theory that misleading statements in a fraud on the market case defraud investors
even in the absence of direct reliance. Basic, 485 U.S. at 241-42 (under fraud on the market
theory, [mJisleading statements will . . . defraud purchasers of stock even if the purchasers do not
directly rely on the misstatements.”) Neither the Harcourt court nor the Supreme Court endorsed
Defendants’ position that the depositions of named Plaintiffs and their financial advisors may
properly take place before a determination as to class-wide liability where there is no allegation of

direct reliance.


Operating Engineers Local No. 132 Pension Plan (collectively “named Plaintiffs"). Plaintiffs object
that these notices are contrary to the court's April 18, 2005 opinion. Defendants raised the matter
with the court at several status conferences, and at an October 19, 2006 hearing, the court asked
Defendants to submit relevant authority supporting their oral motion to depose the named Plaintiffs
and their financial advisors prior to a determination of class-wide liability. For the reasons set forth
here, the court denies the motion to depose and affirms the findings in its April 18, 2005 order.
DISCUSSION

Defendants argue that discovery and depositions of the named Plaintiffs and their financial
advisors are relevant to issues other than individual reliance, and are necessary to further the
fairness goals of the Private Securities Litigation Reform Act of 1995 (“PSLRA”), 15 U.S.C. §78u-4
et seq. Defendants also claim that the court's April 18, 2005 decision improperly distinguished
relevant authority supporting such discovery. The court addresses each argument in turn.
A. Truth on the Market

Defendants first argue that the requested depositions and discovery are relevant to
establish the truth on the market defense to Plaintiffs’ fraud on the market theory of class-wide
reliance. Defendants claim that they intend to “explore information regarding what named Plaintiffs
(or their investment advisors if relevant) knew about the nature of and risks inherent in Household’s
business — not to test their individual reliance, or lack of it, but because such information will help
identify what public information was known to the market.” (Def. Mem., at 5.) In Defendants’ view,
they are entitled to take depositions to establish that “the truth was on the market as to the facts
as to which the complaint alleges the market was deceived.” (/d. (citing Cooke v. Manufactured
Homes, Inc., 998 F.2d 1256, 1262 (4th Cir. 1993) (affirming partial summary judgment for

defendants as to securities fraud claims accruing on or after — but not before - December 17, 1988


based on evidence that “the market was so overwhelmed with information questioning the financial
integrity of MH by December 17, 1988, that no reasonable trier of fact could conclude otherwise.”).)

The “truth on the market” defense provides that “a misrepresentation is immaterial if the
information is already known to the market because the misrepresentation cannot then defraud the
market.” Ganino v. Citizens Utilities Co., 228 F.3d 154, 167 (2d Cir. 2000). As one court explained,
“[i]f the market has become aware of the allegedly concealed information, the facts allegedly
omitted by the defendant would already be reflected in the stock's price and the market will not be
misled.” Provenz v. Miller, 95 F.3d 1376, 1391 (9th Cir. 1996) (quoting In re Convergent
Technologies Sec. Litig., 948 F.2d 507, 513 (9th Cir. 1991)). See also Asher v. Baxter Int’! Inc.,
377 F.3d 727, 732 (7th Cir. 2004) (“[I]f the truth or the nature of a business risk is widely known,
an incorrect statement can have no deleterious effect.) The truthful corrective information,
however, “must be conveyed to the public ‘with a degree of intensity and credibility sufficient to
counter-balance effectively any misleading information created by’ the alleged misstatements.”
Ganino, 228 F.3d at 167 (quoting in re Apple Computer Sec. Litig., 886 F.2d 1109, 1116 (9th Cir.
1989)). See also Asher, 377 F.3d at 732 ("[I]f a cautionary statement has been widely
disseminated, that news . . . affects the price just as if that statement had been handed to each
investor.”)

Contrary to Defendants’ assertion, there is no need to depose the individual named
Plaintiffs in order to determine what information was on the market at the time of the alleged fraud.
The truth on the market defense turns on the representations made to the marketplace as a whole,
and not to any individual plaintiff. Cf. in re Vivendi Universal, S.A., No. 02 Civ. 5571(RJH), 03 Civ.
2175(RJH), 2004 WL 876050, at *5 (S.D.N.Y. Apr. 22, 2004) (“[T]he truth on the market defense
has nothing to do with plaintiffs’ individual claims, which turn on the representation made to them,
not to the marketplace.”) indeed, if the market as a whole was privy to corrective information at
the time of the alleged fraud, it is irrelevant whether any individual plaintiff was also aware of that

3