Ostrich Tactics

The long-running saga of the Boeing securities litigation is apparently coming to a close. In 2011, the district court granted the company’s motion to dismiss (on a motion for reconsideration) after it was determined that the key confidential witness denied being the source of the allegations attributed to him in the complaint, denied having worked for Boeing, and claimed to have never met plaintiffs’ counsel until his deposition.

The plaintiffs appealed this decision to the U.S. Court of Appeals for the Seventh Circuit. Not only did the Seventh Circuit affirm the dismissal, but it also strongly suggested that sanctions were appropriate in the case, noting that the “failure to inquire further [about the supposed evidence from the confidential witness] puts one in mind of ostrich tactics – of failing to inquire for fear that the inquiry might reveal stronger evidence of their scienter regarding the authenticity of the confidential source than the flimsy evidence of scienter they were able to marshal against Boeing.” The appellate court remanded the case to the district court to determine whether sanctions should be imposed.

In City of Livonia Employees’ Retirement System v. The Boeing Company, 2014 WL 4199136 (N.D. Ill. August 21, 2014), the district court examined the conduct at issue. First, the court found that the plaintiffs’ counsel should have interviewed the confidential witness before the filing of the initial complaint and that not doing so constituted “a failure to conduct a reasonable pre-filing investigation as required by the PSLRA.” Second, once the confidential witness had been interviewed by an investigator, the court concluded that it should have been clear to the plaintiffs’ counsel that it “did not have reasonable cause to trust the accuracy of the information obtained by the investigator because the investigator herself noted in her report that some of the information [the confidential witness] provided was unreliable.” Finally, even after the confidential witness told the investigator that “he no longer wished to cooperate with Plaintiffs,” the plaintiffs’ counsel filed a second amended complaint attributing key allegations to the confidential witness and “repeatedly made assurances to the court as to the truth of the allegations.” The court also noted that this was not the first time that the plaintiffs’ counsel had engaged in this type of misconduct. Under these circumstances, the court held that the imposition of sanctions was warranted.

Holding: Imposing Rule 11 sanctions and encouraging the parties to mediate and settle the issue of what constituted “reasonable attorneys’ fees and other expenses incurred in defending the lawsuit.”

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