Knowing The Details

Courts can be skeptical about statements from confidential witnesses. One way to express that skepticism is to wonder why, if the witness knows so much about what went on at the company, he or she is unable to provide details about the alleged fraud.
In Konkol v. Diebold, Inc., 2009 WL 4909110 (6th Cir. Dec. 22, 2009), the defendants allegedly had access to internal financial reports demonstrating the falsity of their public statements. These reports included, as described by confidential witnesses who worked at the company, days sales outstanding reports and revenue scorecards.
In evaluating whether the confidential witness allegations contributed to a strong inference of scienter, the court reiterated its previous holding that statements from confidential witnesses should be “discounted,” especially when there is a lack of information about the witnesses in the complaint. Moreover, the court noted that “because the investors had confidential witnesses who provided generalized statements about the reports, one would reasonably expect those witnesses to be able to provide more details about the reports and to be able to specifically connect them to the Defendants.” In the absence of this specific information, the court declined to credit statements from the confidential witnesses about the fraudulent scheme being “openly known” or taking place at a “high level” within the company.
Holding: Dismissal affirmed.

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