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PAYNE v. DeLUCA

December 20, 2005.

THOMAS L. PAYNE, SID ARCHINAL, GARY H. KARESH, JO ANN KARESH, BELCA D. SWANSON AND MERLE K. SWANSON, individually and on behalf of all others similarly situated, Plaintiffs,
v.
ANTHONY J. DeLUCA, HARRY J. SOOSE, FRANCIS J. HARVEY, JAMES C. McGILL, RICHARD W. POGUE, DANIEL A. D'ANIELLO, PHILLIP B. DOLAN, E. MARTIN GIBSON, ROBERT F. PUGLIESE, JAMES DAVID WATKINS, and THE CARLYLE GROUP, Defendants.



The opinion of the court was delivered by: WILLIAM STANDISH, Senior District Judge

MEMORANDUM ORDER

Pending before the Court are (1) a motion by Plaintiffs to lift the discovery stay imposed in this case pursuant to the Private Securities Litigation Reform Act ("PSLRA"), correctly filed at Docket No. 103, and (2) a motion by Defendants, seeking an order of Court to permit issuance of subpoenas to preserve certain documents relevant to discovery herein, filed at Docket No. 106. For the reasons discussed below, Plaintiffs' Motion is denied and Defendants' Motion is granted subject to certain modifications discussed below.*fn1

I. BACKGROUND

  The facts of this case are largely irrelevant to the pending motions and have been provided in the Court's previous Memorandum denying without prejudice Defendants' motion to dismiss the amended class action complaint. (See Docket No. 68, December 16, 2004, at 2-3.) Briefly stated, the named Plaintiffs filed an action on behalf of themselves and other investors similarly situated against the "Individual Defendants"*fn2 and The Carlyle Group*fn3 (collectively, "Defendants"), claiming that Defendants' actions on behalf of IT Group, Inc., violated federal securities law. IT Group, Inc. ("IT" or "the Company"), was an environmental waste remediation firm based in Monroeville, Pennsylvania. The Carlyle Group acquired control of IT in November 1996 and, at approximately the same time, the Company expanded rapidly by acquiring other firms who performed similar services. Plaintiffs claim that by the end of 2001, Defendants had made a number of poor financial and management decisions which, inter alia, resulted in liquidity problems and violation of the Company's highly lucrative government contracts. IT declared bankruptcy on January 15, 2002.

  During the course of the bankruptcy proceedings, Plaintiffs learned that Defendants had consistently misrepresented IT's financial condition in annual and quarter filings made with the Securities and Exchange Commission, press releases, and other statements disseminated to the investing public. As a result, Plaintiffs and other investors were damaged when they purchased IT common stock at artificially inflated prices during the Class Period.*fn4 Plaintiffs did not learn of Defendants' fraudulent activities until March and April 2002 when the relevant documents were published in the bankruptcy proceedings.

  II. THE PENDING MOTIONS

  A. Plaintiffs' Motion to Lift the Discovery Stay

  At this point in time, the bankruptcy proceedings are nearing completion in the United States District Court for the District of Delaware. On October 21, 2005, the Trustee of the IT Group Litigation Trust*fn5 filed a motion with the bankruptcy court, seeking approval of a proposed document retention plan. (See Declaration of Robert M. Zabb in Support of Motion to Lift the PSLRA Stay of Discovery, correctly filed at Docket No. 105, Exhibit H, IT Litigation Trust Trustee's Renewed Motion for Entry of an Order Authorizing Document Retention Procedures, "the Trustee's plan.")*fn6 According to Plaintiffs, the Trustee's plan — applicable to some 134,000 boxes of documents at 45 storage sites throughout the United States — would result in the irreversible loss of documents they need to prosecute this securities fraud action. As proposed in October, the plan would allow the Trustee to begin destroying documents as of December 31, 2005; the only documents the Trustee would retain would be those identified by an interested party prior to that date or those which the Trustee determined were relevant to its own pending litigation. Moreover, although Plaintiffs acknowledge the Trustee's plan allows them to access the documents through December 31, 2005, they claim such access would be meaningless because the Trustee has indicated it would not respond to document requests or otherwise assist Plaintiffs in identifying and locating documents relevant to this lawsuit. (Plaintiffs' Memorandum of Law in Support of Motion to Lift the PSLRA Stay of Discovery in Connection with Potential Destruction of Company Documents, correctly filed at Docket No. 104, "Plfs.' Memo," at 1.) The Trustee's motion to approve its proposed document retention plan was scheduled to be heard by the bankruptcy court on November 16, 2005.*fn7

  On November 4, 2005, Plaintiffs filed a motion with this Court, seeking an order lifting the PSLRA stay of discovery pursuant to 15 U.S.C. § 78u-4(b) (3) (B) in the event the bankruptcy court approved the Trustee's plan. Specifically, Plaintiffs sought to have the stay "lifted as to discovery of documents in the custody of the Trustee, as well as to depositions to ascertain the nature and extent and location of the documents held by the Trustee which are relevant to this case." (Plaintiffs' Notice of Motion and Motion to Lift the PSLRA Stay of Discovery in Connection with Potential Destruction of Company Documents, correctly filed at Docket No. 103.) The only named deponent is Defendant Harry Soose, IT's former chief financial officer and now an employee of the Trustee, whom Plaintiffs identify as "the single person best situated to locate the financial and accounting documents" they need. They claim that without this deposition, they would be playing "blindman's bluff" trying to locate relevant documents among the 134,000 boxes. (Plfs.' Memo at 1, note 3.)

  Plaintiffs' motion is based on the PSLRA exception to the mandatory discovery stay imposed while a motion to dismiss is under consideration by the district court when such discovery is "necessary to preserve evidence or to prevent undue prejudice" to the plaintiff. (Plfs.' Memo at 2, citing 15 U.S.C. § 78u-4(b) (3) (B).)

  B. Defendants' Motion for an Order Permitting Issuance of Subpoenas to Preserve Documents

  In response to Plaintiffs' motion, Defendants filed a motion based on an alternative plan to preserve the documents in question. (Defendants' Notice of Motion and Motion for Order Permitting Issuance of Subpoenas to Preserve Documents, Docket No. 106.) Defendants agree to a lifting of the stay imposed by the PSLRA, but only for the far more limited purpose of allowing subpoenas to be issued which would direct the Trustee to preserve the documents "for the duration of this litigation," but not require immediate document production. Further, the subpoenas would advise the Trustee that it would not have to respond until this Court has ruled on a pending Motion to Dismiss the Second Amended Complaint and lifted the stay. (Defendants' Memorandum of Law in Opposition to the Motion to Lift the PSLRA Stay . . . and in Support of Motion for Order Permitting Issuance of Subpoenas to Preserve Documents, Docket No. 100, "Defs.' Memo.," at 1-2.)

  Defendants agree with Plaintiffs that the all parties to this litigation have an interest in preserving the documents held by the Trustee, but contend that this interest will be adequately served by allowing Plaintiffs to issue preservation subpoenas. (Defs.' Memo. at 4-9.) They oppose a blanket order lifting the stay on discovery with regard to all documents held by the Trustee and permitting depositions, arguing that the PSLRA anticipates lifting the discovery stay only for "particularized" discovery. (Id. at 9.)

  While acknowledging that protective subpoenas "would be better than nothing," Plaintiffs respond to Defendants' suggestion by arguing that (1) the Trustee, based on its past behavior, cannot be trusted to honestly comply with a protective subpoena and could easily claim to comply with its terms while proceeding unchecked in its drive to destroy documents; (2) the bankruptcy court itself is of no help in protecting Plaintiffs' interests because the court has previously indicated its inclination to approve the Trustee's plan; (3) protective subpoenas are not sanctioned by the PSLRA in that Congress provided only a single remedy for protecting evidence which may potentially be lost, i.e., lifting the discovery stay; and (4) contrary to Defendants' argument that the discovery request is not sufficiently particularized, Plaintiffs seek to have the stay lifted only with regard to the 134,000 boxes in the Trustee's control, an amount which is not unreasonable in light of the magnitude of this ...


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