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(The article featured below is a selection from Federal Securities Law Reporter, which is available to subscribers of that publication.)

7th Circuit Panel Reverses Stay of Request to Inspect Public Documents

A 7th Circuit panel reversed a district court judgment granting a stay of discovery. Bond owners had filed a class action against a Wisconsin city that had issued the bonds after it had defaulted. The owners alleged that the city had violated the federal securities laws by failing to disclose material information about the project that the bonds were intended to finance. The named plaintiff, a bank, obtained an order in state court commanding the city to comply with an earlier request under Wisconsin's public record law to inspect specified records concerning the project. The city then asked the district court for and was granted a stay under Exchange Act Section 21D(b)(3)(D).

The question on appeal was whether Section 21D(b)(3)(D) authorizes a district court "to enjoin a private securities plaintiff from gaining access to records that a state's public-records law entitles members of the public to see and copy at their own expense." Judge Posner, writing for the panel, first observed that discovery orders are generally not appealable in federal courts, but there are exceptions, such as the collateral-order doctrine, which allows an appeal to resolve an important issue that is separate from the action's merits. Judge Posner also suggested, as argued by the bank in this case, an additional exception for the appeal of discovery orders that have the effect of preempting state law.

The panel concluded that the inspection of public records pursuant to a state statute is not discovery and that the stay of the inspection was an injunction and therefore appealable. Judge Posner observed that "much of the information-gathering that litigants do is not "discovery" as the term is understood in the law," giving as an example the investigation of corporate records and SEC filings that are freely accessible online. "Case law," he continued, "uniformly refuses to define requests for access to federal or state public records under public records laws...as discovery demands, even when as in this case the request is made for the purpose of obtaining information to aid in a litigation and is worded much like a discovery demand." Further, settlement extortion, or the use of discovery to impose costs on defendants and force a settlement, was not an issue because, under Wisconsin law, the costs associated with producing the public records are charged to the person making the request. It was happenstance, stated the judge, that the records' custodian and the defendant were the same, and the city should not be allowed to use its "dual status" to gain an advantage.

American Bank v. City of Menasha (7thCir) is reported at ¶95,965.