Petrie v. Electronic Game Card, Inc.

A party does not violate the discovery stay under the Private Securities Litigation Reform Act when it relies on materials provided by a third party pursuant to a valid subpoena issued when no PSLRA discovery stay was in effect.

Investors sued the controlling officers of a company for Securities and Exchange Act violations. The investors allege that the company concealed language in a 2002 agreement to acquire the subsidiary Electronic Game Cards, Inc. (“ECG”), which stated if the company changed the governing documents of EGC, then EGC would revert to its original owners. Sometime in 2010, following a change in leadership at the company, EGC did revert back to its original owners. The district court dismissed part of the investors’ first amended complaint and issued a scheduling order that was not objected to by either party. The investors issued a subpoena to the company’s auditor, Lee Cole, to produce certain material. Cole filed a motion to dismiss on the pleadings, which triggered a stay of discovery under the Private Securities Litigation Reform Act. Cole, without objecting, then sent the investors the materials in response to the subpoena issued before he filed his motion. The investors then filed another amended complaint that included information that Cole gave them to back up the investors’ claim that the controlling officers concealed the 2002 agreement from the investors. Cole filed a motion to strike any allegations that were supported by the materials he provided the investors under the scheduling order. The district court granted the motion to strike on the grounds that a motion to stay was in effect because there was a pending motion. The district court then dismissed the third amended complaint. The panel held that the district court erred in granting the motion to strike because at the time the subpoena was issued there was no pending motion. The panel also determined that the district court erred in dismissing the compliant, because, as filed, the complaint was “sufficient to plead both falsity and scienter under the PSLRA.” REVERSED and REMANDED.