FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
SG COWEN SECURITIES
CORPORATION; REHAN SYED,
Petitioners,
v.
UNITED STATES DISTRICT
No. 98-71501
COURT FOR THE NORTHERN
D.C. No.
DISTRICT OF CALIFORNIA,
CV-97-21001-JF
Respondent,
THOMAS RANDALL, et al., on behalf
of themselves and all others
similarly situated,
Real Party in Interest.
RATIONAL SOFTWARE
CORPORATION AND PAUL D. LEVY,
Petitioners,
v.
No. 98-71503
UNITED STATES DISTRICT
D.C. No.
COURT FOR THE NORTHERN
CV-97-21001-JF
DISTRICT OF CALIFORNIA,
Respondent,
OPINION
TOM, et al., on behalf of
themselves and all others similarly
situated,
Real Party in Interest.
10081
Petitions for Writs of Mandamus to
the United States District Court
for the Northern District of California
Jeremy Fogel, District Judge, Presiding
Argued and Submitted
July 15, 1999--San Francisco, California
Filed August 30, 1999
Before: Charles Wiggins, Ferdinand F. Fernandez, and
Sidney R. Thomas, Circuit Judges.
Opinion by Judge Thomas
_________________________________________________________________
COUNSEL
Boris Feldman, Wilson Sonsini Goodrich & Rosati, Palo Alto,
California, for petitioners Rational Software Corporation and
Paul D. Levy.
Lisa M. Carvalho, Steefel, Levitt & Weiss, San Francisco,
California, for petitioners SG Cowen and Rehan Syed.
Lionel Z. Glancy, Law Offices of Lionel Z. Glancy, Los
Angeles, California, for the plaintiffs-real parties in interest.
_________________________________________________________________
OPINION
THOMAS, Circuit Judge:
The defendants in this securities class action lawsuit seek
a writ of mandamus vacating the district court's order for lim-
ited discovery. We hold that the order violated the discovery
stay provision of the Private Securities Litigation Reform Act
of 1995, and grant the writ.
I
The plaintiffs filed this class action lawsuit alleging viola-
tions of federal and state securities law. The complaint alleges
10084
that on the morning of October 8, 1997, Rational Software
Corporation ("Rational") Chief Executive Officer Paul Levy
told SG Cowen Securities Corporation ("Cowen") analyst
Rehan Syed that Rational's earnings would be lower than
expected. Syed then allegedly alerted Cowen's customers,
who in turn began selling Rational shares. Rational's stock
price, which began the trading day at $15 1/6, deteriorated to
$11 7/8 by mid-afternoon when trading in Rational stock was
halted. The stock price continued its downward spiral the fol-
lowing day, closing near $9 per share. Trading volume was
unusually high; on the day of the Syed conversation, volume
increased fivefold over Rational's three-month daily average.
Plaintiffs filed this class action lawsuit against defendants
Rational, Levy, Cowen, and Syed days later.
The defendants moved to dismiss the action, contending
that the plaintiffs had failed to plead the requisite scienter and
personal benefit elements sufficiently to state a section 10(b)
violation, and that the complaint did not state a cause of
action under California securities law because privity was not
alleged. The district court granted the motions to dismiss,
holding that the plaintiffs had not provided any factual basis
for their contention that Levy had received a personal benefit
for tipping Syed, and that the complaint did not contain any
facts demonstrating that Syed knew or should have known
that the disclosure constituted a fiduciary breach. The court
granted plaintiffs leave to file an amended complaint.
Plaintiffs subsequently filed a motion for leave to take lim-
ited discovery for the purpose of uncovering facts to support
their allegations. The court granted the request, and defen-
dants filed this petition for a writ of mandate.
II
At issue in this case is the scope of the discovery stay under
the Private Securities Litigation Reform Act of 1995 ("Act"),
Pub. L. No. 104-67 (codified as amended at 15 U.S.C.SS 77a
10085
et. seq.). The Act was passed in response to several perceived
abuses in securities litigation, including discovery abuses. As
the Third Circuit recently observed:
The purpose of the Act was to restrict abuses in
securities class-action litigation, including: (1) the
practice of filing lawsuits against issuers of securi-
ties in response to any significant change in stock
price, regardless of defendants' culpability; (2) the
targeting of "deep pocket" defendants; (3) the abuse
of the discovery process to coerce settlement; and (4)
manipulation of clients by class action attorneys.
In re Advanta Corp. Secs. Litig., 180 F.3d 525, 1999 WL
395997, at *4 (3d Cir. June 17, 1999).
The Act's reforms included the institution of heightened
pleading standards. See 15 U.S.C.A. S 78u-4(b)(1)-(2) (West
Supp. 1999); H.R. Conf. Rep. No. 104-369, 104th Cong. 1st
Sess. at 41 (1995) reprinted in U.S.C.C.A.N. Sess. 740. In
addition, the Act mandated a stay of discovery during the pen-
dency of a summary judgment or dismissal motion. Section
78u-4(b)(3)(B) provides:
In any private action arising under this chapter, all
discovery and other proceedings shall be stayed dur-
ing the pendency of any motion to dismiss, unless
the court finds upon the motion of any party that par-
ticularized discovery is necessary to preserve evi-
dence or to prevent undue prejudice to that party.
15 U.S.C.A. S 78u-4(b)(3)(B) (West Supp. 1999).
This section was "intended to prevent unnecessary imposi-
tion of discovery costs on defendants." H.R. Conf. Rep. No.
104-369, 104th Cong. 1st Sess. at 32 (1995), reprinted in
1995 U.S.C.C.A.N. Sess. 731. As the House and Senate man-
10086
agers further noted in their Joint Explanatory Statement of the
Committee of Conference:
The cost of discovery often forces innocent parties to
settle frivolous securities class actions. According to
the general counsel of an investment bank,
"discovery costs account for roughly 80% of total lit-
igation costs in securities fraud cases." In addition,
the threat that the time of key employees will be
spent responding to discovery requests, including
providing deposition testimony, often forces coer-
cive settlements . . . .
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. For example, the
terminal illness of an important witness might
require the deposition of the witness prior to the rul-
ing on the motion to dismiss.
Id. at 736.
In this case, plaintiffs requested discovery to learn the iden-
tity of Rational traders on October 8, 1998, and to determine
the nature of the relationship between Cowen and Rational.
They argued that failing to allow the requested discovery
would shield the defendants from liability, causing them the
"undue prejudice" contemplated by S 78u-4(b)(3)(B).
In granting the discovery motion in part, the district court
reasoned that:
a securities class action plaintiff may establish the
existence of undue prejudice by (1) alleging specific
10087
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, and (2) demonstrating a reasonable
probability that such defendant is likely to avoid lia-
bility 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.
Applying the test, the district court then explained:
Plaintiffs have alleged narrow claims based upon the
disclosure of specific inside information by a spe-
cific person on a specific date and the subsequent
"dumping" of large blocks of Rational stock on that
same date. For the most part, Plaintiff's allegations
are supported by specific facts which at a minimum
give rise to an appearance of impropriety on the part
of Levy and Syed. The consolidated 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 dis-
closing 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 . . . . As Plaintiffs point out, facts
supporting [their] theory are of a type likely to be
solely within Defendants' possession. Under these
circumstances, even though Plaintiffs have alleged
significant and specific facts in support of their
insider trading claims, there is a reasonable probabil-
ity that Defendants will be shielded from liability
unless Plaintiffs are permitted to take limited discov-
10088
ery regarding the relationship between Cowen and
Rational.
The district court thereupon permitted plaintiffs to pro-
pound ten interrogatories upon Cowen to inquire into the rela-
tionship between Levy and Cowen, and permitted plaintiffs to
issue subpoenas on the NASD and brokerage firms to deter-
mine who sold Rational shares on October 8, 1997. The court
denied the rest of the motion for discovery because it was not
sufficiently particularized.
[1] Distilled to its essence, the district court granted plain-
tiffs leave to conduct discovery so that they might uncover
facts sufficient to satisfy the Act's pleading requirements.
This is not a permissible reason for lifting the discovery stay
under the Act. As we plainly stated in Medhekar v. United
States Dist. Ct.:
Congress clearly intended that complaints in these
securities actions should stand or fall based on the
actual knowledge of the plaintiffs rather than infor-
mation produced by the defendants after the action
has been filed.
99 F.3d 325, 328 (9th Cir. 1996).
[2] The "Stay of Discovery" provision of the Act clearly
contemplates that "discovery should be permitted in securities
class actions only after the court has sustained the legal suffi-
ciency of the complaint." S. Rep. No. 104-98, at 14 (1995)
reprinted in U.S.C.C.A.N. 693 (emphasis added). The Act
requires the trial court to dismiss the complaint if it fails to
satisfy the Act's heightened pleading standards. See S 78u-
4(b)(3)(A). Thus, as a matter of law, failure to muster facts
sufficient to meet the Act's pleading requirements cannot con-
stitute the requisite "undue prejudice" to the plaintiff justify-
ing a lift of the discovery stay under S 78u-4(b)(3)(B). To so
hold would contravene the purpose of the Act's heightened
10089
pleading standards. Accordingly, we conclude that the district
court clearly erred in granting the limited discovery request.1
III
Determining that the district court erred in granting the dis-
covery request does not end our inquiry, for we must also
consider whether issuance of a writ of mandamus is appropri-
ate. Mandamus is "an extraordinary remedy limited to excep-
tional circumstances." Wilson v. United States Dist. Ct., 103
F.3d 828, 829 (9th Cir. 1996) (internal citation and quotation
marks omitted). The burden is on the petitioner to show that
his right to the writ is "clear and indisputable. " Calderon v.
United States Dist. Ct., 103 F.3d 72, 74 (9th Cir. 1996).
[3] We apply a five-factor test, first articulated in Bauman
v. United States Dist. Ct., 557 F.2d 650 (9th Cir. 1977), to
determine whether the exercise of its mandamus jurisdiction
is proper. See United States v. Amlani, 169 F.3d 1189, 1193-
94 (9th Cir. 1999). The factors are:
(1) The party seeking the writ has no other adequate
means, such as a direct appeal, to attain the relief he
or she desires.
(2) The petitioner will be damaged or prejudiced in
a way not correctable on appeal. . . .
(3) The district court's order is clearly erroneous as
a matter of law.
_________________________________________________________________
1 We also reject plaintiffs' argument that the district court should have
permitted discovery because plaintiffs asserted state claims. As the district
court correctly explained, "Congress' attempt to address [concerns of dis-
covery abuse] would be rendered meaningless if securities plaintiffs could
circumvent the stay simply by asserting pendent state law claims in federal
court in conjunction with their federal law claims."
10090
(4) The district court's order is an oft-repeated error,
or manifests a persistent disregard of the federal
rules.
(5) The district court's order raises new and impor-
tant problems, or issues of law of first impression.
Amlani, 169 F.3d at 1193-94. The factors should be weighed
together based on the facts of the individual case. See
Calderon v. United States Dist. Ct., 163 F.3d 530, 534 (9th
Cir. 1998), cert. denied, 119 S. Ct. 1377 (1999).
[4] Here, application of the Bauman factors demonstrates
that the writ should be granted. First, defendants have no
other adequate means to obtain the relief desired. They may
not directly appeal the discovery order because discovery
orders are not final, appealable orders under 28 U.S.C.
S 1291. See Admiral Ins. Co. v. United States Dist. Ct., 881
F.2d 1486, 1490 (9th Cir. 1989). Appellate review pursuant to
28 U.S.C. S 1292(b) is unavailable because the district court
did not certify the issue for appellate review. See 28 U.S.C.A.
S 1292(b) (West Supp. 1999). Neither does Federal Rule of
Procedure 54(b) apply, as this rule applies to situations in
which final judgment is entered as to some but not all claims
or parties. See Fed. R. Civ. P. 54(b). Although Cowen could
refuse to comply with the discovery orders directed at it and
then appeal from the contempt order, the majority of discov-
ery is directed at third-parties who could not be expected to
do so. See In re Grand Jury Subpoena 92-1(SJ) , 31 F.3d 826,
829 (9th Cir. 1994). Thus, the first Bauman factor indicates
that the defendants have no other adequate remedy.
Second, a petitioner is damaged or prejudiced if his claim
will be moot on appeal. Compliance with a discovery order
moots an appeal of that order. See Medhekar v. United States
Dist. Ct., 99 F.3d 325, 326-27 (9th Cir. 1996). Thus, the sec-
ond Bauman factor also indicates that the petition should be
granted.
10091
Third, as we have previously discussed, the district court
clearly erred in holding that a plaintiff may obtain discovery
under the undue prejudice exception to 15 U.S.C. 78u-
4(b)(3)(B) in order to plead a sufficient complaint.
Fourth, defendants concede that the district court's order is
not an "oft-repeated error" that "manifests persistent disregard
of the federal rules." Fifth, plaintiffs concede that there is
"scant appellate authority addressing the Act " and so that the
order raises issues of first impression.
[5] In short, four of the five Bauman factors suggest that
the petition be granted. Only the fourth--whether the district
court's order is an "oft-repeated error"--suggests otherwise,
but this court has noted that "[t]he fourth and fifth Bauman
factors are rarely, if ever, present at the same time." Amlani,
169 F.3d at 1194.
Accordingly, we conclude the writ should issue.
PETITION GRANTED
10092
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