Conversely, some courts have praised “protocols” that require plaintiffs’ investigators to clearly identify themselves as working for plaintiffs’ counsel in a securities class action lawsuit, to disclose the purpose of the outreach, and to provide any designated CW with a copy of the complaint to confirm veracity. See, e.g., Hatamian v. Advanced Micro Devices, Inc., 2015 WL 511175, at *2 (N.D. Cal. Feb. 6, 2015).
Several courts have also emphasized that plaintiffs’ counsel should not rely on investigators alone; instead, they should follow up with CWs and confirm their accounts before featuring them in a securities complaint. The court in Belmont Holdings Corp. v. SunTrust Banks, Inc., 896 F. Supp. 2d 1210, 1232–33 (N.D. Ga. 2012), for example, criticized plaintiffs’ counsel and “reluctant[ly]” declined to issue sanctions where “no lawyer representing Plaintiff ever met with or interviewed” a witness featured in the complaint and “Plaintiff’s counsel decided to rely exclusively on its investigators.” Similarly, in Millennial Media, Judge Engelmayer chided plaintiffs’ counsel for filing a complaint without contacting any CW or attempting to “confirm with these witnesses the facts and quotations that counsel proposed to attribute to them.” 2015 WL 3443918, at *10–11.
The existence of nondisclosure agreements (NDAs) also raises thorny questions during an informal plaintiffs’ investigation. Some courts have rejected defendants’ attempts to affirmatively rely on NDAs to prevent former employees from speaking with plaintiffs’ investigators, explaining that “an NDA cannot be used to shield information from discovery.” See, e.g., Micron Tech., Inc. v. Factory Mut. Ins. Co., 2022 WL 1687156, at *2 (N.D. Cal. May 26, 2022). In one extreme case, after a corporate defendant sent “reminder” letters to former employees with NDAs, a court ordered the defendant to circulate a new letter informing the employees that they were “relieved” of their confidentiality obligations but also emphasizing that the employees were not required to speak with plaintiffs’ investigators. See Latourette v. First Horizon Pharm. Corp., No. 1:02-cv-2332 (N.D. Ga. July 13, 2003).
Courts have been hesitant, however, to issue sweeping orders limiting the scope or enforceability of NDAs to aid plaintiffs in informal discovery. In Kuriakose v. Federal Home Loan Mortgage Co., 674 F. Supp. 2d 483, 490–92 (S.D.N.Y. 2009), for example, the court held that the plaintiffs lacked standing to challenge the enforceability of an NDA where they failed to show that former employees declined interviews because of the NDA and not for an independent reason. In In re Morning Song Bird Food Litigation, 2015 WL 12791471, at *3–4 (S.D. Cal. Feb. 6, 2015), the court denied the plaintiffs’ motion seeking to limit the scope of confidentiality agreements between the corporate defendant and its former employees because the plaintiffs failed to specify (i) the protected information they sought from former employees, (ii) the questions they intended to ask former employees, (iii) how the proposed communications were covered by the NDA, and (iv) why the NDA was overbroad or otherwise unenforceable. And in In re Spectrum Brands, Inc., Securities Litigation, 2007 WL 1483633, at *2–5 (N.D. Ga. May 18, 2007), the court denied a similar motion where the plaintiffs had “not told the Court what questions they would ask if the Court issued the order.”
Inaccuracies in CW Allegations in an Operative Complaint
Defendants typically get their first view of CW allegations in an amended or consolidated complaint filed by the court-appointed lead plaintiff. There is abundant case law—which is beyond the scope of this article—assessing defendants’ arguments on a motion to dismiss that plaintiffs’ CW allegations are too vague, too far removed from senior management, or otherwise inadequate to support the plaintiffs’ claims. Sometimes, however, defendants learn from a CW itself that the CW has been misquoted or had its statements taken out of context in a securities complaint. Although the case law is mixed, some defendants have successfully used a CW’s sworn statements contradicting a complaint to get a securities case dismissed at the pleading stage or on a subsequent motion for reconsideration.
In Campo v. Sears Holdings Corporation, 371 F. App’x 212, 216–17 & n.4 (2d Cir. 2010), for example, the Second Circuit affirmed the dismissal of a securities complaint after the district court ordered CWs to be deposed “for the limited purpose of determining whether the confidential witnesses acknowledged the statements attributed to them in the complaint,” and certain CWs “expressly disclaimed” allegations in the complaint. In City of Livonia Employees’ Retirement System & Local 295/Local 851 v. Boeing Co., 711 F.3d 754, 760–62 (7th Cir. 2013), the Seventh Circuit affirmed the district court’s decision to grant a motion for reconsideration and dismiss a securities complaint after the plaintiffs’ sole CW denied “everything that the [plaintiffs’] investigator had reported” and stated under oath that he did not work for the corporate defendant during the relevant time period. The district court subsequently issued sanctions for the plaintiffs’ counsel’s “ostrich tactics,” which Chief Judge Rubén Castillo agreed was a “fraud on the court.” City of Livonia Employees’ Retirement System v. Boeing Co., 306 F.R.D. 175, 177, 182–83 (N.D. Ill. 2014). And in SunTrust Banks, the district court similarly granted a motion for reconsideration and dismissed a securities complaint when presented with three declarations from the plaintiffs’ key witness directly contradicting the allegations attributed to him in the complaint. 896 F. Supp. 2d at 1224–27.
Other courts, however, have declined to consider CW declarations challenging complaint allegations at the pleading stage, finding that they raise factual disputes that should be explored through discovery and resolved at a later stage. See, e.g., Iron Workers Local 580 Joint Funds v. NVIDIA Corp., 522 F. Supp. 3d 660, 671–72 (N.D. Cal. 2021) (denying motion to strike CW allegations). In Hatamian, for example, the court denied a motion to strike allegations from an amended complaint based on CW declarations disclaiming the statements. Hatamian v. Advanced Micro Devices, Inc., 2015 WL 511175, at *2 (N.D. Cal. Feb. 6, 2015). The court held that the declarations did not “conclusively establish” that the allegations were “without merit,” in part because the CWs did not raise any concerns until they were contacted by the defendants one month after reviewing the complaint. Id. at *2.
Discovery of Confidential Witnesses and Plaintiffs’ Investigations
If a motion to dismiss is denied and a securities case enters discovery, defendants often seek disclosure of CW identities and pursue discovery related to CWs, particularly if the court relied on CW allegations in denying the defendants’ motion. Although the law governing CW discovery is not uniform, defendants have had some success seeking the following categories of discovery:
- The identities of the CWs. The “majority view . . . is that the names of the persons identified in the [complaint] as confidential informants are” discoverable and “not entitled to any work product protection.” Fort Worth Emps.’ Ret. Fund v. J.P. Morgan Chase & Co., 2013 WL 1896934, at *1 (S.D.N.Y. May 7, 2013) (internal quotation marks omitted). Although plaintiffs sometimes attempt to mask CW identities by including their names in lengthy initial disclosures without specifying which individuals are CWs, courts generally reject this practice and order disclosure of CW identities because “knowing who the [CWs] are would help the defense to find and interview and/or depose them.” Plumbers & Pipefitters Local Union No. 630 Pension-Annuity Tr. Fund v. Arbitron, Inc., 278 F.R.D. 335, 339 (S.D.N.Y. 2011). Plaintiffs may also attempt to protect CW identities by arguing that they do not intend to rely on the CWs’ testimony at trial; however, courts have rejected this practice as well, as “patently unfair” and “in contravention of the PSLRA’s purpose of discouraging strike suits.” Asher v. Baxter Int’l, Inc., 2005 WL 8180774, at *6 (N.D. Ill. Sept. 9, 2005). Note that some courts have held that a CW’s identity may remain confidential where the CW articulates a concrete basis to fear retaliation. See Arbitron, 278 F.R.D. at 344.
- CW documents and deposition testimony. Once CWs have been identified, courts generally permit defendants to pursue document discovery and depositions. As the court in Arbitron explained, “[i]nasmuch as Lead Plaintiff has represented that the 11 [CWs] have ‘firsthand knowledge’ of specific facts tending to establish [the corporate defendant’s] liability for securities fraud, . . . depositions are reasonably likely themselves to constitute or reveal admissible, if not highly probative, evidence.” Id. at 339. The scope of such discovery will depend on the facts in the case, the nature of information attributed to CWs in the complaint, and, in some instances, concerns over the plaintiffs’ investigation. In In re Bofi Holding, Inc. Securities Litigation, 2021 WL 3700749, at *5–6 (S.D. Cal. July 27, 2021), for example, the court stated that the defendants “‘ha[d] the opportunity to depose [the CWs] to investigate any relevant information [they] may possess with respect to’ the alleged fraud,” but the court cautioned the defendants “not to inquire of the witnesses about any prefiling communications with plaintiff’s counsel or investigators.”
- Information regarding the plaintiffs’ investigation. In cases in which the defendants have reasonable concerns about the plaintiffs’ investigation, courts have permitted discovery into the investigative process itself and have even permitted discovery of the plaintiffs’ investigators. In Pirnik v. Fiat Chrysler Automobiles, N.V., 2018 WL 3677873, at *1–3 (S.D.N.Y. Aug. 2, 2018), for example, the court substantially denied the plaintiffs’ motions to quash subpoenas seeking testimony and documents from the plaintiffs’ investigators relating to their communications with CWs after one CW signed a declaration stating that the complaint did “not accurately reflect” his statements.
- Work-product considerations. Some courts have held that plaintiffs’ communications with CWs and related interview notes and memoranda are protected by the work-product doctrine. See, e.g., In re Bofi Holding, 2021 WL 3700749. But this rule is not absolute. In Pirnik, for example, the court rejected the argument that discovery sought from the plaintiffs’ investigator was “necessarily protected work product” and held that, “[a]t a minimum, Defendants are entitled to take [the investigator’s] deposition and inquire into his communications with [a CW] and the purported discrepancies between those communications and the statements attributed to [the CW] in the [complaint].” 2018 WL 3677873, at *2. And in In re JDS Uniphase Corp. Securities Litigation, 2005 WL 6296194, at *2 (N.D. Cal. Sept. 23, 2005), although the court held that the plaintiffs’ counsel’s interview memos and emails to CWs were protected work product, it nonetheless required the plaintiffs to produce “[e]-mail messages from witness to counsel . . . because they are verbatim statements by the witness that reflect the witnesses’, not counsel’s, mental impressions.” Id. (emphasis added).
In the nearly 30 years since the passage of the PSLRA, CW allegations in securities complaints have become ubiquitous. Although plaintiffs are generally permitted to speak to former employees and investigate their claims, their latitude is not boundless. Courts have been willing to police unscrupulous investigative techniques by permitting discovery into plaintiffs’ investigations, dismissing or revisiting claims, and, in extreme cases, holding bad actors to account through sanctions. Companies facing securities class actions—and their counsel—should arm themselves with legal strategies and discovery tools to defend against CW allegations and stamp out abuses.