1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA 10 11 Case No.: 3:15-cv-02324-GPC-KSC In re BofI HOLDING, INC. SECURITIES
12 LITIGATION ORDER REGARDING THRESHOLD 13 DISCOVERY ISSUES AND DENYING AS MOOT JOINT 14 MOTION FOR EXTENSION OF 15 TIME TO RAISE DISCOVERY DISPUTES 16
17 [Doc. No. 181]
19 Before the Court is the parties’ Joint Motion for Extension of Time to Raise 20 Discovery Disputes (“Joint Motion” or “Jt. Mot.”). Doc. No. 181. In the Joint Motion, the 21 parties request the Court’s guidance on four “threshold” discovery issues. Jt. Mot. at 2. 22 The parties “agree that resolution of these threshold issues will allow them to promptly 23 clarify and resolve their remaining disputes” regarding defendants’ responses to plaintiffs’ 24 First Set of Requests for Production (the “RFPs”). Id. at 3. Counsel for the parties 25 conferred with the Court’s staff regarding these issues on February 23, 2021, and, at the 26 Court’s request, subsequently lodged copies of the relevant discovery requests and 27 responses thereto. Having considered the discovery requests, the arguments of counsel, 28 and the relevant law, the Court issues the following Order. 1 1. The Relevant Time Period for Discovery (Threshold Issue 1) 2 The parties’ first dispute concerns the relevant time period for discovery. Jt. Mot. at 3 2. Plaintiffs’ Third Amended Complaint (“TAC”) – the operative pleading – purports to 4 state claims on behalf of a class of investors who purchased BofI securities during the 5 period September 4, 2013 to February 3, 2016. Doc. No. 136 at 5, 93. Plaintiffs’ RFPs 6 seek documents for the period July 1, 2012 through September 30, 2016, but the parties 7 report that through conferrals this has been narrowed to April 1, 2013 to June 30, 2016. 8 Defendants seek a further limitation, proposing to produce documents from the period July 9 1, 2013 to December 31, 2015. Defendants’ position is premised on their understanding 10 that the Ninth Circuit’s opinion reversing dismissal of the TAC effectively truncated the 11 class period at October 13, 2015, the date on which the whistleblower complaint in Erhart 12 v. BofI Holding, Inc. (“Erhart”), which plaintiffs allege as a corrective disclosure, was 13 filed. See In re BofI Holding, Inc. Sec. Litig., 977 F.3d 781 (9th Cir. 2020). 14 As an initial matter, the Court has carefully reviewed the Ninth Circuit’s opinion and 15 finds no pronouncement therein on the appropriate length of the class period. Plaintiffs’ 16 motion for class certification has not yet been filed, let alone ruled upon. The impact of 17 the Ninth Circuit’s opinion, and whether it forecloses a class period that extends beyond 18 the filing of the Erhart action, are matters to be adjudicated by the District Court at a later 19 point in the litigation. The Court declines defendants’ invitation to preempt those rulings 20 in the context of a discovery dispute. 21 The Court further rejects defendants’ argument that plaintiffs are entitled to 22 discovery only for the quarters in which the alleged misleading statements and corrective 23 disclosures were made. Facts outside of this arbitrary period may be highly relevant to the 24 issues of scienter, knowledge, and falsity, among others. See, e.g., In re Toyota Motor 25 Corp. Sec. Litig., No. CV 10–922 DSF (AJWx), 2012 WL 3791716, at *4 (C.D. Cal. Mar. 26 12, 2012) (noting that “[i]t is beyond dispute that discovery is not limited to the class 27 period” and collecting cases). Plaintiffs have made a good-faith effort to narrow the 28 temporal scope of their RFPs, and a discovery period of approximately five months before, 1 and five months after, a three-year class period is not unreasonable. If defendants’ assertion 2 that there is unlikely to be any material information pre- or post-dating the class period is 3 true, that will be reflected in the discovery produced. Accordingly, the Court finds that the 4 appropriate time period for discovery in this matter is April 1, 2013 to June 30, 2016. 5 2. Topics for Discovery (Threshold Issues 3 and 4) 6 Defendants also object to producing documents and information related to the topics 7 of underwriting standards and credit quality in toto, and regarding internal controls, 8 compliance infrastructure, and risk management deficiencies to the extent they do not relate 9 to acts “alleged in the Erhart complaint and reprinted in the TAC.” Jt. Mot. at 3. 10 Defendants assert that following the Ninth Circuit’s disposition, the Erhart complaint is 11 the sole corrective disclosure and that only those misstatements and fraudulent acts that it 12 revealed to the market are at issue in the case. Defendants further argue that the scope of 13 discovery must be limited to the allegations made in the TAC, to prevent plaintiffs from 14 conducting a wide-ranging examination of defendants’ business in the hopes of revealing 15 other wrongdoing unrelated to the alleged fraud. 16 The Court disagrees. “Discovery is not limited to the issues raised only in the 17 pleadings” but is “‘construed broadly’” to allow the parties to “define and clarify the 18 issues.” Hampton v. City of San Diego, 147 F.R.D. 227, 229 (S.D. Cal. 1993) (citing 19 Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340, 351 (1978)); see also Shaw v. Experian 20 Info. Sols., Inc., 306 F.R.D. 293, 296 (S.D. Cal. 2015) (“There is no requirement that the 21 information sought directly relate to a particular issue in the case.”). Plaintiffs have alleged 22 that defendants engaged in a wrongful course of risky lending practices and disregard of 23 the Company’s internal controls. See generally Doc. No. 136. As such, the Court finds 24 that plaintiffs are entitled to discovery regarding internal controls, compliance 25 infrastructure and risk management deficiencies irrespective of whether specific instances 26 of wrongdoing are alleged in both the Erhart complaint and the TAC. See Heartland 27 Payment Sys., Inc. v. Mercury Payment Sys. LLC, No. 14-cv-00437-CW (MEJ); 2015 WL 28 6459690, at *2 (N.D. Cal. Oct. 27, 2015) (declining to limit the scope of discovery based 1 on premature loss causation arguments). Furthermore, given plaintiffs’ allegations, the 2 Court finds the topics of underwriting standards or credit quality are comfortably within 3 Rule 26’s broad scope. See Lofton v. Verizon Wireless (VAW), 308 F.R.D. 276, 280 (N.D. 4 Cal. 2015) (noting that relevance is “construed liberally” and that discovery should be 5 permitted “unless the information sought has no conceivable bearing on the case”) (citation 6 omitted). 7 As before, the Court declines to treat the parties’ discovery dispute as an opportunity 8 to pronounce upon the merits of plaintiffs’ claims. As the District Court explained at the 9 December 11, 2020 hearing, “the plaintiffs have survived the challenges to earlier operative 10 pleadings. We know this case is going to move forward … [even if] [w]e may not be sure 11 with respect to what the entire universe of allegations are.” Doc. No. 170 at 8. Further, 12 even assuming that the Ninth Circuit’s opinion controls the scope of discovery here, that 13 would not change the Court’s disposition. The Court observes that the Ninth Circuit held 14 the Erhart complaint was “a potential corrective disclosure” as to both the underwriting- 15 standards statements and the internal-controls statements. See In re BofI Sec. Litig., 977 16 F.3d at 798; see also id. at 786-87 (describing the “two categories of misstatements”); 793 17 (finding that “Erhart’s lawsuit disclosed facts that, if true, rendered false BofI’s prior 18 statements about underwriting standards, internal controls, and compliance 19 infrastructure”).
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1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA 10 11 Case No.: 3:15-cv-02324-GPC-KSC In re BofI HOLDING, INC. SECURITIES
12 LITIGATION ORDER REGARDING THRESHOLD 13 DISCOVERY ISSUES AND DENYING AS MOOT JOINT 14 MOTION FOR EXTENSION OF 15 TIME TO RAISE DISCOVERY DISPUTES 16
17 [Doc. No. 181]
19 Before the Court is the parties’ Joint Motion for Extension of Time to Raise 20 Discovery Disputes (“Joint Motion” or “Jt. Mot.”). Doc. No. 181. In the Joint Motion, the 21 parties request the Court’s guidance on four “threshold” discovery issues. Jt. Mot. at 2. 22 The parties “agree that resolution of these threshold issues will allow them to promptly 23 clarify and resolve their remaining disputes” regarding defendants’ responses to plaintiffs’ 24 First Set of Requests for Production (the “RFPs”). Id. at 3. Counsel for the parties 25 conferred with the Court’s staff regarding these issues on February 23, 2021, and, at the 26 Court’s request, subsequently lodged copies of the relevant discovery requests and 27 responses thereto. Having considered the discovery requests, the arguments of counsel, 28 and the relevant law, the Court issues the following Order. 1 1. The Relevant Time Period for Discovery (Threshold Issue 1) 2 The parties’ first dispute concerns the relevant time period for discovery. Jt. Mot. at 3 2. Plaintiffs’ Third Amended Complaint (“TAC”) – the operative pleading – purports to 4 state claims on behalf of a class of investors who purchased BofI securities during the 5 period September 4, 2013 to February 3, 2016. Doc. No. 136 at 5, 93. Plaintiffs’ RFPs 6 seek documents for the period July 1, 2012 through September 30, 2016, but the parties 7 report that through conferrals this has been narrowed to April 1, 2013 to June 30, 2016. 8 Defendants seek a further limitation, proposing to produce documents from the period July 9 1, 2013 to December 31, 2015. Defendants’ position is premised on their understanding 10 that the Ninth Circuit’s opinion reversing dismissal of the TAC effectively truncated the 11 class period at October 13, 2015, the date on which the whistleblower complaint in Erhart 12 v. BofI Holding, Inc. (“Erhart”), which plaintiffs allege as a corrective disclosure, was 13 filed. See In re BofI Holding, Inc. Sec. Litig., 977 F.3d 781 (9th Cir. 2020). 14 As an initial matter, the Court has carefully reviewed the Ninth Circuit’s opinion and 15 finds no pronouncement therein on the appropriate length of the class period. Plaintiffs’ 16 motion for class certification has not yet been filed, let alone ruled upon. The impact of 17 the Ninth Circuit’s opinion, and whether it forecloses a class period that extends beyond 18 the filing of the Erhart action, are matters to be adjudicated by the District Court at a later 19 point in the litigation. The Court declines defendants’ invitation to preempt those rulings 20 in the context of a discovery dispute. 21 The Court further rejects defendants’ argument that plaintiffs are entitled to 22 discovery only for the quarters in which the alleged misleading statements and corrective 23 disclosures were made. Facts outside of this arbitrary period may be highly relevant to the 24 issues of scienter, knowledge, and falsity, among others. See, e.g., In re Toyota Motor 25 Corp. Sec. Litig., No. CV 10–922 DSF (AJWx), 2012 WL 3791716, at *4 (C.D. Cal. Mar. 26 12, 2012) (noting that “[i]t is beyond dispute that discovery is not limited to the class 27 period” and collecting cases). Plaintiffs have made a good-faith effort to narrow the 28 temporal scope of their RFPs, and a discovery period of approximately five months before, 1 and five months after, a three-year class period is not unreasonable. If defendants’ assertion 2 that there is unlikely to be any material information pre- or post-dating the class period is 3 true, that will be reflected in the discovery produced. Accordingly, the Court finds that the 4 appropriate time period for discovery in this matter is April 1, 2013 to June 30, 2016. 5 2. Topics for Discovery (Threshold Issues 3 and 4) 6 Defendants also object to producing documents and information related to the topics 7 of underwriting standards and credit quality in toto, and regarding internal controls, 8 compliance infrastructure, and risk management deficiencies to the extent they do not relate 9 to acts “alleged in the Erhart complaint and reprinted in the TAC.” Jt. Mot. at 3. 10 Defendants assert that following the Ninth Circuit’s disposition, the Erhart complaint is 11 the sole corrective disclosure and that only those misstatements and fraudulent acts that it 12 revealed to the market are at issue in the case. Defendants further argue that the scope of 13 discovery must be limited to the allegations made in the TAC, to prevent plaintiffs from 14 conducting a wide-ranging examination of defendants’ business in the hopes of revealing 15 other wrongdoing unrelated to the alleged fraud. 16 The Court disagrees. “Discovery is not limited to the issues raised only in the 17 pleadings” but is “‘construed broadly’” to allow the parties to “define and clarify the 18 issues.” Hampton v. City of San Diego, 147 F.R.D. 227, 229 (S.D. Cal. 1993) (citing 19 Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340, 351 (1978)); see also Shaw v. Experian 20 Info. Sols., Inc., 306 F.R.D. 293, 296 (S.D. Cal. 2015) (“There is no requirement that the 21 information sought directly relate to a particular issue in the case.”). Plaintiffs have alleged 22 that defendants engaged in a wrongful course of risky lending practices and disregard of 23 the Company’s internal controls. See generally Doc. No. 136. As such, the Court finds 24 that plaintiffs are entitled to discovery regarding internal controls, compliance 25 infrastructure and risk management deficiencies irrespective of whether specific instances 26 of wrongdoing are alleged in both the Erhart complaint and the TAC. See Heartland 27 Payment Sys., Inc. v. Mercury Payment Sys. LLC, No. 14-cv-00437-CW (MEJ); 2015 WL 28 6459690, at *2 (N.D. Cal. Oct. 27, 2015) (declining to limit the scope of discovery based 1 on premature loss causation arguments). Furthermore, given plaintiffs’ allegations, the 2 Court finds the topics of underwriting standards or credit quality are comfortably within 3 Rule 26’s broad scope. See Lofton v. Verizon Wireless (VAW), 308 F.R.D. 276, 280 (N.D. 4 Cal. 2015) (noting that relevance is “construed liberally” and that discovery should be 5 permitted “unless the information sought has no conceivable bearing on the case”) (citation 6 omitted). 7 As before, the Court declines to treat the parties’ discovery dispute as an opportunity 8 to pronounce upon the merits of plaintiffs’ claims. As the District Court explained at the 9 December 11, 2020 hearing, “the plaintiffs have survived the challenges to earlier operative 10 pleadings. We know this case is going to move forward … [even if] [w]e may not be sure 11 with respect to what the entire universe of allegations are.” Doc. No. 170 at 8. Further, 12 even assuming that the Ninth Circuit’s opinion controls the scope of discovery here, that 13 would not change the Court’s disposition. The Court observes that the Ninth Circuit held 14 the Erhart complaint was “a potential corrective disclosure” as to both the underwriting- 15 standards statements and the internal-controls statements. See In re BofI Sec. Litig., 977 16 F.3d at 798; see also id. at 786-87 (describing the “two categories of misstatements”); 793 17 (finding that “Erhart’s lawsuit disclosed facts that, if true, rendered false BofI’s prior 18 statements about underwriting standards, internal controls, and compliance 19 infrastructure”). The Ninth Circuit also explained that corrective disclosures “need not 20 precisely mirror the earlier misrepresentation,” and encouraged a “flexible approach to 21 evaluating corrective disclosures.” Id. at 790, 795; see also id. at 791 n.3. 22 For these reasons, the Court finds the Erhart complaint does not define the 23 boundaries of discovery in this matter. Defendants shall produce information concerning 24 underwriting standards, credit quality, internal controls, compliance infrastructure, and risk 25 management deficiencies as requested in plaintiffs’ RFPs. Defendants’ concerns regarding 26 the overbreadth of these topics may be addressed through the use of carefully crafted search 27 terms and the selection of appropriate custodians. 28 /// 1 3. Discovery from Erhart v. BofI Holding, Inc. (Threshold Issue 2) 2 Plaintiffs’ RFPs No. 1 and 2 seek the production of all documents produced by 3 parties and nonparties in the Erhart action, as well as copies of all deposition transcripts 4 and videotapes from that matter. Defendants object on the basis that not all of the 5 information produced in discovery in Erhart is relevant to this case, and also state that the 6 Erhart discovery was produced pursuant to a protective order which prohibits the sharing 7 of information outside of the litigation. 8 Defendants’ objections are well taken. The “scope of discovery,” while broad, “is 9 not unlimited.” Cabell v. Zorro Prods., 294 F.R.D. 604, 607 (W.D. Wash. 2013). The 10 Court finds plaintiffs have not met their burden of demonstrating the relevance of all 11 discovery exchanged in Erhart to this case. See Hancock v. Aetna Life Ins. Co., 321 F.R.D. 12 383, 390 (W.D. Wash. 2017) (noting that party seeking discovery “bears the burden” of 13 demonstrating relevance). To the extent documents produced in Erhart are relevant, they 14 would presumably be responsive to one of plaintiffs’ 45 other document requests. And, 15 since plaintiffs acknowledge that the Erhart discovery is not intended to supplant their 16 ability to request documents or depose witnesses in this matter, the Court is also not 17 persuaded that the wholesale production of discovery from Erhart would achieve any 18 efficiency or conserve the parties’ resources. 19 For these reasons, the Court finds defendants are not obligated to produce discovery 20 from the Erhart action. However, where documents produced by defendants in Erhart are 21 otherwise responsive to plaintiffs’ RFPs, the Court sees no reason those documents cannot 22 be produced expeditiously. Defendants shall produce such documents to plaintiffs within 23 30 days of the date of this Order. 24 4. Deadline to Raise Further Disputes 25 The parties describe the above disputes as “threshold” issues and indicate they 26 continue to meet and confer regarding specific RFPs and responses. Jt. Mot. at 3. The 27 Court therefore clarifies that the foregoing rulings are without prejudice to the parties’ 28 ability to raise disputes regarding specific document requests that are not otherwise 1 || addressed by this Order. The parties are hereby ordered to continue to meet and confer in 2 || good faith. Any dispute regarding plaintiffs’ First Set of RFPs and defendants’ responses 3 ||thereto that is not resolved through further good faith conferral, including any disputes 4 ||regarding search terms, custodians or other parameters of defendants’ search for and 5 || collection of relevant ESI, must be brought to the Court’s attention no later than March 6 ||26, 2021. The parties are instructed to review and comply with the undersigned’s 7 || Chambers’ Rules with respect to raising any such further disputes. The Joint Motion for 8 Extension of Time [Doc. No. 181] is DENIED AS MOOT. 9 IT IS SO ORDERED. 10 ||Dated: February 26, 2021 A y /; ) 11 YUL LA Hori. Karen S. Crawford United States Magistrate Judge 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28