The New York Appellate Division – First Department found that the Private Securities Litigation Reform Act’s (PSLRA) automatic discovery stay “applies to any private action, whether brought in state or federal court.”

Unlike claims commenced pursuant to the Securities Exchange Act of 1934, wherein federal courts have exclusive jurisdiction, claims under the Securities Act of 1933 may be filed in state or federal court. Following Cyan, Inc. v. Beaver County Employees Retirement Fund, 138 S. Ct. 1061 (2018), which precluded removal of 1933 Act claims from state court to federal court, plaintiffs increased their efforts, at times, to utilize state courts to circumvent the requirements of the PSLRA – including the automatic stay of discovery while a motion to dismiss is pending.

State trial courts have grappled with whether the PSLRA discovery stay applies in actions filed in state court. For example, in In re Everquote, Inc. Securities Litigation, 65 Misc. 3d, 226 (NY Sup Ct, NY County 2019), the court, in reaching a conflicting conclusion than Matter of PPDAI Group Securities Litigation, 64 Misc. 3d 1208(A) (NY Sup Ct, NY County 2019), found that the “simple, plain, and unambiguous language expressly provides that discovery is stayed during a pending motion to dismiss...[n]owhere does it indicate that it applies only to actions brought in federal court.”

After analyzing the issue, the First Department held that the PSLRA applies in state court actions filed under the Securities Act of 1933 to stay discovery pending the trial court’s resolution of a motion to dismiss. The court further clarified that the PSLRA discovery stay does not apply during the pendency of appeals from denied motions to dismiss – while noting that this serves to “maintain uniformity between the federal and state systems, preventing an incentive for forum shopping.”

While this decision is helpful to defendants in New York, further clarification is needed in other jurisdictions, such as California. If you have questions about the latest D&O developments, your coverage or are interested in obtaining coverage, please contact your Aon broker.

Camelot Event Driven Fund v. Morgan Stanley & Co. LLC, 2023 N.Y. App. Div. LEXIS 5467 (NY 1st Dep’t, 2023)

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