Speaking of confidential sources, it has not taken long for the Third Circuit’s decision in Chubb to have an effect in the lower courts. In Freed v. Universal Health Services, Inc., 2005 WL 1030195 (E.D.Pa. May 3, 2005), the plaintiffs relied on confidential sources in alleging that UHS improperly accounted for its receivables and deliberately understated its bad debt reserves.
The confidential sources included numerous unnamed former employees of UHS, but all of them worked in individual hospitals owned by the corporation. The court, citing the Chubb decision, found that the statements could not be relied upon because “the Amended Complaint fails to allege how [the confidential sources] would have access to information regarding UHS’s operations nationwide.” The Legal Intelligencer has an article (via law.com – free regist. req’d) on the decision.
Holding: Dismissed with leave to amend.
Quote of note: “[C]omplaints that rely heavily on confidential sources to establish the ‘true facts’ must contain information describing the time period during which the confidential sources were employed by the defendant corporation, the dates on which they acquired the information they purportedly possess, and the manner in which they had access to such information.”
The 10b-5 Daily 