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Court of Chancery Holds that Private Securities Litigation Reform Act and Securities Litigation Uniform Standards Act do not Preempt Books and Records Action

Romero v. Career Educ. Corp., C.A. No. 793-N, 2005 WL 1798042 (Del. Ch. July 19, 2005). Plaintiff shareholder brought an action against Career Education Corporation ("CEC"), a Delaware corporation, seeking to compel inspection of certain books and records. CEC moved to dismiss the complaint or to stay. Plaintiff, the beneficial owner of 100 shares of CEC, a corporation providing private postsecondary education, initially served a demand upon CEC to inspect certain books and records and stating that the purpose for her demand was to investigate possible breaches of fiduciary duties by CEC's board of directors and executive officers. In response, CEC produced 152 pages of documents--many of which had been publicly filed--so plaintiff filed an action challenging the completeness of CEC's production. The court found that plaintiff sufficiently alleged a proper purpose, as she sought books and records relating to the falsification of enrollment and other records and failure to investigate misconduct--allegations corroborated by the fact that CEC's own former employees filed suit alleging that the company conferred degrees on students who did not meet the requirements. CEC also argued that plaintiff's demand should be dismissed or stayed because it interfered with the stay of a related federal securities action, which case had been stayed under the Private Securities Litigation Reform Act ("PSLRA") until a motion to dismiss was heard. The court held that PSLRA and the Securities Litigation Uniform Standards Act did not bar this books and records case because (1) plaintiff's purpose was not to circumvent these statutes; (2) plaintiff's claims for breach of fiduciary duties under Delaware law were different from the pending federal securities claims; (3) the parties even entered into a confidentiality agreement prohibiting the sharing of materials obtained in this case; and (4) plaintiff was not involved in the securities action. Authored by: R. Christian Walker 302-888-6974 rwalker@morrisjames.com