Grappling with the credibility of witnesses has been a focal point of legal systems for thousands of years. Despite all this practice, however, our legal system has not yet established a uniform approach to dealing with a witness credibility issue in a somewhat new context — a securities class action complaint governed by the Private Securities Litigation Reform Act, Pub. L. No. 104-67, 109 Stat. 737, codified at 15 U.S.C. § 78u-4. This article explores why this issue has arisen since the passage of the PSLRA, enumerates the different approaches taken by a number of courts and defense counsel grappling with this issue, and explains why the approach taken recently in Union Asset Management Holding AG v. SanDisk LLC, Civ. No. 15-01455, 2017 U.S. Dist. LEXIS 977 (N.D. Cal. Jan. 4, 2017) makes sense.
The PSLRA simultaneously raised the pleading standards for surviving a motion to dismiss to a very high level and forbids discovery in most cases until and unless a complaint survives a motion to dismiss. As courts have recognized, the “combined effect of the high scienter standard in securities fraud litigation and the strict PSLRA discovery stay is to place great weight at the pleading stage on the statements of confidential witnesses.” Union Asset, 2017 U.S. Dist. LEXIS 977, at *6. In the absence of discovery, these confidential witnesses or whistleblowers, often former employees of the defendant companies, are often the only sources of information as to what the defendants knew and when they knew it — normally key pieces of information for a securities fraud complaint to move past the motion to dismiss. Plaintiffs counsel, working with investigators or otherwise, locate and interview these witnesses and then include allegations based on the information gleaned from the interviews in their complaints. Generally, in an attempt to protect the witness from retaliation, unwanted publicity, and other potential negative repercussions stemming from whistleblowing on their former employees, these whistleblower witnesses are listed as confidential witnesses along with descriptions (usually of title, dates of employment, and scope of responsibilities) of the past employment that gave them access to the information that is being used as the basis for allegations in the complaint.
Mr. Eisenkraft's full article can be read here.