“[I]t is 5 proper to deny discovery of matter that is relevant only . . . to events that occurred before 6 an applicable limitations period, unless the information sought is otherwise relevant to 7 issues in the case.”
How later courts described this case
- “[I]t is 5 proper to deny discovery of matter that is relevant only . . . to events that occurred before 6 an applicable limitations period, unless the information sought is otherwise relevant to 7 issues in the case.”
- granting discretionary stay of discovery in state law shareholder 16 derivative action that was parallel to federal securities actions
- noting that “[t]he district court is given broad 24 discretion in supervising the pretrial phase of litigation”
- noting that even sua sponte dismissal of claims may 9 be appropriate in certain circumstances
Written by the judges who cited it.
The opinion
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8 UNITED STATES DISTRICT COURT
9 SOUTHERN DISTRICT OF CALIFORNIA
10
11 In re BofI Holding, Inc. Securities Case No.: 3:15-cv-02324-GPC-KSC
Litigation.
12
ORDER REGARDING
13 DEFENDANTS’ OBJECTION TO
THE MAGISTRATE JUDGE’S
14
FEBRUARY 26, 2021 DISCOVERY
15 ORDER
16
[ECF No. 183]
17
18 On March 12, 2021, Defendants filed a Motion on Objections to Magistrate Judge
19 Crawford’s February 26, 2021 Order. ECF No. 183. The objections have been fully
20 briefed. ECF Nos. 188, 191. The Court finds this matter suitable for disposition without
21 oral argument pursuant to Civil Local Rule 7.1(d)(1) and thus VACATES the hearing on
22 this matter currently scheduled for May 7, 2021. Civ. L.R. 7.1(d)(1). For the reasons
23 that follow, the Court OVERRULES Defendants’ objections but clarifies that Defendants
24 shall be permitted to challenge the proportionality of particular discovery requests in the
25 context of non-“threshold” discovery disputes related to those requests.
26 \ \ \
27 \ \ \
28 \ \ \
1 I. Background
2 This case is a consolidated putative securities fraud class action brought by
3 purchasers of BofI’s1 stock for violations of Sections 10(b) and 20(a) of the Securities
4 Exchange Act of 1934. On February 1, 2016, the Court appointed Houston Municipal
5 Employees Pension System as lead plaintiff (“Plaintiff”). ECF No. 23.
6 The operative pleading in this case is the Third Amended Complaint (the “TAC”).
7 ECF No. 136. On March 21, 2018, the Court granted Defendants’ motion to dismiss the
8 TAC with prejudice. ECF No. 156. The Court concluded that the TAC failed to identify
9 a corrective disclosure of the alleged misrepresentations with the particularity required by
10 Federal Rule of Civil Procedure (“Rule”) 9(b). Id. at 9.2 Specifically, the Court
11 determined that the two alleged corrective disclosures—the complaint in Erhart v. BofI
12 Holding, Inc., No. 3:15-cv-02287-BAS-NLS (S.D. Cal.), ECF No. 1 (the “Erhart
13 Complaint”) filed against BofI by Charles Matthew Erhart, a former BofI internal auditor,
14 and several articles by Seeking Alpha—could not establish loss causation. With respect
15 to the Erhart Complaint, the Court found that the complaint was at most a “partial”
16 corrective disclosure of Defendants’ misrepresentations about BofI’s internal controls
17 because the allegations, standing alone, did not confirm the fraud. Id. at 14. As to the
18 Seeking Alpha articles, the Court determined that Plaintiff did not plausibly allege a
19 corrective disclosure because all of the articles were based on public information. Id. at
20 17, 23. The Court also determined that certain statements by Defendants regarding
21 regulatory investigations were not actionable misstatements under the heightened
22 pleading standards of Rule 9(b) and the Private Securities Litigation Reform Act
23
24
25
26 1 “BofI is the holding company for BofI Federal Bank, a federally chartered savings association that
purportedly operates from its single location in San Diego.” TAC, ECF No. 136 at ¶ 28. The entities
27 now operate under a different corporate name, but the Court will continue to use “BofI” to refer to both
the holding company and its subsidiary BofI Federal Bank.
28
1 (“PSLRA”) and that the TAC failed to adequately allege corrective disclosures with
2 respect to this issue. Id. at 25–28.
3 Plaintiff appealed, and the Ninth Circuit reversed. In re BofI Holding, Inc. Sec.
4 Litig., 977 F.3d 781 (9th Cir. 2020). The Ninth Circuit agreed that the Seeking Alpha
5 articles could not constitute corrective disclosures, though for a slightly different reason,
6 but determined that Plaintiff adequately alleged the Erhart Complaint was a corrective
7 disclosure and that the loss causation element was satisfied. Id. at 786, 794, 797.
8 Additionally, the Ninth Circuit reviewed the Court’s determination that misstatements
9 alleged for the first time in the TAC related to regulatory investigations were not
10 actionable, and agreed that Plaintiff failed to plausibly allege falsity. Id. at 798. In a
11 footnote, the Ninth Circuit also noted that the Court had not addressed whether certain
12 other alleged misstatements were actionable and would need to make that determination
13 on remand, but added that “it appears that at least some of them are.” Id. at 787 n.1.
14 On December 11, 2020, following remand, the Court held an appeal mandate
15 hearing. ECF No. 168. At the hearing, Defense counsel inquired whether the Court
16 would entertain another round of litigation on the pleadings, in light of the Ninth
17 Circuit’s indication that the Court would need to determine whether certain alleged
18 misstatements were actionable on remand. ECF No. 170 at 6–7. Plaintiff maintained that
19 the alleged misstatements that had yet to be specifically addressed by the Court were
20 closely related to the issues already ruled upon, and thus that an additional round of
21 litigation on the pleadings was not required. Id. at 9. The Court directed the parties to
22 “meet and confer to identify what these additional statements are and whether or not they
23 come within the scope of statements or type of statements that this Court and the Ninth
24 Circuit has previously addressed” and stated that the Court would entertain a request to
25 file a further motion challenging the pleadings “to the extent that the defense takes a
26 position that it expands the universe of statements in a significant way.” Id. at 10.
27 Defendants have thus far not filed such a motion or request for leave to do so.
28
1 The Court referred the case to Magistrate Judge Crawford to proceed with
2 discovery. Plaintiff propounded its first set of requests for production (“RFPs”),
3 consisting of 47 requests. ECF No. 183-4. Defendants then served their responses,
4 which included a number of objections. ECF No. 183-5. After meeting and conferring
5 several times regarding the discovery disputes, the parties filed a Joint Motion for
6 Extension of Time to Raise Discovery Disputes (“Joint Motion”). ECF No. 181. In the
7 Joint Motion, the parties identified four threshold discovery issues for judicial
8 determination:
9 1. The relevant time period for discovery;
2. Whether Defendants must produce discovery from Erhart v. BofI Holding, Inc.,
10
No. 3:15-cv-02324-BAS-NLS;
11 3. Whether Defendants must produce information relating to underwriting
standards and credit quality; and
12
4. Whether Defendants must produce documents regarding all of the internal
13 control, compliance infrastructure, and risk management deficiencies alleged in the
TAC, or only documents regarding the purported violations of its internal controls,
14
compliance infrastructure and risk management alleged in the Erhart complaint and
15 reprinted in the TAC.
16 Id. at 2–3. The parties stated that “resolution of these threshold issues will allow them to
17 promptly clarify and resolve their remaining disputes” and requested that the Court
18 “extend the deadline for Plaintiff to move to compel on its Requests to fourteen (14) days
19 following the Court’s resolution of the threshold issues referenced above.” Id. at 3.
20 On February 26, 2021, the Magistrate Judge issued an Order Regarding Threshold
21 Discovery Issues and Denying as Moot Joint Motion for Extension of Time to Raise
22 Discovery Disputes. ECF No. 182 (“Discovery Order”). According to the Discovery
23 Order, “Counsel for the parties conferred with the Court’s staff regarding these
24 [discovery] issues on February 23, 2021, and, at the Court’s request, subsequently lodged
25 copies of the relevant discovery requests and responses thereto.” Id. at 1. In the
26 Discovery Order, the Magistrate Judge resolved the four threshold discovery issues
27 identified in the Joint Motion and clarified that “the foregoing rulings are without
28 prejudice to the parties’ ability to raise disputes regarding specific document requests that
1 are not otherwise addressed by this Order,” and set a deadline of March 26, 2021 for the
2 parties to raise any disputes regarding Plaintiff’s first set of RFPs. Id. at 5–6. With
3 respect to the first threshold issue, the Magistrate Judge concluded that the relevant time
4 period of discovery proposed by Plaintiff, from April 1, 2013 to June 30, 2016, was
5 appropriate given that facts beyond the quarters in which the alleged misleading
6 statements and corrective disclosures were made may be highly relevant to elements of
7 Plaintiff’s claims. Id. at 2. As to the second threshold issue, the Magistrate Judge agreed
8 with Defendants and found that defendants are not obligated to produce all discovery
9 from the Erhart action. Id. at 5. The Magistrate Judge agreed with Plaintiff on the third
10 and fourth threshold issues, finding that information related to credit underwriting
11 standards and credit quality were still relevant to the non-dismissed portions of the TAC
12 and that information relating to internal controls, compliance infrastructure, and risk
13 management deficiencies, even if not alleged in the Erhart Complaint and reprinted in the
14 TAC, still falls within the broad scope of discovery under Rule 26. Id. at 3–4.
15 On March 12, 2021, Defendants filed the instant objection to the Discovery
16 Order’s resolution of the first, third, and fourth threshold discovery issue. ECF No. 183.
17 On April 9, 2021, Plaintiff filed a response in opposition. ECF No. 189. On April 23,
18 2021, Defendants filed a reply.
19 II. Legal Standard
20 Under Rule 72(a), aggrieved parties may file objections to the rulings of a
21 magistrate judge in non-dispositive matters within fourteen days. Fed. R. Civ. P. 72(a).
22 District court review of magistrate judge orders on non-dispositive motions is limited. A
23 district court judge may reconsider a magistrate judge’s ruling on a non-dispositive
24 motion only “where it has been shown that the magistrate’s order is clearly erroneous or
25 contrary to law.” 28 U.S.C. § 636(b)(1)(A); see also Fed. R. Civ. P. 72(a); United States
26 v. Raddatz, 447 U.S. 667, 673 (1980); Osband v. Woodford, 290 F.3d 1036, 1041 (9th
27 Cir. 2002).
28
1 A motion relating to discovery, such as the one here, is considered non-dispositive.
2 See 28 U.S.C. § 636(b)(1)(A); see Bhan v. NME Hosps., Inc., 929 F.2d 1404, 1414 (9th
3 Cir. 1991) (noting that order on discovery sanctions in non-dispositive); Thomas E. Hoar,
4 Inc. v. Sara Lee Corp., 900 F.2d 522, 525 (2d Cir.), cert. denied, 498 U.S. 846, 111 S.Ct.
5 132, 112 L.Ed.2d 100 (1990). Non-dispositive decisions issued by magistrate judges
6 under 28 U.S.C. §636(b)(1)(A) are entitled to “great deference by the district court.” U.S.
7 v. Abonce-Barrera, 257 F.3d 959, 969 (9th Cir. 2002). As such and in making its
8 determination, the “reviewing court may not simply substitute its judgment for that of the
9 deciding court.” Grimes v. City & Cty. of San Francisco, 951 F.2d 236, 240–41 (9th Cir.
10 1991).
11 III. Discussion
12 In their objection, Defendants make two primary arguments: First, that the
13 Magistrate Judge’s resolution of the first, third, and fourth threshold discovery issues
14 relating to the scope of discovery was contrary to law under the standards set out in Rule
15 26; and second, that Defendants’ due process rights were violated by the Magistrate
16 Judge’s decision to issue the Discovery Order on the threshold issues without giving
17 Defendants an opportunity to be heard and without abiding by the procedures set out in
18 the Magistrate Judge’s Chambers Rules. The Court first addresses Defendants’ due
19 process arguments before considering whether the resolution of the threshold discovery
20 disputes in the Discovery Order was clearly erroneous or contrary to law.
21 a. Due Process
22 Defendants contend that the Discovery Order violated their due process rights
23 because the Magistrate Judge issued the order on the threshold disputes without motion
24 practice or argument. ECF No. 183-1 at 28. Specifically, Defendants argue that the
25 Magistrate Judge violated 28 U.S.C. § 636 because she did not “hear” the dispute when
26 deciding the issues without briefing or a hearing, and that she violated her own Chambers
27 Rules. Id. at 28–31. Plaintiff responds that no due process violation occurred as neither
28
1 Section 636 nor the Magistrate Judge’s Chambers Rules prohibited the procedure used
2 here. ECF No. 188 at 26–29.
3 “To satisfy procedural due process, a deprivation of life, liberty, or property must
4 be ‘preceded by notice and opportunity for hearing appropriate to the nature of the case.’”
5 In re Yochum, 89 F.3d 661, 672 (9th Cir. 1996) (quoting Cleveland Board of Education v.
6 Loudermill, 470 U.S. 532, 542 (1985)). This does not mean that every order issued sua
7 sponte deprives litigants of procedural due process. E.g., Omar v. Sea-Land Serv., Inc.,
8 813 F.2d 986, 991 (9th Cir. 1987) (noting that even sua sponte dismissal of claims may
9 be appropriate in certain circumstances). Defendants have not identified what particular
10 liberty or property interest they have been deprived by Magistrate Judge’s Discovery
11 Order or how severe of a deprivation this was. Indeed, the Discovery Order was “without
12 prejudice to the parties’ ability to raise disputes regarding specific document requests that
13 are not otherwise addressed by this Order,” so Defendants could seemingly still raise
14 specific concerns regarding the burdens or disproportionality of particular RFPs.
15 Discovery Order at 5–6.
16 Assuming that some process is due before a court decides “threshold” discovery
17 disputes without prejudice to future motion practice on specific disputes, Defendant has
18 not demonstrated that the process here was insufficient. “A ‘district court has wide
19 discretion in controlling discovery.’” Ollier v. Sweetwater Union High Sch. Dist., 768
20 F.3d 843, 862 (9th Cir. 2014). Further, courts have “broad discretion to manage
21 discovery and to control the course of litigation under Federal Rule of Civil Procedure
22 16.” Hunt v. Cty. of Orange, 672 F.3d 606, 616 (9th Cir. 2012); Jorgensen v. Cassiday,
23 320 F.3d 906, 913 (9th Cir. 2003) (noting that “[t]he district court is given broad
24 discretion in supervising the pretrial phase of litigation”). Courts regularly issue orders
25 pursuant to this case management authority, and the Court can locate no requirement that
26 a court must permit full briefing on every discovery issue before issuing an order. Contra
27 Fed. R. Civ. P. 37(a)(5), (c)(1), (f) (requiring opportunity to be heard before ordering
28 payment of attorney’s fees in discovery disputes). Especially because the parties’ joint
1 motion suggested that they sought the Magistrate Judge’s guidance on threshold issues
2 before potentially raising disputes as to particular RFPs through a discovery motion, see
3 ECF No. 181 at 3, the Court is not convinced that due process requires the opportunity to
4 engage in two full rounds of briefing on a single set of RFPs. Rather, it appears that the
5 Magistrate Judge acted within her discretion to expeditiously resolve the “threshold
6 issues” raised by the parties while reserving further briefing for discovery disputes arising
7 from specific requests.
8 Nor have Defendants demonstrated that the Discovery Order violates 28 U.S.C. §
9 636 or the Magistrate Judge’s Chambers Rules. Section 636 does not provide for any
10 particular procedure that must be followed by magistrate judges in handling pretrial
11 matters, and it is highly unlikely that by providing that “a judge may designate a
12 magistrate judge to hear and determine any pretrial matter pending before the court,”
13 Congress intended to require all magistrate judge orders on pretrial matters, no matter
14 how minor, be preceded by briefing and/or a hearing.3 28 U.S.C. § 636(b)(1)(A). And
15 although the Magistrate Judge’s Chambers Rules indicate that the Court will direct the
16 parties to either engage in an informal dispute resolution conference or file a joint motion
17 for determination of the discovery dispute after explaining the dispute to the law clerk,
18 the Chambers Rules also explicitly provide that they are intended as guidance and that
19 “the Court may vary these procedures as appropriate in any case.” Chambers’ Rules,
20 Civil Pretrial Procedures (Crawford, M.J.) at 1, 7. Defendants fail to adequately support
21 their argument that the Magistrate Judge’s decision to issue a decision on the threshold
22 issues after ascertaining the parties’ basic positions without soliciting further argument,
23
24
25
26 3 Nor is this a situation where the Magistrate Judge stepped outside her proper role of adjudicating a
discovery dispute. Cf. Chan v. Bay Area Air Quality Mgmt. Dist., 2 F. App’x 861, 866 (9th Cir. 2001)
27 (disapproving of magistrate judge’s “discovery management techniques” that required plaintiffs to
answer interrogatories, rejected plaintiffs’ responses to those interrogatories as insufficient, and then
28
1 even if this arguably varies from the Chambers Rules, rises to the level of a deprivation
2 of their due process rights.
3 The Court therefore OVERRULES Defendants’ objections on the basis that their
4 due process rights were violated by the Discovery Order.
5 b. Scope of Discovery
6 The Court now turns to whether the Discovery Order was contrary to law or clearly
7 erroneous.
8 The scope of discovery is defined by Rule 26(b), which provides that “parties may
9 obtain discovery regarding any nonprivileged matter that is relevant to any party’s claim
10 or defense and proportional to the needs of the case, considering the importance of the
11 issues at stake in the action, the amount in controversy, the parties’ relative access to
12 relevant information, the parties’ resources, the importance of the discovery in resolving
13 the issues, and whether the burden or expense of the proposed discovery outweighs its
14 likely benefit.” Fed. R. Civ. P. 26(b)(1). Although the relevance standard is broad, the
15 2015 amendment to Rule 26(b)(1) reinforces the need to ensure that all parties and the
16 court weigh relevance against these other factors. See Fed. R. Civ. P. 26 advisory
17 committee notes (2015 amendments). Materials need not be admissible evidence to be
18 discoverable. Fed. R. Civ. P. 26(b)(1).
19 “District courts have broad discretion in determining relevancy for discovery
20 purposes.” Surfvivor Media, Inc. v. Survivor Prods., 406 F.3d 625, 635 (9th Cir. 2005);
21 see also Cassirer v. Thyssen-Bornemisza Collection Found., 862 F.3d 951, 958 n.6 (9th
22 Cir. 2017) (noting trial court’s broad discretion to permit or deny discovery). Likewise,
23 under the clearly erroneous standard, such discretionary orders by a magistrate judge
24 “will be overturned only if the district court is left with the definite and firm conviction
25 that a mistake has been made.” Ctr. for Biological Diversity v. Fed. Highway Admin.,
26 290 F. Supp. 2d 1175, 1199–1200 (S.D. Cal. 2003) (quoting Weeks v. Samsung Heavy
27 Indus. Co., 126 F.3d 926, 943 (7th Cir. 1997)); Concrete Pipe & Prods. of Cal., Inc. v.
28 Constrs. Laborers Pension Trust, 508 U.S. 602, 622 (1993).
1 The Magistrate Judge’s order here differs from a typical discovery order because it
2 dealt only with the “threshold issues” that the parties represented would “allow them to
3 promptly clarify and resolve their remaining disputes” before resorting to a motion to
4 compel. ECF No. 181 at 3. As the Magistrate Judge stated, “[t]he parties describe the
5 above disputes as ‘threshold’ issues and indicate they continue to meet and confer
6 regarding specific RFPs and responses . . . The Court therefore clarifies that the foregoing
7 rulings are without prejudice to the parties’ ability to raise disputes regarding specific
8 document requests that are not otherwise addressed by this Order.” Discovery Order at
9 5–6. The Court therefore finds it inappropriate to reach arguments regarding particular
10 RFPs and will confine its review to the limited threshold issues that the Magistrate Judge
11 actually decided in the Discovery Order.
12 i. Time Period
13 Plaintiff’s Third Amended Complaint (“TAC”) – the operative pleading – alleges a
14 class period of September 4, 2013 to February 3, 2016. ECF No. 136 at 5, 93.
15 Meanwhile, the Erhart Complaint that was identified by the Ninth Circuit as a corrective
16 disclosure was filed on October 13, 2015. See In re BofI Sec. Litig., 977 F.3d at 788. The
17 Magistrate Judge determined that “the appropriate time period for discovery in this matter
18 is April 1, 2013 to June 30, 2016.” Discovery Ord at 3. Defendants object that the time
19 period sought by Plaintiff and approved of by the Magistrate Judge is overbroad and
20 would encompass communications that cannot be tied to actionable misstatements and
21 corrective disclosures, arguing that the discovery period should start on July 1, 2013, the
22 start of the fiscal quarter before the start of Plaintiff’s proposed class period, and end on
23 December 31, 2015, the end of the fiscal quarter after the filing of the Erhart Complaint.
24 ECF No. 183-1 at 16. Plaintiff responds that the time period approved of by the
25 Magistrate Judge is appropriate as it would lead to the discovery of material relevant to
26 the earliest alleged misstatements and communications regarding Defendants’ response to
27 the Erhart Complaint in the months that followed the filing. ECF No. 188 at 13.
28
1 The relevant time period for discovery must be determined on a case-by-case basis.
2 There is no rule that discovery be constrained to a particular time period beyond the
3 general standard under Rule 26(b)(1) requiring that discovery be relevant and
4 proportionate. Cf. Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340, 352 (1978) (“[I]t is
5 proper to deny discovery of matter that is relevant only . . . to events that occurred before
6 an applicable limitations period, unless the information sought is otherwise relevant to
7 issues in the case.”) (emphasis added). Likewise, although the Court notes that discovery
8 decisions are highly dependent on case-specific facts, other courts have determined that
9 documents created outside the class period may be relevant to securities claims. See In re
10 SunPower Sec. Litig., No. 09-CV-5473 RS JSC, 2012 WL 4343245, at *2 (N.D. Cal.
11 Sept. 20, 2012) (finding that some, but not all, of plaintiff’s discovery requests for
12 documents outside of the class period would be relevant to falsity, materiality, and
13 scienter, and ordering parties to meet and confer regarding particular requests); In re
14 Seagate Tech. II Sec. Litig., No. C-89-2493 (A)-VRW, 1993 WL 293008, at *1 (N.D.
15 Cal. June 10, 1993) (“Although plaintiffs’ subpoenas request documents beyond the
16 actual class period, courts have routinely cautioned against erecting artificial and
17 arbitrary restrictions on discovery.”).
18 Here, the Magistrate Judge found that “[f]acts outside of [the] arbitrary period
19 [proposed by Defendants] may be highly relevant to the issues of scienter, knowledge,
20 and falsity, among others.” Discovery Order at 2. Plaintiff gives several concrete
21 examples to illustrate why it believes discovery into the approved time period will lead to
22 relevant documents.
23 As to justification for the discovery of documents prepared or created five months
24 prior to the start of the proposed class period, Plaintiff notes that a Confidential Witness
25 (“CW”) alleged deficiencies in BofI’s internal controls stemming from conduct observed
26 no later than May 2013, when the CW left BofI. TAC ¶¶ 59, 70, 108, 118–21. At
27 minimum, the CW allegations relate to whether BofI’s internal controls were in fact
28 deficient and whether Defendants knew of those deficiencies when they made the alleged
1 misstatements. Such information would be relevant as to the falsity and scienter of the
2 alleged misstatements. Plaintiff also notes that the first alleged misrepresentation, BofI’s
3 2013 Form 10-K, covered the fiscal year ending June 30, 2013. Although discovery into
4 time periods further removed from the subject matter of the alleged misstatements would
5 be increasingly less relevant, the Court does not find that the Magistrate Judge erred in
6 permitting discovery to extend back to April of 2013 given that information and
7 communications relating to BofI’s practices from that time may well inform whether
8 statements made regarding that time period were knowingly false.
9 For the eight-months following the end of the proposed class period, Plaintiff
10 argues discovery is relevant because communications regarding the internal investigation
11 of the allegations in the Erhart complaint were ongoing after the complaint was actually
12 filed, including up through March 11, 2016, when the Audit Committee announced the
13 results of its independent investigation. ECF No. 188 at 15. Plaintiff also specifically
14 cites to a document produced in the Erhart litigation described as “2.6.16 Email from
15 Garrabrants to bank staff re Thoughts on Recent Market Movement and Media
16 Controversy” that was sent in February 2016. Id. at 14. The Court agrees that documents
17 created after the alleged fraud was revealed may be relevant to scienter and falsity. For
18 example, as suggested by Plaintiff, communications about the Erhart lawsuit may be
19 relevant to whether Defendants had known about the allegations in the Erhart Complaint
20 and whether they believed the allegations to be true. Information relating to the
21 independent investigation may likewise be relevant. Although the end date of June 30,
22 2016 is somewhat arbitrary, it is no more arbitrary than the December 31, 2015 date
23 proposed by Defendants, as the Court doubts that communications and other documents
24 related to the allegations in the Erhart Complaint halted upon the end of the fiscal
25 quarter. It is not unreasonable to presume that relevant communications continued to
26 occur several months after the filing of the Complaint and only a few months after the
27 Audit Committee’s announcement.
28
1 The Court therefore concludes that the Magistrate Judge did not err in finding that
2 documents from between April 1, 2013 to June 30, 2016 were potentially relevant.
3 ii. Loan Underwriting and Credit Quality
4 In the Discovery Order, the Magistrate Judge found that “the topics of
5 underwriting standards or credit quality are comfortably within Rule 26’s broad scope.”
6 Discovery Order at 4. Defendants argue that the misstatements regarding these topics are
7 not actionable because Plaintiff only pleaded that these statements were corrected by the
8 Seeking Alpha articles that the Ninth Circuit found insufficient. ECF No. 183-1 at 17–18.
9 Plaintiff argues that its requests related to BofI’s underwriting policies and practices are
10 supported by the allegations in the TAC and that the Ninth Circuit found that Erhart
11 Complaint could serve as a corrective disclosure for misstatements related to those topics.
12 ECF No. 188 at 15–16.
13 At the outset, the Court notes that courts may properly deny discovery into matters
14 that have been stricken or claims that have been dismissed from the complaint unless they
15 are otherwise relevant. Oppenheimer, 437 U.S. at 352; see also Tequila Centinela, S.A.
16 de C.V. v. Bacardi & Co., 242 F.R.D. 1, 8–9, 13 (D.D.C. 2007) (denying motion to
17 compel responses to discovery requests that could only be construed as relating to issues
18 that had been dismissed from the case); Andrich v. Ryan, No. CV-16-02734-PHX-GMS
19 (JZB), 2017 WL 11424013, at *8 (D. Ariz. Dec. 11, 2017) (“[W]hile discovery is
20 permitted with respect to claims that have been challenged, further discovery on a claim
21 that has been dismissed is not allowed.”). This view comports with the language of Rule
22 26(b)(1), which provides that material is discoverable only if relevant to a party’s claim
23 or defense. Fed. R. Civ. P. 26(b)(1). If a court has dismissed one of several claims in a
24 complaint, discovery into topics relevant only to that dismissed claim is no more
25 permissible than if it had been the sole claim raised and the case were dismissed outright.
26 The Court therefore agrees in principle with Defendants’ argument that Plaintiff
27 cannot base its discovery requests on allegations that have already been determined not
28 actionable or claims that have been determined to fail as a matter of law. Although the
1 relevance standard is broad, the proceedings thus far have been valuable in narrowing
2 down the universe of allegations at play. The relevance of BofI’s loan underwriting and
3 credit quality standards therefore depends upon whether those topics are relevant to a
4 claim or defense that has not been dismissed or struck. These topics could be
5 discoverable if the surviving portions of the TAC include a claim arising from
6 misstatements relating to loan underwriting and credit quality, or if information relating
7 to loan underwriting and credit quality is otherwise relevant to the remaining claims in
8 the TAC. The Magistrate Judge answered both of these implicit questions in the
9 affirmative, reasoning that the discovery standard is to be construed liberally and that
10 even if the Ninth Circuit’s opinion controls the scope of discovery, the Ninth Circuit
11 indicated that the Erhart Complaint was a “potential corrective disclosure” for
12 underwriting standards-related statements as well as internal controls-related statements.
13 Discovery Order at 4.
14 The Ninth Circuit’s opinion indicates that the Erhart Complaint could serve as a
15 corrective disclosure for the actionable misstatements related to BofI’s underwriting and
16 credit quality standards. First, as both parties agree, the Ninth Circuit affirmed the
17 Court’s finding that the TAC adequately alleges falsity and scienter with respect to
18 misstatements regarding these topics. In re BofI Sec. Litig., 977 F.3d at 789. The Ninth
19 Circuit then concluded that the allegations in the Erhart Complaint, “if true, render
20 BofI’s prior assertions about the strength of its underwriting standards, internal controls,
21 and compliance infrastructure false or misleading.” Id. at 791 (emphasis added). In
22 concluding, the Ninth Circuit held: “The shareholders have adequately pleaded a viable
23 claim under § 10(b) and Rule 10b-5 for the two categories of misstatements the district
24 court found actionable, with the Erhart lawsuit serving as a potential corrective
25 disclosure.” Id. at 798; see also id. at 786 –87 (defining two categories of misstatements
26 as “concerning (1) the bank’s underwriting standards and (2) its system of internal
27 controls and compliance infrastructure”). The opinion clearly did not intend to foreclose
28
1 a claim arising from both remaining categories of misstatements, even though it found the
2 Seeking Alpha articles failed to qualify as corrective disclosures.
3 An independent reading of the TAC confirms that Plaintiff has alleged that the
4 Erhart Complaint “reveal[ed] new facts that, taken as true, render some aspect of the
5 defendant’s prior statements false or misleading.” Id. at 790. Specifically, the TAC
6 states that the Erhart Complaint alleges that “BofI made loans to foreign nationals with
7 suspicious or unverifiable backgrounds, including criminals and politically exposed
8 persons and persons who failed to provide sufficient identifying information,” that “the
9 Bank was making substantial loans to foreign nationals including Politically Exposed
10 Persons (‘PEP’s’) in potential violation of BSA/Know Your Customer rules,” and that
11 BofI falsely represented that it had no accounts without Taxpayer Identification Numbers.
12 TAC ¶¶ 179–80, 187–88. Plaintiff’s TAC therefore includes specific facts indicating that
13 the Erhart Complaint revealed the truth behind some of the alleged misstatements in this
14 category, and that disclosure caused the stock price to decline. See In re BofI Sec. Litig.,
15 977 F.3d at 791–92. While the Court agrees that the TAC is not a model of clarity, the
16 Court cannot conclude that as a blanket matter, lending and credit quality are irrelevant to
17 the claims remaining after the Ninth Circuit’s decision.
18 As discussed further below, Defendants may have stronger arguments as to the
19 limited relevance and disproportionality of particular discovery requests as they relate to
20 this area of inquiry. However, the Discovery Order did not make any decisions regarding
21 particular discovery requests in resolving these threshold disputes. See Discovery Order
22 at 5–6. The Court will therefore clarify that even though information related to
23 underwriting standard and credit quality is broadly relevant, Defendants should have an
24 opportunity to challenge particular discovery requests on the basis of the proportionality
25 analysis demanded by Rule 26(b)(1). However, an argument that all documents related
26 to these topics are irrelevant is not the appropriate way to do so.
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1 Accordingly, based on the Ninth Circuit’s opinion and the TAC, the Court does not
2 find that the Magistrate Judge erred in determining that as a threshold matter, information
3 regarding loan underwriting and credit quality is discoverable.
4 iii. Internal Controls, Compliance Infrastructure, and Risk Management
5 The Magistrate Judge held that Plaintiff is “entitled to discovery regarding internal
6 controls, compliance infrastructure and risk management deficiencies irrespective of
7 whether specific instances of wrongdoing are alleged in both the Erhart complaint and
8 the TAC.” Discovery Order at 3. Defendants argue that “[d]iscovery concerning
9 undefined ‘internal controls’ should be treated as outside the proper scope of discovery
10 unless and until the Court holds that the newly added statements in the TAC regarding
11 ‘internal controls’ are actionable,” and that at most discovery should be limited to internal
12 controls regarding financial reporting. ECF No. 183-1 at 19. Plaintiff argues that the
13 Magistrate Judge correctly determined that discovery supporting their claims regarding
14 BofI’s systemic disregard for internal controls is not limited to the specific instances of
15 misconduct alleged in the Erhart Complaint, and that Defendants’ objection attempts to
16 turn the discovery dispute into an unauthorized pleadings challenge. ECF No. 188 at 18,
17 21.
18 In its order dismissing the TAC, the Court noted that the TAC “asserts new
19 allegations of misrepresentations that make the Erhart Complaint potentially relevant” to
20 the actionable misrepresentations regarding internal controls and compliance
21 infrastructure. ECF No. 156 at 11. The Court expressly did not decide whether the new
22 alleged misrepresentations were actionable, as the Ninth Circuit noted. Id. at 11 n.4; In
23 re BofI Sec. Litig., 977 F.3d at 787 n.1. At the appeal mandate hearing, the Court
24 considered the parties’ positions regarding the Ninth Circuit’s statement that “[o]n
25 remand, the district court will need to determine which of the remaining misstatements
26 are actionable.” Id. The Court then directed the parties to meet and confer on the issue
27 and stated that, upon meeting and conferring,
28
1 to the extent that the defense takes a position that it expands the universe of
statements in a significant way, then I would entertain a request to file a further
2
motion. But at this point, without further workup by the parties, I am not prepared
3 to grant license or carte blanche to go ahead and file additional motions.
4 ECF No. 170 at 10. Thus far, Defendants have not sought leave to file a further motion
5 related to the pleadings.
6 Defendants argue that Plaintiff must establish that internal controls statements are
7 actionable as “a prerequisite before any discovery, let alone expansive discovery, should
8 be allowed.” ECF No. 183-1 at 19. There are certain circumstances in which discovery
9 may not proceed until the court resolves pleadings challenges. For example, the PSLRA
10 provides that “all discovery and other proceedings shall be stayed during the pendency of
11 any motion to dismiss, unless the court finds, upon the motion of any party, that
12 particularized discovery is necessary to preserve evidence or to prevent undue prejudice
13 to that party.” 15 U.S.C. § 77z-1(b)(1); see also Chadbourne & Parke LLP v. Troice, 571
14 U.S. 377, 383 (2014); In re First Bancorp Derivative Litigation, 407 F. Supp. 2d 585,
15 587 (S.D.N.Y. 2006) (granting discretionary stay of discovery in state law shareholder
16 derivative action that was parallel to federal securities actions).
17 However, Defendants do not rely on any such statutory authority—or other legal
18 authority—to support their argument that discovery cannot be allowed into topics
19 addressed by the misstatements newly added in the TAC until a court determines that
20 they are actionable in the context of this discovery dispute. But beyond the absence of
21 legal support, there are several reasons that Defendants’ insistence that this Court
22 adjudicate whether the misstatements are actionable when ruling on this objection is
23 improper. First, the threshold issue that was presented to the Magistrate Judge, and that
24 the Magistrate Judge decided in the Discovery Order, was “[w]hether Defendants must
25 produce documents regarding all of the internal control, compliance infrastructure, and
26 risk management deficiencies alleged in the TAC, or only documents regarding the
27 purported violations of its internal controls, compliance infrastructure and risk
28 management alleged in the Erhart complaint and reprinted in the TAC.” ECF No. 181 at
1 2–3. As the Magistrate Judge noted, addressing substantive pleading issues was not
2 required to resolve the threshold discovery dispute raised to the Court. Discovery Order
3 at 4. Additionally, at the appeal mandate hearing, the Court did not suggest it would
4 appropriate for Defendants to attempt to resolve merits-related questions in the context of
5 a discovery dispute. Rather, the Court stated that it would entertain a request to file a
6 further motion to challenge the pleadings if Defendants believed the additional
7 misstatements greatly expanded the potential scope of discovery.4 ECF No. 170 at 10;
8 see also id. at 8 (noting that with respect to the misstatements that have not yet been
9 deemed actionable, “the question would be whether or not that should be taken up under
10 the guise or through a motion to dismiss, or motion for judgment on the pleadings, or a
11 motion for summary judgment at some later point in time”).
12 Defendants argue that it is impossible to know whether discovery into these
13 matters is relevant and proportional until the Court rules on this issue. But this would be
14 equally true in any case in which the defendant declines to file a motion to dismiss or
15 other pleadings challenge. There is no reason to transform the discovery process into
16 another forum to test the sufficiency the pleadings. Until claims arising from the not-yet-
17 ruled-actionable misstatements are dismissed or struck upon proper motion, information
18 relevant to those misstatements “is relevant to [a] party’s claim,” and therefore falls
19 within the scope of discovery if non-privileged and proportional to the needs of the case.
20 Fed. R. Civ. P. 26(b)(1). The Court therefore concludes that there is no basis to reach
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4 Defendants state that “defendants informed the Court and lead plaintiff that defendants would likely be
26 raising these issues to Magistrate Judge Crawford as part of the discovery process” and “[t]he Court did
not disagree with defendants’ statement or inform the parties that this plan was improper.” ECF No. 191
27 at 7. However, while the Court directed the parties to begin discovery, the Court never indicated that
raising a challenge to the sufficiency of the pleadings through a discovery dispute was appropriate. ECF
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1 Defendants’ arguments that the TAC’s newly added alleged misstatements are not
2 actionable in ruling on the current objection.5
3 Defendants otherwise have not shown that the Discovery Order’s decision on the
4 fourth threshold issue was clearly erroneous or contrary to law. Defendants contend that
5 discovery into “internal controls” should be defined and limited to internal controls over
6 financial reporting, as defined by Section 404 of the Sarbanes-Oxley Act of 2002. ECF
7 No. 183-1 at 22. At this stage, in reviewing the threshold issue ruled upon by the
8 Magistrate Judge, the Court finds no reason to define the scope of discovery by the
9 Sarbanes-Oxley Act or the SEC rather than by what is relevant to the allegations in the
10 TAC. As detailed below, should Defendants believe any particular discovery request
11 related to “internal controls” is disproportionately burdensome compared to its relevance
12 to the non-dismissed claims in the TAC, that issue can be addressed at the stage of a
13 motion to compel or a motion for protective order, not by preemptively limiting all
14 discovery into internal controls to a definition not adopted in the TAC.
15 Accordingly, the Court finds that the Magistrate Judge did not clearly err or act
16 contrary to law in determining that discovery into internal controls is not limited only to
17 allegations from the Erhart Complaint.
18 iv. Burden and Proportionality
19 Defendants additionally object that the Magistrate Judge did not consider the Rule
20 26 proportionality standard in making her determination on the threshold issues, and thus
21 that the Discovery Order was contrary to law. ECF No. 183-1 at 23–24. Plaintiff
22 contends that the Magistrate Judge’s direction to the parties to meet and confer regarding
23 appropriate search terms appropriately addressed Defendants’ proportionality concerns at
24 the stage of these threshold disputes. ECF No. 188 at 24.
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5 Defendants’ argument that they relied on Plaintiff’s assertion that a motion to strike would be improper
27 is unavailing. ECF No. 191 at 7. While the Court appreciates the parties’ efforts to come to a joint
resolution of their issues, Defendants could have sought leave to file a motion to strike even if Plaintiff
28
1 As noted above, Rule 26(b)(1) provides that the scope of discovery is limited to
2 “any nonprivileged matter that is relevant to any party’s claim or defense and
3 proportional to the needs of the case, considering the importance of the issues at stake in
4 the action, the amount in controversy, the parties’ relative access to relevant information,
5 the parties’ resources, the importance of the discovery in resolving the issues, and
6 whether the burden or expense of the proposed discovery outweighs its likely benefit.”
7 Fed. R. Civ. P. 26(b)(1). “[A] party claiming that discovery imposes an undue burden
8 must ‘allege specific facts which indicate the nature and extent of the burden, usually by
9 affidavit or other reliable evidence.’” Nationstar Mortg., LLC v. Flamingo Trails No. 7
10 Landscape Maint. Ass’n, 316 F.R.D. 327, 334 (D. Nev. 2016) (internal citation and
11 quotation marks omitted). “The court’s responsibility, using all the information provided
12 by the parties, is to consider [the burden and importance of the requested discovery] and
13 all the other factors in reaching a case-specific determination of the appropriate scope of
14 discovery.” Fed. R. Civ. P. 26 advisory committee notes (2015 amendments).
15 The Court agrees with Defendants that the Discovery Order does not address the
16 proportionality factors set out in Rule 26(b)(1). However, the parties framed the first
17 dispute in their joint motion as a threshold issue regarding “[t]he relevant time period for
18 discovery,” ECF No. 181 at 2, and the Court fails to see how the Magistrate Judge erred
19 in failing to explicitly answer the separate question of whether Plaintiff’s RFPs were
20 proportional with respect to this threshold dispute. Likewise, the Court does not interpret
21 the Discovery Order as making a final determination that all discovery into underwriting
22 standards and credit quality or internal controls is proportional to the needs of the case.
23 Given that the Discovery Order was “without prejudice to the parties’ ability to raise
24 disputes regarding specific document requests that are not otherwise addressed by [the]
25 order,” Discovery Order at 5–6, it does not appear that Defendants have been prevented
26 from raising their proportionality concerns with respect to specific RFPs.
27 In any event, Defendants have failed to demonstrate that as a general matter, all
28 discovery related to the given time period and topics raised in the objections is
1 disproportionate to the needs of the case such that the Magistrate Judge erred in deciding
2 the threshold issues. Boilerplate assertions of burden or expense do not suffice. See Fed.
3 R. Civ. P. 26 advisory committee notes (2015 amendments). Defendants state that the
4 additional months included in the relevant time period for discovery “imposes a
5 significant burden on defendants, while at the same time offers a low possibility that the
6 search will result in relevant information” and that discovery into internal controls
7 “imposes a substantial burden,” ECF No. 183-1 at 25–26, which are the type of
8 generalized assertions of burden that are insufficient to limit the scope of discovery.
9 Although Defendants specifically highlight the substantial burdens of producing
10 origination and post-origination documents for the almost 13,000 loans originated during
11 the time period, ECF No. 183-1 at 25–26 (citing Declaration of Tom Constantine ¶¶ 11,
12 12, 16, 19), this information does not show that all discovery requests related to loan
13 underwriting and credit quality or the relevant time period would be overly burdensome.
14 Thus, although Defendants do provide some evidence supporting their assertion of
15 burden, it is an insufficient basis upon which the Court can make a determination that all
16 discovery into these relevant topics would be burdensome such that the importance of the
17 discovery is outweighed under Rule 26(b)(1) across the board. Indeed, the
18 proportionality calculus will likely differ significantly depending on the particular
19 discovery request at issue.
20 The Court therefore finds it premature to determine, as a threshold issue, that any
21 discovery into the relevant time period objected to by Defendants, loan underwriting and
22 credit quality, and internal controls would be disproportionate to the needs of the case.
23 However, the Court clarifies that Defendants shall have the opportunity to challenge
24 specific discovery requests on the basis of proportionality.
25 The Court therefore OVERRULES Defendants’ objections to the Magistrate
26 Judge’s resolution of the threshold discovery issues.
27 \ \ \
28 \ \ \
1 IV. Conclusion
2 || For the reasons set forth above, the Court hereby:
3 1. VACATES the hearing on this matter; and
4 2. OVERRULES Defendants’ Objections.
5 IT IS SO ORDERED.
6 || Dated: May 6, 2021 2 apho Ok
7 Hon. Gonzalo P. Curiel
United States District Judge
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