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Cassava Sciences Securities Litigation — Court denied plaintiffs’ motion to lift the automatic PSLRA discovery stay, finding no “undue prejudice”

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Reported / Citable

Case
In Re Cassava Sciences, Inc. Securities Litigation
Court
U.S. District Court, Western District of Texas, Austin Division
Judge
Susan Hightower (Judges of the U.S. District Court for the Western District of Texas, 2019)
Date Decided
January 2, 2023
Docket No.
1:21-cv-00751-DAE
Topics
Securities fraud, PSLRA discovery stay, motion to dismiss, undue prejudice
Source
Read the full opinion

Background

Named plaintiffs Mohammad Bozorgi, Ken Calderone, and Manohar K. Rao filed a securities fraud class action against Cassava Sciences, Inc. and four executives, alleging a fraudulent scheme to mislead investors about simufilam, an investigational Alzheimer’s drug. The complaint alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5, claiming plaintiffs purchased Cassava securities between September 14, 2020 and July 26, 2022 and suffered damages from defendants’ misstatements and omissions.

On August 18, 2021, a Citizen Petition filed with the FDA accused Cassava of research misconduct related to simufilam. The SEC and DOJ subsequently began investigating and requested documents from Cassava. Defendants filed a motion to dismiss in October 2022, which triggered the Private Securities Litigation Reform Act’s (PSLRA) mandatory automatic stay of all discovery pending resolution of that motion.

Plaintiffs moved to partially lift the discovery stay to obtain documents Cassava had produced in a related Delaware derivative action and materials Cassava had provided to the SEC, DOJ, and National Institutes of Health. Plaintiffs argued they would be “unduly prejudiced” by remaining at an informational disadvantage and risked losing settlement opportunities if Cassava’s limited resources were depleted by the government investigations.

The Court’s Holding

The magistrate judge denied plaintiffs’ motion, holding that plaintiffs failed to establish “undue prejudice” as required by 15 U.S.C. § 78u-4(b)(3)(B) to lift the PSLRA discovery stay. The court emphasized that “undue prejudice” requires exceptional circumstances—such as ongoing settlement negotiations or corporate bankruptcy—and that merely being at an informational disadvantage compared to other litigants does not satisfy this burden.

The court found that plaintiffs made only conclusory arguments without meaningfully explaining why they needed early access to the documents or how specific materials would prevent undue prejudice. The court noted Cassava had not filed for bankruptcy, plaintiffs alleged no bankruptcy was imminent, and there were no settlement discussions underway. Critically, the court held that prejudice caused by the inherent delay of the PSLRA’s discovery stay cannot constitute “undue” prejudice because such delay is neither improper nor unfair—it is the statutory purpose of the stay itself.

The court characterized the case as a “garden variety” securities fraud action where the only extraordinary circumstance was that defendants had already produced documents to government agencies and non-parties in related litigation. This fact alone did not justify circumventing the PSLRA’s protective mechanism.

Key Takeaways

  • The PSLRA’s automatic discovery stay is a strong protective mechanism that remains in effect unless a party meets a demanding “undue prejudice” standard requiring exceptional circumstances.
  • Plaintiffs cannot simply point to documents available to other parties (government agencies, derivative action litigants) as sufficient grounds for early discovery; they must show material harm specific to their litigation position.
  • Informational disadvantage and competitive disadvantage in settlement negotiations, without evidence of actual settlement discussions or imminent bankruptcy, do not constitute “undue prejudice” under the PSLRA.
  • Plaintiffs bear a heavy burden to establish the need for partial lifting of the discovery stay and must provide more than conclusory arguments or general assertions of prejudice.

Why It Matters

This decision reinforces strict application of the PSLRA’s discovery stay and establishes a high bar for lifting it. It protects defendants from costly early discovery in securities cases that may ultimately fail at the motion-to-dismiss stage, advancing Congress’s goal of filtering out meritless securities suits. However, it also means plaintiffs must await resolution of motions to dismiss even when related government investigations and derivative actions are moving forward, potentially limiting their ability to obtain information needed for settlement negotiations or to amend complaints before the motion to dismiss is decided.

For practitioners, the decision makes clear that relying on the mere existence of concurrent investigations or related litigation is insufficient. Plaintiffs seeking partial relief from the PSLRA stay must demonstrate specific, material prejudice tied to their particular factual circumstances—a significantly higher showing than simply lacking access to discovery obtained by other parties.

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