Gossip Sessions

The use (and potential abuse) of confidential witnesses continues to be a controversial topic in securities class actions. Some court decisions, particularly in the Boeing securities litigation, have been sharply critical of how the plaintiffs’ bar conducts its pre-filing investigations and decides what statements to include in its complaints. A recent decision from Judge Rakoff (S.D.N.Y), however, suggests that at least some of the problems may arise from witness “indiscretions.”

In City of Pontiac General Employees’ Retirement System v. Lockheed Martin Corp., 2013 WL 3389473 (S.D.N.Y. July 9, 2013), the court denied the defendants’ motion to dismiss. The defendants subsequently deposed the confidential witnesses cited in the complaint and filed a “limited motion for summary judgment” arguing that these witnesses had either recanted their statements or never made them in the first place. The court held an evidentiary hearing, denied the motion, and the parties settled. Nevertheless, the court decided to issue a memorandum on the issue of the confidential witness statements.

In its memorandum, the court noted that the testimony presented by the five confidential witnesses suggested “that some, though not all, of the CWs had been lured by the [plaintiff’s] investigator into stating as ‘facts’ what were often mere surmises, but then, when their indiscretions were revealed, felt pressured into denying outright statements they had actually made.” The court took particular issue with two of the confidential witnesses claiming that they only had short calls with the investigator when the plaintiffs’ phone records revealed that the main calls were both around an hour long. Moreover, two of the witnesses “confirmed the substance of the statements attributed to them in the Amended Complaint, while noting that such snippets did not always convey the nuances of what they had told [the investigator].” The fact that these witnesses testified to the accuracy of what the investigator had reported created an inference that the investigator’s report “was accurate in all material respects.”

Holding: Motion for summary judgment denied.

Quote of note: “It seems highly unlikely that Congress or the Supreme Court, in demanding a fair amount of evidentiary detail in securities class action complaints, intended to turn plaintiffs’ counsel into corporate ‘private eyes’ who would entice naive or disgruntled employees into gossip sessions that might help support a federal lawsuit. Nor did they likely intend to place such employees in the unenviable position of having to account to their employers for such indiscretions, whether or not their statements were accurate. But, as it is, the combined effect of the PSLRA and cases like Tellabs are likely to make such problems endemic.”

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