Confidential witnesses play a crucial role in securities class action lawsuits and the heightened pleading standard, serving as instrumental sources of inside information that can substantiate plaintiffs’ claims under the heightened pleading standard. These witnesses are typically current or former employees of the defendant company who possess firsthand knowledge about the alleged fraudulent activities.

Their testimonies can provide critical insights into the company’s internal operations, uncovering details that are often concealed from public view. To protect their identities and careers, these witnesses remain anonymous throughout the litigation process, hence the term “confidential.”

In securities class actions, the use of confidential witnesses is particularly significant because it helps plaintiffs to meet the stringent pleading standards required by the Private Securities Litigation Reform Act (PSLRA). The PSLRA mandates that plaintiffs must present detailed and specific allegations of fraud, which can be challenging without insider information.

By leveraging the testimonies of confidential witnesses, plaintiffs can bolster their claims with credible evidence, increasing the likelihood of surviving motions to dismiss under the heightened pleading standard and progressing to discovery and trial.

However, the reliance on confidential witnesses also presents challenges. Defendants often scrutinize the credibility and reliability of these witnesses, and courts may require plaintiffs to provide sufficient detail about their sources to assess their legitimacy. This balancing act ensures that while confidential witnesses can aid in exposing corporate malfeasance, their testimonies are not taken at face value without proper vetting.

In conclusion, confidential witnesses are indispensable in securities class action lawsuits, offering invaluable information that can make or break a case. Their contributions help plaintiffs navigate the complexities of securities litigation and hold companies accountable for fraudulent activities. However, maintaining their anonymity while ensuring the reliability of their testimonies remains a delicate and essential aspect of the judicial process.

Best Practices for Effectively Utilizing Confidential Witnesses Securities Fraud

Investigating and interviewing confidential witnesses

• Vetting and assessing credibility: Fully evaluate a prospective witness’s background and motivation. Investigate potential biases, such as being a disgruntled former employee, or whether they have a genuine, credible basis of personal knowledge regarding the alleged fraud. A witness who only offers secondhand information, for example, is less valuable than one with direct involvement.
• Confirm personal knowledge: Ensure the witness provides specific details demonstrating their firsthand knowledge of the fraud. This includes clarifying the witness’s role, their access to relevant information, the specific dates they learned information, and whether the knowledge was first- or second-hand.
• Corroborate with other evidence: Do not rely on a CW’s testimony alone. Confirm statements through other sources, such as emails, electronic communications, and documents, which can provide vital corroboration for allegations of fraud.
• Establish clear expectations: Before formal interviews, an attorney or investigator should inform the CW that their statements may be used in a complaint. They should also be made aware of the possibility that their identity may eventually be disclosed during the discovery phase.
• Conduct thorough interviews: Use the interviews to develop a detailed “cast of characters” and written chronology of events. This process helps to discover inconsistencies and build a more robust case. Some courts view attorney-led interviews as a “best practice” to ensure information accuracy.

• Plead specific facts: The complaint must describe the CW’s statements with enough specificity to demonstrate their basis of knowledge. This is more persuasive than vague or conclusory statements.
• Avoid over-reliance on anonymity: While the witness’s name is not disclosed in the complaint, the level of detail can often allow defendants to deduce their identity. Acknowledging this reality and proceeding with a robust, corroborated case is more prudent than assuming full anonymity will hold.
• Emphasize quantity and quality: Some courts consider the number and variety of CWs as adding particularity to the allegations, as long as the information is well-supported. Simply gathering many low-quality accounts is not effective.
• Prepare for defense tactics: Defendants will attempt to undermine CW allegations at the pleading stage. Defense counsel will scrutinize CW claims and may even attempt to contact them to have them recant statements, so a well-corroborated and documented initial investigation is crucial.

• Anticipate recantation efforts: Be prepared for a defendant to challenge the credibility of a CW and seek recanting affidavits or deposition testimony. While courts are often reluctant to dismiss a case based solely on recantation, they may permit limited discovery to test the witness’s veracity.
• Prepare for disclosure: Unless a CW has received value for their information, their name can often remain confidential during discovery. However, if their testimony is to be used for a summary judgment motion or at trial, their identity will need to be disclosed.
• Provide thorough deposition preparation: Once a CW is to be named and deposed, counsel should prepare them extensively. This includes conducting mock sessions, reviewing all key documents, and teaching them how to respond to questioning truthfully, concisely, and calmly.
• Address emotional concerns: CWs may be understandably nervous about potential retaliation. Counsel must address these concerns and reassure them that measures will be taken to protect their safety. The Sarbanes-Oxley Act (SOX) offers protections for whistleblowers, but their efficacy can be limite

The Role of Confidential Witnesses

• No identification in the complaint: At the filing stage, plaintiffs’ counsel can use anonymous descriptions of confidential witnesses (CWs) instead of their names. The complaint will refer to them as “CW-1,” “CW-2,” and so on, and include only non-identifying details, such as their title, general duties, and dates of employment.
• Insufficient detail for identification: To withstand a motion to dismiss, the complaint must still provide sufficient detail about the CW to show their basis of knowledge. This creates a careful balancing act, as too much detail could inadvertently reveal a CW’s identity to the defendant, while too little could lead a court to disregard the allegations.
• Legal work product privilege: Plaintiffs’ counsel frequently argue that a CW’s identity is protected by the attorney work product doctrine, as revealing the name could show which sources counsel considers most important, thereby revealing trial strategy. This argument is often used to resist defendants’ efforts to learn the identities of CWs during discovery.

• Protective orders: Once a case moves into discovery, plaintiffs’ counsel will often seek a protective order from the court to control the disclosure of confidential information. A protective order can:
  • Limit access: Restrict the release of a CW’s identity only to defense counsel and a limited number of in-house personnel, preventing its wider dissemination as a whistleblower within the company.
  • Prohibit retaliation: Explicitly forbid the defendant company from retaliating against a CW for their participation in the lawsuit.
  • Manage document review: Establish a protocol for handling documents that could potentially reveal a CW’s identity.
• Delayed disclosure: Plaintiffs can request that the court delay the formal disclosure of a CW’s identity until later in the discovery process, such as closer to deposition. This tactic gives the witness more time before their name is disclosed to the defendant.
• Shielded testimony: While typically used in criminal cases, in extreme circumstances, a court could use procedural measures to protect a witness’s identity, such as using pseudonyms or in-camera testimony (testimony presented to the judge privately). However, this is rare in securities class actions.

• Robust communication: Plaintiffs’ counsel must have a candid conversation with a CW from the start, explaining that their anonymity is temporary and likely to end if the case proceeds to discovery or trial. This manages the CW’s expectations and helps prevent recantation later.
• Separate counsel consideration: Witnesses concerned about retaliation  for being a whistleblower can be advised to hire independent counsel. This provides them with a separate layer of legal advice focused solely on their interests, distinct from the broader class action.
• Thorough preparation for disclosure: When a CW’s name is about to be disclosed, counsel should prepare them for the possibility of contact from defense investigators. This preparation can help prevent the witness from being pressured into recanting their statements.
• Strategic litigation choices: In some cases, plaintiffs may decide not to use a CW’s testimony beyond the pleading stage to avoid having to disclose their identity. If the case can proceed without the CW’s live testimony, their information may remain protected under the work product privilege.

Other Ways Can a Confidential Witness’s Identity Be Revealed in a Securities Class Action

• Particularized details: The complaint must include sufficient details about a CW’s job title, responsibilities, and access to information to establish their reliability. This level of detail can sometimes be enough for a defendant company to figure out who the CW is, especially in smaller companies or departments.
• Corroborating details: When multiple CWs are used, the combination of their individual, seemingly non-identifying details may, in the aggregate, make identification easier for the defendant. This is also true when CW testimony is linked to specific documents or company-internal events described in the complaint.

• Internal analysis: Defense counsel will conduct their own internal investigation after the complaint is filed. They will analyze the complaint’s allegations, cross-reference the CW descriptions with employee records, and look for individuals with the specified job titles or access to the described information.
• Aggressive discovery: Even before formal disclosure is ordered, defense attorneys may try to identify CWs through discovery by deposing or obtaining declarations from other former and current employees. They might also propose broad discovery requests designed to force the disclosure of CW identities, such as requiring depositions of all former employees with a given title.
• Hiring investigators: Defense counsel can hire their own investigators to contact former and current employees who fit the CW descriptions in the complaint. These investigators can try to determine who the source was and see if they will recant or contradict their earlier statements.

• Employee-to-employee conversation: A CW may, either intentionally or accidentally, discuss their role in the lawsuit with colleagues, friends, or family. While CWs are advised to be discreet, leaks and gossip can still expose their identity.
• Inadequate redaction: Plaintiffs’ counsel or their investigators could inadvertently reveal the CW’s identity by failing to properly redact information from documents produced during discovery.
• Third-party disclosures: A third party, such as another former employee or an investigator, could unintentionally reveal the CW’s identity during an interview or deposition.

• Reconsideration by the CW: A confidential witness may, for various reasons, decide they no longer want to be involved in the lawsuit. They may recant their statements, possibly driven by fear of retaliation or a change of heart, which could lead to them revealing their identity to defense counsel.
• Influence of defense counsel: A CW might be contacted by defense investigators and be convinced to issue a statement recanting their earlier anonymous allegations. These recanting declarations, especially if made under oath, can become a tool for the defense to challenge the complaint and may reveal the CW’s identity.

What Safeguards Protect a CW from Retaliation?