RATIONAL SOFTWARE CORPORATION
AND PAUL D. LEVY

                      Defendants-Petitioners,

           v.

UNITED STATES DISTRICT COURT,
NORTHERN DISTRICT OF CALIFORNIA,

                      Respondent,

TOM RANDALL, et al., On Behalf Of Themselves And All Others Similarly
Situated,

                      Real Parties In Interest.

TABLE OF AUTHORITIES

PETITION FOR WRIT OF MANDAMUS

I. INTRODUCTION

II. STATEMENT OF THE CASE

A. Factual Background

B. Procedural Background

1. The Dismissal Order

2. The Discovery Order

III. STATEMENT OF RELIEF SOUGHT AND ISSUES PRESENTED

IV. A WRIT OF MANDAMUS VACATING THE DISCOVERY ORDER AND DIRECTING ENTRY OF AN ORDER STAYING DISCOVERY IS APPROPRIATE AND NECESSARY TO EFFECT CONGRESS'S INTENT

A. Mandamus Review is Appropriate in This Case.

B. The District Court's Discovery Order Was Clear Error.

1. The Purpose of the Discovery Stay

2. Congress Did Not Intend to Permit Discovery to be Used to Satisfy the Reform Act's Pleading Standard

V. CONCLUSION

STATEMENT OF RELATED CASES

CERTIFICATE OF COMPLIANCE

Pursuant to Federal Rule of Appellate Procedure 26.1 and Circuit Rule 21-3, defendant-petitioner Rational Software Corporation hereby submits its Corporate Disclosure Statement. Rational Software Corporation does not have any parent, non-wholly owned subsidiary or affiliate that has issued shares to the public.

Petitioners Rational Software Corporation ("Rational") and Paul D. Levy respectfully submit this Petition for Writ of Mandamus Enforcing the Stay Provisions of the Private Securities Litigation Reform Act of 1995.¹

I. INTRODUCTION

This Court has previously issued a writ of mandamus directing a district court to respect Congress's mandatory stay of discovery pending motions to dismiss a securities class action. See Medhekar v. United States Dist. Ct. for N. Dist. of Cal., 99 F.3d 325, 326 (9th Cir. 1996) (holding that initial disclosure requirements of Fed. R. Civ. P. 26(a)(1) are discovery for the purposes of the Private Securities Litigation Reform Act's stay provisions). In this case, the District Court violated that statutory stay without even mentioning the governing Ninth Circuit decision.

The Private Securities Litigation Reform Act of 1995 (the "Reform Act") requires that "all discovery and other proceedings shall be stayed during the pendency of any motion to dismiss, unless the court finds . . . that particularized discovery is necessary to preserve evidence or to prevent undue prejudice . . . ." 15 U.S.C. § 78u-4(b)(3)(B). In its December 4, 1998 Order, the District Court erroneously interpreted this provision of the Reform Act as allowing plaintiff to obtain discovery for the purpose of drafting an amended complaint, providing a plaintiff has alleged facts that give rise to a "strong and credible suspicion" that a fraud was committed and plaintiff can show that a defendant may avoid liability absent discovery. See Order Granting in Part and Denying in Part Plaintiffs' Motion for Limited Discovery at 8 (the "Discovery Order") attached as Appendix Exhibit 1 to Petition for Writ of Mandamus Enforcing the Stay Provisions of the Private Securities Litigation Reform Act of 1995 ("App. Ex. __").

As discussed below, the District Court's ruling is clearly erroneous for two reasons. First, the ruling runs afoul of the intent of Congress in enacting the Reform Act's discovery stay. As this Court stated in Medhekar, "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." 99 F.3d at 328.

Second, the District Court's ruling is contrary to the legislative history discussing the exceptional circumstances permitting a plaintiff to obtain discovery during the stay period. Analysis of the legislative history shows that Congress did not intend to give courts discretion to fashion tests to determine when plaintiffs could obtain discovery to salvage an otherwise insufficient complaint in a securities class action. In fact, Congress rejected an amendment to the Reform Act that would have given district courts the discretion exercised improperly in this action.

Because the District Court's ruling is contrary to the intent of Congress in enacting the Reform Act, and because this is an issue of first impression relating to an important federal statute, petitioners respectfully request that the Court exercise its jurisdiction under the All Writs Act. Petitioners further ask that the Court grant a peremptory writ of mandamus directing the District Court to vacate its order permitting discovery and to enter a new order staying all discovery until plaintiffs plead a cause of action that satisfies the Reform Act's heightened pleading standards.

II. STATEMENT OF THE CASE

A. Factual Background

Rational is a software company based in Cupertino, California that develops, markets, and supports a comprehensive solution that automates the component-based development of computer software. Mr. Levy is Rational's Chief Executive Officer.

The putative class period in the Complaint is the period of time on October 8, 1997 between approximately 11:00 a.m. (the alleged time of a telephone conversation between Levy and Cowen and Syed) and 2:18 p.m. (the time trading in Rational stock was halted).² See Consolidated Amended Class Action Complaint (the "Complaint"), App. Ex. 2 ¶ 39.

According to the Complaint, sometime in the morning of October 8, 1997, Levy had a telephone conversation with Cowen's Syed. Id. ¶ 13. The Complaint alleges that Levy told Syed that Rational's earnings for the third and fourth quarters of Rational's 1998 fiscal year (ending March 31, 1998) and all of Rational's 1999 fiscal year, would be lower than the consensus analyst estimates. Id.

The Complaint further alleges that Syed tipped Cowen customers as to this purportedly material inside information. The Complaint also alleges that unspecified Cowen customers began selling Rational stock based on that information. Id. ¶¶ 14-15. Rational's stock price began to decline late in the morning of October 8. Id. ¶ 15. At around 2 p.m., the Dow Jones News Service reported: "Rational Off; Cowen Says Co. Tells Analysts to Lower Views." Id. ¶ 17.

At 2:18 p.m., NASDAQ halted trading in Rational stock. Id. ¶ 16. After the close of trading, Rational held a conference call with securities analysts. The Complaint asserts that during the call Levy disclosed to the market that Rational was adjusting downward its earnings guidance for fiscal years 1998 and 1999. Id. ¶ 20.

Rational's stock price, which was $14 13/16 at the close of the market on October 7, closed at $12.50 prior to the trading halt on October 8. On October 9, the stock closed at $9.06. Id. ¶ 23. On October 10, the first of several class action complaints in this action was filed.

B. Procedural Background

The operative Complaint was filed on May 28, 1998 and named as defendants Rational, Levy, Cowen and Syed. The Complaint attempted to state claims against all defendants for violations of sections 10(b) and 20A of the Securities Exchange Act of 1934, and sections 25402 and 25502 of the California Corporations Code. Id. at pp. 19-27. The Complaint alleges that Rational and Levy violated the federal and state securities laws by "tipping" material inside information to Syed, who in turn allegedly violated the securities laws by conveying the information to unspecified Cowen customers. Those unnamed customers, according to the Complaint, sold their Rational stock based on the tipped information. Id. ¶ 22

1. The Dismissal Order.

On June 29, 1998 and July 21, 1998, Rational and Cowen respectively, filed motions to dismiss the Complaint pursuant to Fed. R. Civ. P. 12(b)(6). See App. Exs. 3-6 (memoranda, without exhibits, in support of the motions). Petitioners argued, among other things, that the Complaint had failed to plead scienter and personal benefit, two essential elements of the Complaint's federal causes of action. Petitioners also argued that the Complaint failed to allege privity and thus failed to state a claim for violation of the California securities laws.

On October 1, 1998, the District Court granted Petitioners' motions to dismiss, with leave to amend. See App. Ex. 7 (Order Granting Defendants' Motions to Dismiss Consolidated Complaint with Leave to Amend (the "Dismissal Order")).

The District Court held that the Complaint was insufficient in two respects. First, the District Court ruled that plaintiffs did not provide any factual basis for their allegations that Levy received a "personal benefit", in breach of his fiduciary duties, in return for allegedly tipping Syed. Id. at 6-7. The Dismissal Order stated:

These [personal benefit] allegations are speculative and conclusory and are totally unsupported by any facts whatsoever. While plaintiffs cannot be expected to read the Defendants' minds, they must allege some concrete facts from which these speculations and conclusions reasonably could be drawn . . . . Plaintiffs have not alleged any such factual basis for their allegations of personal benefit.

Id. (citations omitted)(emphasis added).

Second, the District Court held that the Complaint did not allege "any facts demonstrating that Syed knew or should have known that [Levy's] disclosure constituted such a breach." Id. at 7.

Accordingly, the District Court dismissed the Complaint with leave to amend. The Reform Act's mandatory discovery stay remained in effect.

2. The Discovery Order.

On October 23, 1998, plaintiffs filed a motion for an order permitting discovery notwithstanding the Reform Act's mandatory stay. See App. Exs. 9-11 (parties' memoranda on the motion). On November 30, 1998, the District Court held a hearing on plaintiffs' motion. See App. Ex. 12 (Transcript of November 30, 1998 hearing). On December 4, 1998, the District Court issued its Order Granting in Part and Denying in Part Plaintiffs' Motion for Limited Discovery. See App. Ex. 1.

As discussed above, the District Court's 13-page Discovery Order focused on interpreting the Reform Act phrase "undue prejudice." Id. at 6-8. The District Court stated:

[T]his Court holds that a securities class action plaintiff may establish the existence of undue prejudice by (1) alleging specific facts which while insufficient in and of themselves to meet the heightened pleading standard of the Reform Act nonetheless give rise to a strong and credible suspicion that a defendant may be liable for securities fraud, and (2) demonstrating a reasonable probability that such defendant is likely to avoid liability absent discovery. If this threshold showing is made, a plaintiff must then show that the requested discovery is sufficiently limited and particularized that permitting the discovery will not defeat the express intent of the Reform Act by placing an undue legal and economic burden on the defendant.

Id. at 8.

The District Court applied the foregoing standards to this case. The District Court stated the Complaint was:

dismissed not because Plaintiffs' claims as a whole were vague and conclusory but primarily because Plaintiffs failed to allege facts tending to show that Levy actually received a personal benefit from disclosing the information or that Syed actually knew that Levy's disclosure was a breach of fiduciary duty, elements without which Plaintiffs cannot state a cause of action.

Id. at 8-9.

The District Court also held that such facts are "of a type likely to be solely within Defendants' possession" and that absent discovery, there was a risk that defendants would be "shielded from liability." Id. at 9. The District Court then terminated the Reform Act's discovery stay.

Finally, the District Court stated that it would permit plaintiffs to issue up to ten interrogatories to Cowen regarding the relationship between Levy and Cowen. Id. at 12. The District Court also permitted plaintiffs to issue subpoenas to the NASD and brokerage firms for the purpose of determining the identity of individuals who sold or placed orders to sell large blocks of Rational stock on October 8, 1998. The District Court denied plaintiffs' motion to the extent plaintiffs sought to pursue discovery broader than the interrogatories and non-party subpoenas discussed above. Id.

III. STATEMENT OF RELIEF SOUGHT AND ISSUES PRESENTED

Petitioners seek an order directing the District Court (1) to vacate its December 4, 1998 Discovery Order; and (2) to enter a new order directing that no discovery shall take place unless and until the Court determines that plaintiffs have alleged facts sufficient to state a cause of action for securities fraud. The issues presented by this Petition include:

(1) Is this an appropriate case for mandamus review?

(2) Did the District Court err in concluding that the Reform Act's mandatory discovery stay was inapplicable because particularized discovery was necessary to prevent undue prejudice to a plaintiff who was unable to meet the Reform Act's heightened pleading standards?

IV. A WRIT OF MANDAMUS VACATING THE DISCOVERY ORDER AND DIRECTING ENTRY OF AN ORDER STAYING DISCOVERY IS APPROPRIATE AND NECESSARY TO EFFECT CONGRESS'S INTENT

A. Mandamus Review is Appropriate in This Case.

This Court has jurisdiction under the All Writs Act to grant the present petition. See 28 U.S.C. § 1651(a). The Ninth Circuit considers five factors (the "Bauman factors") in determining whether mandamus is appropriate in a given case:

1. whether the petitioners have no other adequate means, such as a direct appeal, to attain the desired relief;

2. whether the petitioners will be damaged or prejudiced in a way not correctable on appeal;

3. whether the district court's order is clearly erroneous as a matter of law;

4. whether the district court's order is an oft-repeated error, or manifests a persistent disregard of the federal rules; and

5. whether the district court's order raises new and important problems, or issues of law of first impression.

See Medhekar, 99 F.3d at 326 (citing Bauman v. United States Dist. Ct., 557 F.2d 650, 654-55 (9th Cir. 1977)).

Medhekar, like the present case, turned on the proper interpretation of the Reform Act's discovery stay provision. In Medhekar, as here, the District Court ordered limited discovery while a motion to dismiss was pending, in contravention of the Reform Act's stay provision. Id. The defendants, like the defendants herein, petitioned for a writ of mandamus. The Ninth Circuit analyzed the five Bauman factors, decided to accept mandamus review, and granted the petition. Id. at 326-27. The five-factor Bauman analysis in the present case weighs even more heavily in Petitioners' favor than in Medhekar. Therefore, this Court should accept mandamus review and grant the petition.

The first Bauman factor is whether petitioners have some other adequate means, such as a direct appeal, to attain the desired relief. Since the present case, like Medhekar, involves a party's challenge to a discovery order, direct appeal is not available. Id. at 326; see also Admiral Ins. Co. v. United States Dist. Ct. for Dist. of Ariz., 881 F.2d 1486, 1491 (9th Cir. 1989) (holding discovery orders to parties not immediately appealable). Petitioners cannot appeal under 28 U.S.C. § 1292(b) because the District Court did not certify the issue for interlocutory appeal. See Sofamor Danek Group, Inc. v. Brown, 124 F.3d 1179, 1186 n.4 (9th Cir. 1997) (stating that the Ninth Circuit lacks jurisdiction to consider issues on appeal that have "never been certified for interlocutory appeal to the court of appeals pursuant to 28 U.S.C. § 1292(b)"). Nor is the Discovery Order appropriate for certification pursuant to Fed. R. Civ. P. 54(b) (relating to the dismissal of some claims or parties). See Medhekar, 99 F.3d at 326. Thus, petitioners have no adequate means, other than the present petition, to obtain the desired relief.

The harm the Cowen petitioners will suffer by being forced to comply with the Discovery Order is at least as great as the harm to the defendants in Medhekar, who were merely ordered to provide initial disclosures pursuant to Fed. R. Civ. P. 26(a)(1). Id. In this case, as in Medhekar, the burden of responding to plaintiffs' interrogatories "cannot even be addressed in a subsequent appeal from entry of a final judgment because it will be moot." Id. at 326-27. Therefore, like the petitioners in Medhekar, petitioners herein will be damaged or prejudiced in a way not correctable on appeal unless this Court accepts mandamus review. See also Mortgages, Inc. v. United States Dist. Ct. for Dist. of Nev., 934 F.2d 209, 211 (9th Cir. 1990) (holding that all five Bauman factors need not be satisfied; granting writ notwithstanding failure to satisfy second Bauman factor); Portillo v. United States Dist. Ct. of Ariz., 15 F.3d 819, 821 (9th Cir. 1994) (same).

The third Bauman factor is whether the district court's order is clearly erroneous as a matter of law. As discussed in greater detail below, an analysis of the legislative history of the Reform Act demonstrates conclusively that the district court's order is clearly erroneous as a matter of law. Thus, this factor also weighs in favor of mandamus review.

The district court's order is not "an oft-repeated error" that "manifests a persistent disregard of the federal rules." Id. at 326. However, it is not necessary to satisfy all five factors, and courts have frequently noted that the "fourth and fifth factors [are] rarely if ever present together." Id. at 327 (citing Admiral Ins. Co., 881 F.2d at 1491). Thus, the fourth factor is not dispositive in this case.

The fifth Bauman factor is whether the district court's order raises important issues of law of first impression. That factor is clearly satisfied in this case. Other than Medhekar, there are no recorded appellate decisions interpreting the Reform Act's discovery stay provision. Moreover, there are only a handful of district court opinions on the issue, which shed very little light on the scope of the "undue prejudice" exception. See Powers v. Eichen, 961 F. Supp. 233, 235 (S.D. Cal. 1997) (staying discovery pending a ruling on defendants' motion for reconsideration of an order denying in part their motion to dismiss); Medical Imaging Ctrs. of Am., Inc. v. Lichtenstein, 917 F. Supp. 717, 721-722 (S.D. Cal. 1996) (holding that plaintiffs failed to satisfy the undue prejudice requirement); In re Grand Casinos, Inc. Sec. Litig., 988 F. Supp. 1270, 1272 (D.Minn. 1997) (authorizing subpoenas to third parties for the limited purpose of placing them on notice to prevent destruction of evidence, but precluding enforcement of the subpoenas until after a ruling on the motion to dismiss); Mishkin v. Ageloff, 220 B.R. 784, 793 (S.D.N.Y. 1998) (refusing to lift the discovery stay because plaintiffs failed to satisfy the statutory requirement for "particularized discovery"). Indeed, the District Court itself noted that "there is a surprising lack of authority interpreting and applying the exceptions" to the Reform Act's discovery stay provision. See App. Ex. 1 at 3. Thus, as in Medhekar, 99 F.3d at 327, the District Court's Order raises issues of law of first impression, which merit appellate review.

Apart from the five Bauman factors, this Court has also noted that the exercise of "mandamus authority is particularly appropriate when an important question of law would repeatedly evade review because of the collateral nature of the issue." In re Cement Antitrust Litig., 688 F.2d 1297, 1304 (9th Cir. 1982), aff'd sub nom. Arizona v. United States Dist. Ct. for Dist. of Ariz. 459 U.S. 1191 (1983). The scope of the "undue prejudice" exception to the Reform Act's discovery stay provision is an important question of law. An excessively broad interpretation of the exception would undermine the discovery stay, in contravention of Congress's clear intent "to protect investors, issuers, and all who are associated with our capital markets from abusive securities litigation." H.R. Conf. Rep. No. 104-369, 104th Cong., 1st Sess. at 32, reprinted in 1995 U.S.C.C.A.N. at 731 (1995) (the "Conf. Rep."). (App. Ex. 13).

If appellate courts generally refused to accept mandamus review when district courts ordered discovery in Reform Act cases, the proper interpretation of the stay provision would repeatedly evade review, because the issue would invariably become moot before defendants had an opportunity to appeal from a final judgment. Therefore, this factor also weighs heavily in favor of a decision for this Court to exercise its mandamus authority in this case.

B. The District Court's Discovery Order Was Clear Error.

The Reform Act provides:

In 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).

The immediately preceding provisions of the Reform Act define the heightened standards for pleading a securities cause of action and provide that a complaint that fails to meet those standards shall be dismissed. See 15 U.S.C. §§ 78u-4(b)(3)(A), 78u-4(b)(1)-(2). When read together, as must be done, these provisions express Congress's intent that plaintiffs not be entitled to discovery until they have satisfied the Reform Act's pleading standards.

The District Court viewed the discovery stay in isolation from the Reform Act's pleading mandates, and thus erred in interpreting and applying the discovery stay provision. First, the District Court erred by failing to recognize that the discovery stay was intended to prevent a plaintiff from using materials obtained in discovery to amend his securities complaint. Second, the District Court erred in concluding that the phrase "particularized discovery is necessary . . . to prevent undue prejudice" permits district courts to allow discovery before plaintiff satisfied the Reform Act's heightened pleading standards.

1. The Purpose of the Discovery Stay.

Congress passed the Reform Act to address "significant evidence of abuse in private securities lawsuits . . . ." Conf. Rep. at 31, reprinted in 1995 U.S.C.C.A.N. at 730. (App. Ex. 13). One of the reforms enacted was a mandatory discovery stay. Specifically, the Reform Act stated that "discovery and other proceedings shall be stayed during the pendency of any motion to dismiss . . . ." See 15 U.S.C. §§ 77z-1(b)(1), 78u-4(b)(3)(B).³ The mandatory stay was intended to address two perceived abuses arising out of discovery in private securities actions.

First, the discovery stay was intended to relieve defendants of the enormous burden, in terms of cost and the time devoted by key employees, of discovery. The stay provisions "reform discovery rules to minimize costs incurred during the pendency of a motion to dismiss or a motion for summary judgment." Conf. Rep. at 32, reprinted in 1995 U.S.C.C.A.N. at 731. (App. Ex. 13).

Second, the discovery stay was intended to ensure plaintiffs satisfy the Reform Act's heightened pleading standard before they have access to information or records in discovery. The Reform Act was intended to eliminate "the routine filing of lawsuits . . . with only faint hope that the discovery process might lead eventually to some plausible cause of action." Id.; See 141 Cong. Rec. S19060, S19065 (Dec. 21, 1995) (statement of Sen. Faircloth) (App. Ex. 14) (Before the Reform Act, "[o]nce a lawyer files a frivolous lawsuit, with little or no facts, he gets the ability to engage in discovery. . . . He does not have to have anything when he starts. He gets it after he files his suit."). Simply put, the Reform Act intended that discovery be used to support a valid claim, not to find a claim.

This Court confirmed the dual purpose of the discovery stay in its Medhekar decision. See 99 F.3d at 326. In Medhekar, the Court granted a petition for writ of mandamus and vacated the district court's ruling that Fed. R. Civ. P. 26(a) initial disclosures were not stayed by the Reform Act. Id. at 328. In reaching its decision, the Court noted that the "time and expense involved in the identification and production of documents and other items required by the disclosure rule is exactly the type of burden sought to be eliminated by the [Reform] Act." Id. at 326.

Importantly, the Court also stated that "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 defendants after the action has been filed." Id.; see Powers, 961 F. Supp. at 236 ("[T]he Securities Subcommittee recommended heightened pleading requirements and a stay of discovery pending the outcome of a motion to dismiss. The Subcommittee determined that 'discovery should be permitted in securities class actions only after the court has sustained the legal sufficiency of the complaint.'" (Citation omitted).

The District Court, in this case, erred by failing to acknowledge this Court's ruling in Medhekar and Congress's decision to prohibit the use of discovery materials to amend a securities complaint. The District Court viewed the Reform Act's discovery stay as a device intended only to defer the cost of discovery. The District Court stated:

Both the express language of the Reform Act and the legislative history make clear that Congress intended to prevent broad, expansive 'fishing expeditions' at the expense of defendants against whom no viable claim has been stated.

App. Ex. 1 at 8.⁴ The District Court did not cite to any legislative history.

The District Court's faulty conclusion concerning the scope of congressional intent in enacting the discovery stay laid the foundation for the District Court's second, incorrect conclusion about the meaning of the discovery stay.

2. Congress Did Not Intend to Permit Discovery to Be Used to Satisfy the Reform Act's Pleading Standard.

Having limited the purpose of the discovery stay to cost reduction, the District Court stated that "the most reasonable interpretation of § 101 is that Congress intended to empower district courts to permit discovery notwithstanding the stay only if such discovery is very narrow in scope and then only to prevent injustice." App. Ex. 1 at 7-8. The Court then fashioned its two-part test for determining when a plaintiff could demonstrate "undue prejudice" so as to gain access to particularized discovery. See, p. 8, supra.

The District Court erred for several reasons. First, the plain language and legislative history of the Reform Act demonstrate that plaintiffs must satisfy the heightened pleading standards of the Reform Act before they are entitled to discovery. The Reform Act, in fact, couples dismissal and the stay of discovery under the same heading. See 15 U.S.C. § 78u-4(b)(3)("MOTION TO DISMISS; STAY OF DISCOVERY"). The Reform Act provides in turn that "in any private action arising under this chapter, the court shall . . . dismiss the complaint if the [pleading] requirements [] are not met" and, in the very next paragraph, that discovery is stayed during the pendency of a motion to dismiss. 15 U.S.C. § 78u-4(b)(3)(A), (B). Congress explained that the two provisions were linked: "[T]he [Senate] Committee has determined that discovery should be permitted in securities class actions only after the court has sustained the legal sufficiency of the complaint." See S. Rep. 104-98, 104th Cong., 1st Sess. at 14, reprinted in 1995 U.S.C.C.A.N. at 693 (1995). (App. Ex. 15).

The Reform Act purposefully creates a zero-sum game: if you satisfy the pleading requirements, you get discovery; if you do not, no discovery. The Reform Act did not create some "middle ground" for complaints that come close to withstanding a motion to dismiss or, as in this case, plead some elements of a claim with the requisite particularity, but fail altogether with respect to other elements of a claim. See App. Ex. 7 at 6-7. The District Court improperly altered the Reform Act by creating just such an "other" category. (App. Ex. 1 at 8) (holding that undue prejudice established by "alleging specific facts which while insufficient in and of themselves to meet the heightened pleading requirements of the Reform Act nonetheless give rise to a strong and credible suspicion that a defendant may be liable for securities fraud.")

The opponents of the Reform Act understood that the discovery stay was intended to eliminate access to discovery materials for the purpose of amending a complaint. For example, in a letter to President Clinton encouraging the veto of the Reform Act, Senator Arlen Specter wrote: "[The Act] provides a mandatory stay of discovery when a motion to dismiss is filed, thereby preventing plaintiffs from discovering salient facts that would allow them to amend their complaints to satisfy the new pleading standard." 141 Cong. Rec. S19037, 19048 (Dec. 21, 1995). (App. Ex. 16).

Second, the District Court ignored important legislative history that discusses "undue prejudice." The Conference Report states:

The Conference Committee provides in 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. For example, the terminal illness of an important witness might require the deposition of the witness prior to the ruling on the motion to dismiss.

Conf. Rep. at 37, reprinted in 1995 U.S.C.C.A.N. at 736 (emphasis added). (App. Ex. 13).⁵ Congress imposed a severe restriction on the phrase "undue prejudice" by limiting it to the realm of "exceptional circumstances" such as the imminent death of a witness. The District Court ignored this legislative history, and in doing so, permitted plaintiffs to do the one thing Congress sought to avoid -- obtain discovery for the purpose of amending a complaint to survive a motion to dismiss.

The District Court relied heavily upon Medical Imaging Ctrs. of Am. v. Lichtenstein, 917 F. Supp. 717, 719-21 (S.D. Cal. 1996), for its definition of undue prejudice. Medical Imaging involved a securities action filed in the midst of a battle for corporate control between the plaintiff corporation and defendants who planned a hostile takeover. The plaintiff corporation sought injunctive relief related to an upcoming shareholders meeting. Plaintiff also filed a motion to obtain expedited discovery in advance of a preliminary injunction hearing. Defendants filed a motion to dismiss the complaint, and invoked the Reform Act discovery stay. Plaintiff maintained that it was unduly prejudiced by the stay, as it would essentially condemn plaintiff to a loss of injunctive relief and permit the defendants to gain control of the corporation and terminate the lawsuit. Id.

The Medical Imaging court held that plaintiff did not demonstrate that it would suffer undue prejudice because there was ample time to pursue expedited discovery after a ruling on the motion to dismiss and before the shareholders meeting. In the portion of the decision relied on by the District Court in this action, the Medical Imaging court noted, in dictum, that "[i]f, in fact, [plaintiff] had shown that the discovery stay would prejudice it because the [defendants] would be shielded from eventual liability for any material violations of the securities laws, the Court would find that an 'undue prejudice' exception to the statutory stay had been shown." Id. at 721 n.3. The court stated that plaintiff could maintain an action for securities violations even after the shareholders meeting. Id. at 722.

The District Court's reliance on Medical Imaging is misplaced. The Medical Imaging court was not concerned with the impact of the delay introduced by the discovery stay on plaintiff's ability to state a claim. The court gave no indication that it would grant discovery so that plaintiff would have access to the substance of discovery in order to be able to state a claim for securities fraud. Permitting discovery because of timing considerations, as in the case of a contest for corporate control or, as the Reform Act's legislative history states, when a witness is terminally ill, does not run afoul of the Reform Act's intent to prevent discovery from being used to amend a complaint.

Finally, Senator Specter proposed an amendment to the Senate version of the Reform Act which would have given district courts the same discretion the District Court mistakenly read into the Reform Act. Senator Specter proposed eliminating the discovery stay language that eventually was adopted in the Reform Act and replacing it with the following provision:

(k) Stay of discovery.--

(1) In general.--In any private action arising under this title, the court may stay discovery upon motion of any party only if the court determines that the stay of discovery--

(A) would avoid waste, delay, duplication, or unnecessary expense; and

(B) would not prejudice any plaintiff.

(2) Additional limitations on discovery.--In any private action arising under this title--

(A) prior to the filing of a responsive pleading to the complaint, discovery shall be limited to materials directly relevant to facts expressly pleaded in the complaint . . . .

Proposed Amendment No. 1484 to S. Res. 240, 141 Cong. Rec. S9170 (June 27, 1995). (App. Ex. 17). In support of the amendment, Senator Specter argued, that "this amendment would leave it to the discretion of the trial judge, as the Federal Judges have discretion in all other cases, to decide whether there ought to be discovery after the defense files a motion to dismiss." 141 Cong. Rec. S9199, S9200 (June 28, 1995) (statement of Sen. Specter). (App. Ex. 18).

The Senate rejected the Specter amendment. Id. The Senate's rejection of the amendment is "persuasive" evidence of legislative intent. See Immigration & Naturalization Serv. v. Cardoza-Fonseca, 480 U.S. 421, 442-43 (1987) ("Congress does not intend sub silentio to enact statutory language that it has earlier discarded in favor of other language.")(Citations omitted). The legislative record demonstrates that Congress did not wish to vest in district courts the type of discretion that Senator Specter thought was appropriate and that the District Court in this case seized to permit discovery for the purpose of amending a complaint that did not pass muster under the Reform Act.

In summary, Congress specifically enacted the stay provisions of the Reform Act in conjunction with stiffer pleading requirements in spite of complaints that plaintiffs might not be able to state a claim without access to defendants' documents. The District Court has chosen to supplant Congress's decision and replace it with broad judicial discretion to permit discovery. The District Court's ruling is contrary to the language and intent of the Reform Act and should be vacated.

V. CONCLUSION

Mandamus review of whether the stay provision of the Private Securities Litigation Reform Act of 1995 permits plaintiffs to obtain discovery for the purpose of satisfying the Reform Act's pleading requirements is appropriate. Because discovery in those circumstances violates the language and intent of the Reform Act, Petitioners respectfully request that a writ of mandamus issue directing the District Court to vacate its December 4 Order and to enter a new order staying discovery pending a finding that plaintiffs have alleged a cause of action for violation of the securities laws.

Petitioners are aware of no cases currently pending before this Court that may be deemed "related" to this petition for writ of mandamus pursuant to Circuit Rules 21-3 and 28-2.6.

The accompanying Petition for Writ of Mandamus Enforcing the Stay Provisions of the Private Securities Litigation Reform Act of 1995 uses the Times New Roman 14-point typeface, a proportionally spaced font, and includes 6,118 words, as calculated by the word processing program used to prepare the petition. The text of the petition is double spaced.

¹ SG Cowen Securities Corporation ("Cowen") and Cowen securities analyst Rehan Syed inform petitioners, through their counsel, that they join in this petition. Cowen and Syed will file a joinder and supplemental writ petition.

² All times referred to in this petition are Eastern Standard Time.

³ Plaintiffs below did not challenge the applicability of the discovery stay during the period of time between a ruling on a motion to dismiss and submission of an amended complaint. See App. Ex. 1 at 5.

⁴ At the November 30 hearing on the underlying motion, the District Court stated: "I think what Congress was most concerned about was the burden of voluminous discovery in a securities case." App. Ex. 12 at 4.

⁵ The Conference Report is the authoritative statement of legislative intent. National Forest Resource Council v. Glickman, 82 F.3d 825, 835 (9th Cir. 1996) ("[A] congressional conference report is recognized as the most reliable evidence of congressional intent because it 'represents the final statement of the terms agreed to by both houses'.")(Citation omitted).

Source: Emailed file from Wilson Sonsini Goodrich & Rosati