Court: District Court, D. Massachusetts; September 15, 2016; Federal District Court
Plaintiff MAZ Partners LP seeks discovery related to SEC investigations into alleged insider trading linked to the merger involving defendants PHC, Inc. and Acadia Healthcare Co. The plaintiff requested depositions of certain individuals and documents concerning insider trading, while also seeking corporate representatives from PHC and Acadia to clarify their awareness of the SEC investigations and their failure to disclose relevant information during discovery. Following a September 8, 2016 hearing, plaintiff narrowed its requests, dropping some depositions and the corporate representative demand while specifying document requests. Defendants contend the requested information is irrelevant.
The plaintiff's initial discovery request, served on July 25, 2011, included demands for documents related to insider benefits received by directors and officers, as well as communications with government agencies about the merger. Defendants responded on August 21, 2011, agreeing to produce relevant documents. Discovery closed on April 30, 2015, after which the SEC issued cease-and-desist orders against certain individuals involved in the case for illicit trading, which defendants did not disclose to the plaintiff. The plaintiff became aware of the SEC investigations on December 24, 2015, but defendants maintained that the information was not pertinent. Plaintiff subsequently informed the court of the dispute and requested that rulings on Class Certification and Summary Judgment be postponed.
The standard for discovery allows parties to obtain information relevant to any claim or defense, provided it is non-privileged and proportional to the case's needs, without requiring the information to be admissible in evidence.
The court retains the authority to restrict discovery if it falls outside the parameters set by Rule 26(b)(1). Federal trial courts have broad discretionary power to manage pretrial processes, including discovery timelines. Rule 16(b) mandates that a scheduling order be issued within 120 days of the complaint's service, establishing deadlines for further proceedings. While the court can extend these deadlines for good cause if parties cannot meet them despite due diligence, it emphasizes that discovery must have reasonable limits and cannot be an open-ended pursuit.
In this case, the plaintiff's discovery requests include identifying documents requested by the SEC from individuals involved in insider trading, documents produced to the SEC, deposition transcripts or equivalent records, and depositions of Eric Shear and Donald Robar. The plaintiff argues these requests align with initial discovery inquiries, particularly regarding Robar's share purchases before a merger. However, defendants contend that Robar's actions were not wrongful, highlighting the early timing and small monetary amount involved.
Considering the case's age and impending trial, the court deems it unproductive to delve into whether defendants concealed information. The court applies the "good cause" standard from Fed. R. Civ. P. 16(b)(4), recognizing that the plaintiff's discovery request stems from a newly discovered SEC investigation, for which they acted diligently.
The court assesses the relevance and proportionality of the requests under Rule 26. It concludes that while Robar owed a fiduciary duty to shareholders and his actions are pertinent, the plaintiff has not adequately justified extending discovery to the other three individuals investigated by the SEC. Therefore, the court's analysis will focus solely on materials relating to Robar.
Defendants assert that Robar’s alleged insider trading is immaterial legally for three main reasons: (1) the trade’s value of $4,617.25 is negligible compared to the merger’s value exceeding $100 million; (2) the District Court previously determined that there are no disclosure claims, categorizing them as duty of care claims barred by an exculpatory bylaw; and (3) the precedent set in Van de Walle v. Unimation, Inc. supports a lack of legal connection between insider trading violations and fiduciary breach claims regarding merger consideration. Defendants acknowledge, for the sake of their motion, the truth of the SEC settlement order regarding Robar but emphasize that no discovery has occurred to ascertain the specifics of the alleged insider trading. The SEC order notes that any stipulations were made solely to resolve the proceeding without admitting liability. Defendants argue that the court has the authority to determine the materiality of evidence as a matter of law; however, they contend that the cases cited are factually different because they involved complete records. While the Summary Judgment Order dismissed disclosure claims against PHC directors due to a lack of evidence for misconduct, it did not include the information relevant to Robar’s alleged insider trading, as the plaintiff had not been able to conduct discovery. Allowing limited discovery would impose minimal burden on defendants and provide a clearer understanding of the events. Post-discovery, parties can address evidence admissibility at trial, and the plaintiff may seek reconsideration of the Summary Judgment Order if warranted. Defendants maintain that the Unimation case demonstrates there is no legal nexus between insider trading evidence and fiduciary duty claims related to merger terms, as the court there ruled in favor of the defendants after a thorough examination of the issues.
Defendants reference a footnote from the Unimation decision concerning insider trading allegations against two specific individuals associated with the defendant corporation, which the court found lacked evidentiary support. The court indicated that even if these transactions represented an unintentional fiduciary violation, no relief could be granted as none was requested. Defendants argue that this footnote establishes a lack of legal connection between the current claims and the discovery sought. However, the court finds this argument unconvincing due to the absence of factual basis regarding the relevance of allegations against Robar. Should the allegations of Robar trading on insider information be true, they could impact his credibility and the legitimacy of the proxy statement sent to shareholders.
The court orders the defendants to produce documents related to SEC requests regarding Robar, all documents Robar gave to the SEC during its inquiries, and transcripts of any depositions or interviews related to these inquiries. Additionally, the plaintiff is permitted to depose Robar for two hours about insider information, trading, and the SEC investigation. The court will postpone its decision on the plaintiff's request to re-depose Bruce Shear. The motion to compel limited discovery is granted in part and denied in part, specifically identifying the individuals from whom discovery is sought: Donald Robar, Eric E. Shear, Robert A. Hanner, and Danny Carpenter. Bruce Shear is excluded as he was not under SEC investigation and has already been deposed. The SEC alleged that Robar improperly benefitted a family member through insider trading, and the defendants' arguments against the relevance of the requested documents regarding benefits received by PHC directors are rejected.
