Opinion
C21-5190 BHS
03-03-2022
BRIAN JOE COURTER, et al., Individually and on Behalf of All Others Similarly Situated, Plaintiffs, v. CYTODYN, INC., et al., Defendants.
ORDER GRANTING PLAINTIFFS' MOTION TO PARTIALLY MODIFY THE PSLRA DISCOVERY STAY
BENJAMIN H. SETTLE, United States District Judge.
This matter comes before the Court on Lead Plaintiff Brian Joe Courter and Courter and Sons LLC and Named Plaintiffs Diane Hooper, Thomas McGee, and Candra Evans's motion to partially modify the discovery stay imposed by the Private Securities Litigation Reform Act of 1995 (“PSLRA”). Dkt. 90. The Court has considered the briefing filed in support of and in opposition to the motion and the remainder of the file and hereby grants the motion for the reasons stated herein.
I. FACTUAL & PROCEDURAL BACKGROUND
Plaintiffs filed their amended class action complaint in December 2021, alleging violations of federal securities laws against Defendants CytoDyn, Inc., a publicly-traded biotechnology company, and its officers and directors, Nader Pourhassan, Michael Mulholland, and Scott Kelly. Dkt. 83. Specifically they allege that Defendants violated Sections 10(b), 20(a), and 20A of the Securities Exchange Act of 1934 by: (1) making materially false and misleading statements in CytoDyn's submission to the United States Food and Drug Administration of a Biologics License Application for the use of leronlimab to treat HIV and the use of leronlimab to treat COVID-19; (2) engaging in a scheme to promote leronlimab and the likelihood of FDA approval of its use to treat COVID-19; and (3) selling 7.8 million shares of CytoDyn stock at inflated prices while in possession of material, non-public information. See Id. ¶ 1. Plaintiffs allege that Defendants constructed a materially false narrative that leronlimab, CytoDyn's only drug prospect, was safe and effective for the treatment of COVID-19 and that regulatory approval for treating COVID-19 was imminent. Id. ¶¶ 43, 137-38. They assert that Defendants engaged in a stock promotion scheme with these materially false and misleading statements and sold millions of shares of CytoDyn stock. See Id. ¶¶ 407-35. Plaintiffs allege that the fraud scheme began to unravel in March 2021 when CytoDyn announced disappointing trial results, Id. ¶¶ 268-70, 272, and when the FDA issued a public statement on leronlimab, exposing Defendants' fraud, Id. ¶¶ 287-91.
On July 30, 2021, CytoDyn disclosed that the Securities and Exchange Commission and Department of Justice were investigating it and its executives. Id. ¶ 295. Specifically, the SEC issued subpoenas “requesting documents and information, ” and the DOJ issued subpoenas seeking “testimony and/or records” regarding CytoDyn's “public statements regarding the use of leronlimab as a potential treatment for COVID-19 and related communications with the FDA, investors, and others and trading in the securities of CytoDyn.” Id. Plaintiffs additionally assert that on January 10, 2022, CytoDyn disclosed that the SEC and DOJ investigations had expanded to include CytoDyn's statements about the use of leronlimab to treat HIV, litigation involving former employees, and CytoDyn's retention of investor relations consultants. Dkt. 90 at 8 (citing Dkt. 90-1 at 7).
Plaintiffs assert that the SEC and DOJ investigations are related to the fraud they have alleged in their amended complaint. Discovery has been automatically stayed during the pendency of Defendants' motion to dismiss, Dkt. 95, which will not be ripe for consideration until May 26, 2022, see Dkt. 93. Plaintiffs now move for a partial modification of the discovery stay “to obtain a copy of productions that Defendants have provided or will provide to the SEC and DOJ” in response to the subpoenas described herein. Dkt. 90 at 8. Defendants oppose the motion, arguing in part that there are not exceptional circumstances to warrant partially lifting the stay. Dkt. 91.
II. DISCUSSION
The PSLRA provides for an automatic stay of discovery “during the pendency of any motion to dismiss” in a private securities fraud action. 15 U.S.C. § 78u-4(b)(3)(B). Congress enacted the discovery stay “to minimize the incentives for plaintiffs to file frivolous securities class actions in the hope either that corporate defendants will settle those actions rather than bear the high cost of discovery . . . or that the plaintiff will find during discovery some sustainable claim not alleged in the complaint.” In re WorldCom, Inc. Sec. Litig., 234 F.Supp.2d 301, 305 (S.D.N.Y. 2002) (internal citations omitted). However, the statute expressly provides courts with discretion to allow limited discovery during the stay “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).
A. Particularized Discovery
Under 15 U.S.C. § 78u-4(b)(3)(B), a discovery request is particularized if “the party seeking discovery under the exception adequately specifies the target of the requested discovery.” In re FirstEnergy Corp. Sec. Litig., No. 2:20-cv-03785, 2021 WL 2414763, at *3 (S.D. Ohio June 14, 2021) (internal alteration omitted). Plaintiffs seek the discovery Defendants have provided or will provide to the SEC and DOJ in response to the subpoenas described in CytoDyn's July 30, 2022 and January 10, 2022 SEC filings. Dkt. 90 at 11-12. They argue that this discovery is particularized because it is “already assembled and produced” and is a “closed universe of materials.” Id. at 11 (quoting In re Delphi Corp. Sec., Derivative & “ERISA” Litig., MDL No. 1725, 2007 WL 518626, at *4 (E.D. Mich. Feb. 15, 2007)).
Defendants, in response, argue that Plaintiffs' request is not sufficiently particularized. Dkt. 91 at 6-7. They assert that Plaintiffs have failed to identify the specific categories or types of documents sought or how the documents sought will be relevant. Id. at 7 (quoting In re Am. Funds Sec. Litig., 493 F.Supp.2d 1103, 1107 (C.D. Cal. 2007)).
However, Defendants fail to engage with Plaintiffs' cited case law. Courts have regularly held that requests seeking documents produced to regulatory agencies or produced in other proceedings were particularized. See, e.g., In re Royal Ahold N.V. Sec. & ERISA Litig., 220 F.R.D. 246, 250 (D. Md. 2004) (finding particularity in a request describing a “clearly defined universe of documents” produced to governmental, regulatory, or self-regulatory agencies); Pension Tr. Fund for Operating Eng'rs v. Assisted Living Concepts, Inc., 943 F.Supp.2d 913, 915 (E.D. Wis. 2013) (agreeing that requested discovery was particularized because the request was “limited solely to relevant materials that have already been produced in other proceedings[.]”); In re FirstEnergy Corp. Sec. Litig., No. 20-cv-03785, 2021 WL 2414763, at *3-5 (S.D. Ohio June 14, 2021) (holding that the plaintiff's “specific request for already-produced discovery is sufficiently particularized.”). The Court agrees that Plaintiffs' requested discovery is sufficiently particularized. They do not seek to engage in a “fishing expedition, ” In re WorldCom, 234 F.Supp.2d at 306, and rather have identified what specific documents they seek-the documents produced by Defendants in response to the ongoing SEC and DOJ investigations.
The Court thus concludes that Plaintiff has adequately specified the particularized discovery.
B. Undue Prejudice
The Court now must determine whether Plaintiffs have demonstrated undue prejudice. “Courts weigh the burden to defendants against the potential prejudice to plaintiffs, focusing on the production costs to defendants and plaintiffs' need for early review of the documents.” In re Bank of Am. Corp. Sec., Derivative, & Emp. Income Sec. Act (ERISA) Litig., No. 09 MDL 2058(DC), 2009 WL 4796169, at *2 (S.D.N.Y. Nov. 16, 2009) (internal citations omitted). “Courts may consider other factors, such as the defendants' financial state, settlement negotiations, case management, and the effect of delay in determining whether to lift the discovery stay.” Id. (citing, inter alia, In re Worldcom, 234 F.Supp.2d at 306; in re Initial Pub. Offering Sec. Litig., 2366 F.Supp.2d 286, 287 (S.D.N.Y. 2002)).
Defendants advocate for the Court to apply the “exceptional circumstances” test in considering undue prejudice. Dkt. 91 at 9-10. “Exceptional circumstances” appears to be a phrase derived from the Joint Explanatory Statement of the Committee of Conference when enacting the PSLRA. See SG Cowen Sec. Corp. v. U.S. Dist. Court for N. Dist. of Cal., 189 F.3d 909, 911-12 (9th Cir. 1999) (“The Conference Committee provides in new section 27(b) of the 1933 Act and new section 21D(b)(3) of the 1934 Act that courts must stay all discovery pending a ruling on a motion to dismiss, unless exceptional circumstances exist where particularized discovery is necessary to preserve evidence or to prevent undue prejudice to a party.” (internal citation omitted)). The Court does not find “exceptional circumstances” to be its own standard that Plaintiffs must meet in order to modify the stay. See In re Bank of Am. Corp., 2009 WL 4796169, at *2. Rather, exceptional circumstances exist where a party moving to lift the stay can show particularized discovery and undue prejudice.
With this in mind, the Court now turns to consider whether Plaintiffs would be unduly prejudiced by the stay. See In re Smith Barney Transfer Agent Litig., No. 05 Civ. 7583(WHP), 2006 WL 1738078, at *3 (S.D.N.Y. June 26, 2006) (“The proper inquiry under the PSLRA is whether the plaintiff would be unduly prejudiced by the stay, not whether the defendant would be burdened by lifting the stay.”). Plaintiffs present three arguments as to why they would suffer undue prejudice by a continued stay of discovery: (1) that they are placed at an unfair disadvantage in developing litigation and resolution strategies; (2) that CytoDyn is an imminent insolvency risk; and (3) that they risk falling far behind ongoing matters that are proceeding apace. Dkt. 90 at 12-15.
The Court agrees that Plaintiffs would be unduly prejudiced by a stay. Specific to the facts here, where documents have been discovered and produced (or soon will be) to governmental agencies, courts have found undue prejudice because “maintaining the discovery stay as to materials already provided to government entities does not further the policies behind the PSLRA.” In re FirstEnergy Corp. Sec. Litig., 229 F.R.D. 541, 545 (N.D. Ohio 2004). Further, “[w]ithout discovery of documents already made available to government entities, Plaintiffs would be unfairly disadvantaged in pursuing litigation and settlement strategies.” Id. See also Singer v. Nicor, Inc., No. 02 C 5168, 2003 WL 22013905, at *2 (N.D. Ill. Apr. 23, 2003) (“Plaintiffs here may well be unfairly disadvantaged if they do not have access to the documents that the governmental and other agencies already have, during the pendency of the motion to dismiss.”).
In addition to the concerns of the SEC and DOJ investigations and of Plaintiffs being disadvantaged without the requested discovery, CytoDyn's solvency is of concern. Plaintiffs assert that there is a significant risk that CytoDyn may file for bankruptcy in the near future due to incurring millions of dollars in legal fees related to a proxy contest, SEC and DOJ investigations, an employment dispute, and a dispute involving the company that oversaw CytoDyn's clinical research on leronlimab. See Dkt. 90 at 8-11. While Defendants argue that CytoDyn has not filed for bankruptcy nor stated that it is insolvent, there is no denying that its solvency is rapidly changing. Undue prejudice can exist where the plaintiffs are “prejudiced by [their] inability to make informed decisions about [their] litigation strategy in a rapidly shifting landscape.” In re WorldCom, 234 F.Supp.2d at 305. Plaintiffs face “the very real risk that [they] will be left to pursue [their] action against defendants who no longer have anything or at least as much to offer.” Id. at 306. Moreover, as Plaintiffs highlight, if CytoDyn files for bankruptcy while Defendants' motion to dismiss is pending, Plaintiffs will be required to obtain stay modifications in this Court and in the bankruptcy proceeding. See Id. (modifying both the PSLRA stay and bankruptcy stay).
Therefore, in considering CytoDyn's financial state, the effect of delay on and disadvantage to Plaintiffs, and the minimal burden on Defendants in producing the sought-after documents, the Court concludes that Plaintiffs would be unduly prejudiced by a continued stay of discovery. Plaintiffs have thus met their burden in establishing that particularized discovery is needed to prevent undue prejudice to warrant a modification of the stay. And even if exceptional circumstances were the applicable standard, the forgoing analysis would result in the same conclusion. Exceptional circumstances exist warranting a modification of the stay. Plaintiffs' motion is, therefore, granted.
III. ORDER
Therefore, it is hereby ORDERED that Plaintiffs' motion to partially modify the PSLRA discovery stay, Dkt. 90, is GRANTED.
The discovery stay is hereby modified to allow Plaintiffs to request and receive a copy of the discovery Defendants have provided or will provide to the SEC and DOJ in response to the subpoenas described in CytoDyn's July 30, 2021 and January 10, 2022 SEC filings.