BRUCE G. VANYO, State Bar # 060134
JEROME F. BIRN, JR., State Bar # 128561
IGNACIO E. SALCEDA, State Bar # 164017
TRACY L. TOSH, State Bar #184666
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304-1050
Telephone: (650) 493-9300

Attorneys for Defendants
NETMANAGE, INC., ZVI ALON, WALTER
AMARAL, UZIA GALIL, JOHN BOSCH,
ROBERT WILLIAMS and RICHARD KORETZ

ARGUMENT

I. THE MANDATORY DISCOVERY STAY WILL BE NULLIFIED UNLESS THE COURT ISSUES AN ORDER TO PREVENT STATE COURT DISCOVERY FROM BEING USED IN THIS CASE

A. The Mandatory Discovery Stay is A Centerpiece of the Reform Act and Must be Preserved

B. The General Policy of Allowing Litigants to Share Information Among Cases Cannot Outweigh An Express Congressional Determination that Plaintiffs Must Plead A Securities Case Without Resorting to Discovery

C. The Court Has the Power to Require Plaintiffs to Erect an Ethical Wall or to Decertify those Lead Plaintiffs and Lead Plaintiffs' Counsel Who Will be Engaged in State Court Discovery

D. Plaintiffs Would Not Be Prejudiced by the Court's Order.

CONCLUSION

Burlington City Board of Educ. v. United States Mineral Prods. Co,
     115 F.R.D. 188 (M.D.N.C. 1987)

Carlough v. Amchem Prods. Inc., 10 F.3d 189 (3d Cir. 1993)

Cipollone v. Ligget Group, Inc., 113 F.R.D. 86 (D.N.J. 1986)

Colorado River Water Conservation District v. United States,
     424 U.S. 800 (1976)

Econo-Car Int'l, Inc. v. Antilles Car Rentals, Inc., 61 F.R.D. 8 (D.V.I. 1973),
     rev'd on other grounds, 499 F.2d 1391 (3d Cir. 1974)

Harry F. Ortlip Co. v. George Hyman Constr. Co., 126 F.R.D. 494
     (E.D. Pa. 1989)

In re Joint Eastern & Southern Dist. Asbestos Litig., 134 F.R.D. 32
     (E. & S. D.N.Y. 1990)

Kane v. Madge Networks, No. C-96-20652 (N.D. Cal. Jan. 13, 1997)

Key v. Gillette Co., 782 F.2d 5 (1st Cir. 1986)

Kline v. Wolf, 702 F.2d 400 (2d Cir. 1983)

Legal Econ. Evaluations, Inc. v. Metropolitan Life Ins. Co., 39 F.3d 951
     (9th Cir. 1994)

McGowan v. Faulkner Concrete Pipe Co., 659 F.2d 554 (5th Cir. 1981)

McSurely v. McClellan, 426 F.2d 664 (D.C. Cir. 1970)

Medhekar v. United States Dist. Court, 99 F.3d 325 (9th Cir. 1996)

Medical Imaging Centers of America, Inc. v. Lichtenstein,
     917 F. Supp. 717 (S.D. Cal. 1996)

Minucci v. Agrama, 868 F.2d 1113 (9th Cir. 1989)

Mississippi Power Co. v. Peabody Coal Co., 69 F.R.D. 558 (S.D. Mis. 1976)

Moses H. Cone Memorial Hosp. v. Mercury Const. Corp., 460 U.S. 1 (1983)

Novak v. Kasaks, [1996-1997 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 99,307
     (S.D.N.Y. Aug. 16, 1996)

Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340 (1978)

Sasu v. Yoshimura, 147 F.R.D. 173 (N.D. Ill. 1993)

Silberkleit v. Kantrowitz, 713 F.2d 433 (9th Cir. 1983)

Sperry Rand Corp. v. Rothlein, 288 F.2d 245 (2d Cir. 1961)

United States v. Parrott, 248 F. Supp. 196 (D.D.C. 1965)

Ward v. Ford Motor Co., 93 F.R.D. 579 (D. Colo. 1982)

Wauchop v. Domino's Pizza, Inc., 138 F.R.D. 539 (N.D. Ind. 1991)

All Writs Act, 28 U.S.C. § 2283

Securities Exchange Act of 1934, 15 U.S.C. § 78aa

Securities Exchange Act of 1934, § 21D,
     15 U.S.C. § 78u-4

Fed. R. Civ. P. 26(c)

H.R. Conf. Rep. No. 104-369, 104th Cong., 1st Sess. (1995)

6 Moore's Federal Practice § 26.105[1] (3d. ed. 1997)

U.S. Securities and Exchange Commission, Report to the President and the Congress on the First Year of Practice Under the Private Securities Litigation Reform Act of 1995 (Apr. 1997)

Arthur Levitt, Chairman, U.S. Securities and Exchange Commission, Testimony Concerning the Impact of the Private Securities Litigation Reform Act of 1995, Before the Senate Subcommittee on Securities, Committee on Banking, Housing, & Urban Affairs, July 24, 1997

In their opening brief, defendants explained how the Reform Act's discovery stay in this case was threatened by plaintiffs' admission that they intended to use discovery from the state case they filed against defendants to bolster this federal case. In their opposition, plaintiffs do not deny that they intend to use state court discovery for their federal case to circumvent the Reform Act's mandatory stay of discovery pending resolution of defendants' motion to dismiss.¹ Indeed, plaintiffs almost boast of their intent to do so, arguing that the sharing of information in this manner is often encouraged by courts. Nor do plaintiffs deny that the mandatory discovery stay is one of the centerpieces of the Reform Act. Instead, plaintiffs maintain that because Congress did not preempt state court suits in passing the Reform Act, plaintiffs are entitled to proceed along this dual-track strategy, using the state court to get around the discovery stay in effect in this Court. Plaintiffs' response misses the point and fails to address the central issue of this motion.

Defendants are not asking the Court to enjoin plaintiffs from prosecuting their state court case. Rather, defendants have moved the Court to exercise its power over the Lead Plaintiffs and their Counsel that the Court appointed to preserve defendants' federal rights under the Reform Act by limiting what plaintiffs and their counsel are permitted to do in this federal case.

In seeking to use their state case to obtain discovery for the federal action, plaintiffs threaten to undermine one of the cornerstones of the Reform Act. The mandatory stay demonstrates Congress' "clear[] inten[t] 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 action has been filed." Medhekar v. United States Dist. Court, 99 F.3d 325, 328 (9th Cir. 1996) (emphasis added). Unless the Court requires that plaintiffs and their counsel erect an ethical wall to prevent them from obtaining the fruits of any discovery obtained in the state case (until discovery may proceed in this case) or decertifies those Lead Plaintiffs and their Counsel who participate in state court discovery, plaintiffs will be able to circumvent the mandatory discovery stay in every federal securities case merely by filing an identical state case. Indeed, this appears to be precisely what is happening. In their opening brief, defendants identified 33 cases in California­and 20 cases in the Northern District alone­where there are parallel state and federal securities class actions. See Appendix A to Defs' Mem. The number is now up to 35 in California and 21 in the Northern District. See Appendix A to this memorandum.

When defendants noted the potential problems with respect to plaintiffs' dual-track strategy during the hearing on appointment as Lead Plaintiffs and Lead Plaintiffs counsel, the Court expressed its concern that federal interests and defendants' rights under the Reform Act should be protected: "[T]here is a concern in the federal court with respect to protecting the defendants from discovery[;] that is inherent in the federal law with respect to this stay provision." (Transcript) Tosh Decl. Ex. P at 16; see also id. at 8 ("we need to make sure that we're not subverting the purposes of Congress in ordering a stay by allowing a case that is factually identical to proceed in state court "); id. at 17. The Court is not alone. The Securities and Exchange Commission expressed this same concern in its report to the President and Congress concerning the first year of the Reform Act. Noting that "some plaintiffs appear to have been drawn to state court by the potential for obtaining discovery during the pendency of a motion to dismiss," the SEC warned that "[t]o the extent that state courts can be used to avoid the discovery stay in cases that would otherwise have been brought under the federal securities laws, one of the goals of the Reform Act may be frustrated." U.S. Securities and Exchange Commission, Report to the President and the Congress on the First Year of Practice Under the Private Securities Litigation Reform Act of 1995, at 69 (Apr. 1997) (emphasis added) (Attached as Exhibit A to the Declaration of Ignacio E. Salceda ("Salceda Decl.")).

Recent developments in this case show that unless the Court acts to prevent the danger foreseen by the SEC, the purposes of the Reform Act will be frustrated in this case. Soon after defendants filed this motion, plaintiffs moved the state court to compel the attendance of two NetManage witnesses at deposition and the production of documents by NetManage's independent auditors, Arthur Andersen. During a hearing on September 4, 1997, a discovery master appointed by the Superior Court granted plaintiffs' motion to compel, although it ordered that discovery would not take place until this Court had the opportunity to consider this motion. Defendants noted in their opening brief that they intended to file a writ of mandamus to the California Court of Appeal seeking to stay discovery in the state case. That petition was denied by the Sixth District Court of Appeal on September 23, 1997. Defendants filed a petition for review with the California Supreme Court on October 3, 1997, which is still pending.

Defendants have repeatedly attempted to protect their federal rights in the state court and through negotiation with plaintiffs.² These attempts have failed. This Court must now step forward and protect an essential aspect of the Reform Act. The Court should issue an order imposing an ethical wall between Lead Plaintiffs' Counsel and counsel working on the state case. Alternatively, the Court should decertify those Lead Plaintiffs and Lead Plaintiffs' Counsel who obtain any discovery in the state case.

I. THE MANDATORY DISCOVERY STAY WILL BE NULLIFIED UNLESS THE COURT ISSUES AN ORDER TO PREVENT STATE COURT DISCOVERY FROM BEING USED IN THIS CASE

A. The Mandatory Discovery Stay is A Centerpiece of the Reform Act and Must be Preserved

As defendants noted in their opening brief, Congress passed the Reform Act after finding "by significant evidence of abuse in private securities lawsuits." H.R. Conf. Rep. No. 104-369, 104th Cong., 1st Sess. at 31 (1995) ("Conf. Rep.") (Tosh Decl. Ex. A). Congress was especially concerned about the "the abuse of the discovery process to impose costs so burdensome that it is often economical for the victimized party to settle[.]" Id. Congress therefore intended to preclude "the routine filing of lawsuits . . . without regard to any underlying culpability of the issuer, and with only faint hope that the discovery process might lead eventually to some plausible cause of action[.]" Id. (emphasis added). One of the most important protections that Congress created is the automatic discovery stay: Section 21D(b)(3)(B) provides:

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

The Ninth Circuit has also left no doubt that Congress expressly desired this result: "Congress clearly intended 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 action has been filed." Medhekar, 99 F.3d at 328 (emphasis added).

To evade the federal discovery stay, securities plaintiffs have adopted the tactic of filing parallel class actions­federal claims in federal court, state claims in state court. This stratagem is more than a needless multiplication of expense and a waste of judicial resources. It is a transparent attempt to use the state court case to skirt the discovery stay mandated by federal law.

The Securities and Exchange Commission recently submitted its report to the President and Congress summarizing the first year under the Reform Act. The Commission warned of the danger that parallel actions in state courts could undermine the purposes of the Reform Act:

Following enactment of the Reform Act, some plaintiffs appear to have been drawn to state court by the potential for obtaining discovery during the pendency of a motion to dismiss, a procedure that is not available under the Act. . . . To the extent that state courts can be used to avoid the discovery stay in cases that would otherwise have been brought under the federal securities laws, one of the goals of the Reform Act may be frustrated.

B. The General Policy of Allowing Litigants to Share Information Among Cases Cannot Outweigh An Express Congressional Determination that Plaintiffs Must Plead A Securities Case Without Resorting to Discovery

In their opposition, plaintiffs argue at length that federal courts often permit the sharing of discovery among different plaintiffs in different cases. See Pl. Opp. at 9-12. In the cases cited by plaintiffs, however, courts were motivated by the view that the sharing of discovery was proper because it would reduce the costs of litigation on the parties.⁴ In none of the cases was a discovery stay in place or a significant policy reason for preventing discovery. Indeed, where there is such a discovery stay or policy consideration, such as in the arbitration context, courts routinely prohibit parties from pursuing discovery beyond that authorized by the law applicable to that case. See Mississippi Power Co. v. Peabody Coal Co., 69 F.R.D. 558, 566-67 (S.D. Mis. 1976) (courts routinely stay discovery in case where arbitration is pending, absent "exceptional circumstances") (cited with approval in Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340, 352 n.17 (1978)); Econo-Car Int'l, Inc. v. Antilles Car Rentals, Inc., 61 F.R.D. 8, 10 (D.V.I. 1973) ("In proceedings to compel arbitration, discovery delving into the merits of the grievance to be arbitrated is improper.") (cited in Oppenheimer), rev'd on other grounds, 499 F.2d 1391 (3d Cir. 1974). See also Harry F. Ortlip Co. v. George Hyman Constr. Co., 126 F.R.D. 494 (E.D. Pa. 1989) (same) (citing cases).⁵

Plaintiffs' respond to these cases by claiming that there is "no absolute stay of discovery under the Federal Arbitration Act . . . [because] courts may permit discovery upon a showing of exceptional circumstances." Pl. Opp. at 15 (emphasis in original). Notably, however, the Reform Act is very similar. Congress barred all discovery "unless the court finds . . . that particularized discovery is necessary to preserve evidence or to prevent undue prejudice." § 21D(b)(3)(B). Congress said that this would occur only under "exceptional circumstances . . . . [such as] the terminal illness of an important witness." Conf. Rep. at 37 (emphasis added).⁶ Plaintiffs have not articulated any exceptional circumstances in this case which would allow any discovery to go forward.

The Reform Act's discovery stay and the significant federal policy concerns underlying it take precedence over plaintiffs' desire to evade the discovery stay. Congress imposed the discovery stay to prevent exactly what plaintiffs seek to do: use discovery to concoct a claim.

As defendants showed in their opening brief, federal courts have granted protective orders to prevent discovery from one case being used for improper purposes in another case. See Def. Mem. 8-9. They have done so where defendants' rights would be infringed, or it appeared that the case where discovery was undertaken was pretextual and solely for the purpose of obtaining discovery otherwise barred.

In Sperry Rand Corp. v. Rothlein, 288 F.2d 245 (2d Cir. 1961), plaintiff filed a trade secrets action in federal court against several former employees. As part of its case management, the district court sequenced discovery so that plaintiffs would conclude their discovery before defendants. After conducting limited discovery, plaintiff filed an action for injunctive relief in state court and intended to use the federal discovery for that purpose.

The Second Circuit affirmed the injunction, noting that allowing plaintiffs to misuse federal discovery for state injunctive action would be unfair to defendants, as they had not had the opportunity to conduct their own discovery. Otherwise, the purpose of the federal court's discovery orders would be undermined. Id. at 248. Moreover, the court was concerned that the state case was brought to undermine the federal court's order. Id. at 249.

Plaintiffs attempt to distinguish Sperry Rand by claiming that this Court has not issued any order with respect to discovery that needs to be protected from interference through state court discovery. See Pl. Opp. at 14-15. But there is something much more powerful in this case: the mandatory discovery stay created by Congress. Plaintiffs also purport to distinguish Sperry Rand in that defendants have not requested the injunctive relief granted in Sperry Rand, namely a stay of the state court case. Pl. Opp. at 15. But defendants have invoked the same source of authority, the All Writs Act, to request the much more limited relief sought in this motion.

The Reform Act's prohibition of discovery in this case presents a more compelling reason for this Court to exercise its power than the discovery scheduling order found sufficient in Sperry Rand. In Sperry Rand, the court was merely enforcing its own protective order, which necessarily required the court to balance the shifting interests of the parties. Here, defendants ask the Court to enforce a specific mandate of Congress that there shall be a discovery stay in these types of cases.

Here, defendants' rights under the Reform Act unquestionably would be harmed were plaintiffs allowed to use state court discovery to circumvent the Reform Act. By stopping plaintiffs from doing so, the Court would only be applying the Congressional mandate of the Reform Act against the plaintiffs and their counsel who have been certified by this Court under that statute to prosecute this action.

C. The Court Has the Power to Require Plaintiffs to Erect an Ethical Wall or to Decertify those Lead Plaintiffs and Lead Plaintiffs' Counsel Who Will be Engaged in State Court Discovery

In the opening memorandum, defendants noted that this Court has the power to order either form of defendants' requested relief pursuant to its supervisory authority over Lead Plaintiffs and their Counsel under the Reform Act, its inherent authority under the All Writs Act to issue any writs necessary to protect its jurisdiction, and Fed. R. Civ. P. 26(c). See Def. Mem. at 1. In response, plaintiffs largely ignore the first two sources of the Court's power and instead focus largely on Rule 26(c).

There is no doubt that the Court has broad powers under the All Writs Act. A federal court has the power to enjoin the prosecution of a state case altogether where expressly authorized by Congress, where necessary to protect its jurisdiction, or to protect or effectuate the court's judgments. 28 U.S.C. § 2283.⁷ Defendants' opening brief made clear that defendants are seeking much more limited relief. Defendants are moving this Court to exercise its power over the Lead Plaintiffs and their Counsel to preserve defendants' federal rights by limiting what plaintiffs and their counsel are permitted to do in this federal case. An order is proper under the All Writ's Act in that the Court has exclusive jurisdiction over plaintiffs' claims under the Securities Exchange Act of 1934, 15 U.S.C. § 78aa, and preventing plaintiffs from using a state court case to undermine the federal discovery stay upholds the purposes of federal law.

In addition, the Court has the power to condition the continued role of Lead Plaintiffs and Lead Plaintiffs' Counsel on their compliance with federal law. In enacting the lead plaintiff provisions, Congress made clear that it "[did] not intend to disturb the court's discretion under existing law to approve or disapprove of the lead plaintiff's choice of counsel. . . . " Conf. Rep. at 35. Before the Reform Act, courts had broad discretion to deny plaintiffs and counsel the right to represent a class where they had failed to comply with the law or prosecute the case properly. See, e.g., Kline v. Wolf, 702 F.2d 400, 402-03 (2d Cir. 1983) (named plaintiff inadequate for failure to respond to discovery, and credibility was seriously in doubt); Key v. Gillette Co., 782 F.2d 5, 7 (1st Cir. 1986) (counsel found inadequate for failure to prosecute case properly); McGowan v. Faulkner Concrete Pipe Co., 659 F.2d 554, 559 (5th Cir. 1981) (same). Here, Lead Plaintiffs and Lead Plaintiffs' Counsel have admitted that they intend to use the state court case to circumvent the Reform Act discovery stay.⁸ This deliberate decision to undermine the Reform Act gives the Court more than enough grounds to disqualify any of the Lead Plaintiffs or their Counsel who participate in state discovery from further participation in this case.

Under Federal Rule of Civil Procedure 26(c), the Court has broad discretion "to fashion a protective order to fit the facts and circumstances of the case." 6 Moore's Federal Practice § 26.105[1][b] (3d. ed. 1997). Courts have used this power in numerous instances to limit the use of discovery from one case in another case. See, e.g., Sperry Rand, 288 F.2d at 248-49; United States v. Parrott, 248 F. Supp. 196, 200-02 (D.D.C. 1965) (Government may not bring parallel civil proceeding and avail itself of civil discovery in securities suit to obtain evidence for subsequent criminal case); McSurely v. McClellan, 426 F.2d 664 (D.C. Cir. 1970) (civil discovery may not be used to subvert limitations on discovery in criminal cases). Plaintiffs argue that the Court should not use these powers because it would involve discovery obtained in another case. Unfortunately, defendants' repeated arguments to the state courts that they should prevent plaintiffs from using state discovery to undermine the Reform Act have been unavailing. See Def. Mem. at 3, 6-7. In essence, the state court has said that the integrity of federal procedural and substantive law is a matter for this Court, not for the state courts. Faced with this unique situation, it is appropriate for a federal court to step in and ensure that federal law is not undermined.

D. Plaintiffs Would Not Be Prejudiced by the Court's Order

As demonstrated above, this case presents one of the strongest possible situations where this Court should act to preserve federal policy interests. Plaintiffs and their counsel have made it clear that they filed parallel state and federal actions in order to circumvent the Reform Act's discovery stay. An order requiring Lead Plaintiffs and Lead Plaintiffs Counsel to establish an ethical wall or disqualifying some of the Lead Plaintiffs and Counsel would allow the continuation of this case and the state case. Because both cases are class actions, the plaintiff class (as well as the individual plaintiffs) would still be able to obtain the benefits of any judgment or settlement in both proceedings.

Plaintiffs argue that they would "unquestionably" be prejudiced because they could not circumvent the Reform Act's discovery stay. See Pl. Mem at 17. That argument proves the point. The inability to evade federal law is not the type of prejudice that should sway the Court against issuing an order to preserve the Reform Act. Congress made a considered policy decision that securities class actions were unique, and 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 action has been filed." Medhekar, 99 F.3d at 328. Congress understood and accepted the risk that a small number of federal cases that could have survived the pleading stage with discovery might be dismissed. But Congress concluded that the abuses of the old regime of free-wheeling discovery in search of a claim significantly outweighed this risk. That plaintiffs' federal complaint might be dismissed for failure to allege facts that state a claim is not "undue prejudice"­it is precisely the result that Congress intended.⁹

Plaintiffs' disdain for their duties under the Reform Act is nowhere better demonstrated than in their offer to stay the federal action pending resolution of the state court case. See Pl. Mem. at 17. Plaintiffs offer no reason why they filed a complaint, gave notice under the Reform Act to potential class members of doing so, moved for and received appointment as Lead Plaintiffs, and now, after gained control of the case, no longer care to proceed.¹⁰

In addition, it is an open question whether plaintiffs could agree to stay the case after having notified absent members of the potential class that they had instituted an action, without notifying them of the intetion to stay. Under the Reform Act, plaintiffs must issue notice when commencing a class action and allow absent class members the opportunity to move for appointment as Lead Plaintiff. See Securities Exchange Act of 1934, § 21D(a)(3)(A). In addition, the Reform Act imposes very specific disclosure requirements on plaintiffs settling a class action. See § 21D(a)(7). The reason is that plaintiffs want the benefits of a federal action and a nationwide class but refuse to live by the rules Congress has imposed. Notably, plaintiffs ignore the reasonable solution: stay the state case, or append their state law claims to their federal complaint. Defendants have repeatedly offered to waive any objection to this Court's exercise of supplemental jurisdiction over the state law claims.¹¹ Plaintiffs have declined this offer.¹² Having created this situation by their own refusal to play by Congress' rules, Plaintiffs cannot claim that they will suffer prejudice if the Court enforces the rules

Plaintiffs' tactic in this case­and in at least 20 other cases pending in the Northern District­is clear. Refusing to abide by the mandatory discovery stay, plaintiffs file identical complaints in state and federal court, using the former to evade the rules promulgated by Congress. If plaintiffs are allowed to continue this practice, not only will the discovery stay be rendered meaningless but the state and federal courts will be put in the unfortunate position of being antagonists in the same cases. State procedure will be used to subvert federal cases. Federal cases will be filed without the factual basis Congress demands. Members of the plaintiff class will be asked to pay for the additional costs of duplicative litigation. And defendants will be faced not only with the increased cost of defending themselves in two courts, they will have lost the prote Court should put a stop to this.

For the foregoing reasons, the Court should issue an Order as follows:

• The Court should impose an ethical wall to prevent any of the Lead Plaintiffs and their Counsel in this case from obtaining, directly or indirectly, the fruits of any discovery obtained in the state case, until such time as discovery may proceed in this case, if ever;

• Alternatively, the Court should disqualify any of the Lead Plaintiffs and their Counsel who participate in state discovery from further participation in this case, and also prohibit any counsel remaining in this case from obtaining, directly or indirectly, the fruits of any discovery obtained in the state case, until such time as discovery may proceed in this case, if ever.

¹ Defendants filed their motion to dismiss on July 15, 1997. Rather than oppose the motion, plaintiffs chose to file an Amended Complaint. On October 15, 1997, defendants filed a motion to dismiss the Amended Complaint. That motion is scheduled to be heard on December 22, 1997.

² See Letters of Jerome F. Birn, Jr. dated Mar. 3, 1997, and July 21, 1997, and letter of Ignacio E. Salceda dated July 7, 1997 (Tosh Decl. Exs. Q-S).

³ See also Arthur Levitt, Chairman, U.S. Securities and Exchange Commission, Testimony Concerning the Impact of the Private Securities Litigation Reform Act of 1995, Before the Senate Subcommittee on Securities, Committee on Banking, Housing, & Urban Affairs, July 24, 1997, at 15 ( "Fifty-five percent of the state court cases . . . have allegations that are essentially identical to those brought by the same law firm in federal court. It is reasonable to assume that these cases were filed primarily to get discovery for use in the federal action." (emphasis added) (Salceda Decl. Ex. B).

⁴ Burlington City Board of Educ. v. United States Mineral Prods. Co, 115 F.R.D. 188,190 (M.D.N.C. 1987) ("The sharing of information between even diverse plaintiffs promotes speedy, efficient and inexpensive litigation . . . ."); Cipollone v. Ligget Group, Inc., 113 F.R.D. 86, 91 (D.N.J. 1986) ("in litigation of this magnitude, we . . . are impressed with the wastefulness of requiring the [collateral part] to duplicate discovery already made . . .") (quotation omitted); Ward v. Ford Motor Co., 93 F.R.D. 579, 580 (D. Colo. 1982) ("The plaintiffs' attorneys' discovery information exchange group reduces the effort and expense inflicted on all parties . . by repetitive and unnecessary discovery."); Wauchop v. Domino's Pizza, Inc., 138 F.R.D. 539, 546 (N.D. Ind. 1991) ("the sharing of discovery materials ultimately may further the goals of Rule 1 by eliminating the time and expense involved in 're discovery'").

⁵ See also Sasu v. Yoshimura, 147 F.R.D. 173, 176 (N.D. Ill. 1993) (denying motion to modify protective order to allow discovery from one case to be used in another case because sharing discovery would violate privacy interests; "no right to use pretrial discovery in one case for the prosecution of another case ").

⁶ Kane v. Madge Networks, No. C-96-20652 (N.D. Cal. Jan. 13, 1997) (no discovery prior to assessment of viability of pleadings) (Tosh Decl. Ex. O); Novak v. Kasaks, [1996-1997 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 99,307 (S.D.N.Y. Aug. 16, 1996) (no discovery prior to assessment of viability of pleadings); Medical Imaging Centers of America, Inc. v. Lichtenstein, 917 F. Supp. 717, 721-22 (S.D. Cal. 1996) (no discovery before resolution of motion to dismiss; delay resulting from Reform Act's discovery stay not "undue prejudice" in hostile takeover case even though corporate action to be enjoined would occur less than three weeks after hearing).

⁷ See, e.g., Carlough v. Amchem Prods. Inc., 10 F.3d 189, 202-03 (3d Cir. 1993) (enjoining state court actions as necessary in aid of federal court's jurisdiction where settlement of federal class action imminent) (citing similar cases); In re Joint Eastern & Southern Dist. Asbestos Litig., 134 F.R.D. 32 (E. & S. D.N.Y. 1990) (same)

⁸ See Letter of Travis Downs dated June 10, 1997 (Tosh Decl. Ex. U); Pl. Opp. at 17.

⁹ Notably, plaintiffs do not argue that they would be unable to abide by an order requiring Lead Plaintiffs' Counsel to separate into two groups, one group to conduct discovery in the state case, and the other to defend their federal amended complaint. The reason is obvious. Lead Plaintiffs in this case are represented by five separate law firms, all of whom are experienced in prosecuting securities class actions, and able to conduct this litigation. Indeed, in moving for appointment as Lead Plaintiffs' Counsel, these firms represented to the Court that they were able to conduct this litigation.

¹⁰ It is unlikely that plaintiffs could properly stay this action, for which there is exclusive federal jurisdiction. Under the doctrine established in Colorado River Water Conservation District v. United States, 424 U.S. 800 (1976), a district court may stay a federal case out of deference to a state case only in "exceptional circumstances." See also Moses H. Cone Memorial Hosp. v. Mercury Const. Corp., 460 U.S. 1, 28 (1983). The Ninth Circuit has held that a federal court may not stay a case where there is exclusive federal jurisdiction for the claims. See Legal Econ. Evaluations, Inc. v. Metropolitan Life Ins. Co., 39 F.3d 951, 953 (9th Cir. 1994) (affirming denial of stay because federal jurisdiction over Clayton Act claims is exclusive); Minucci v. Agrama, 868 F.2d 1113 (9th Cir. 1989) (reversing stay of copyright action because of exclusive federal jurisdiction for copyright claims); Silberkleit v. Kantrowitz, 713 F.2d 433 (9th Cir. 1983) (reversing stay of action involving ERISA and Exchange Act claims).

¹¹ See Letters of Jerome F. Birn, Jr. dated Mar. 3, 1997, and July 21, 1997, and letter of Ignacio E. Salceda dated July 7, 1997. Tosh Decl. Exs. Q-S.

¹² See Letter of Alan Schulman, dated Mar. 6, 1997 (Tosh Decl. Ex. T.)