Plaintiffs in securities class actions often use "confidential witnesses" in their complaints to substantiate various allegations. The practice makes some sense at the complaint stage: it allows the plaintiff to plead fraud and loss causation with the specificity required by the PSLRA, without exposing potential witnesses to backlash from their employer should the case never proceed past the motion-to-dismiss stage. But once the motion to dismiss has been decided, is there any need for a plaintiff to keep confidential witnesses confidential?
In In re Netbank Securities Litigation, 259 F.R.D. 656 (N.D. Ga. 2009), the plaintiff alleged that Netbank had deceived some of its shareholders. The plaintiff survived a motion to dismiss, and the court certified a securities-fraud class. (It held that there was an efficient market in the securities traded, so the class was entitled to a presumption of reliance on the alleged misrepresentations.) But the really interesting part of this opinion is in its discussion of the motion to compel. The plaintiff had relied heavily on seven "confidential witnesses" in his complaint. So, in discovery, the defendants served interrogatories asking for their identities. And the plaintiff refused to reveal them. Once the defendants moved to compel, the court held that plaintiff had to provide the identities:
Mr. Brown first responds to Defendants’ Motion to Compel by arguing it is without merit, as the list of 130 individuals he provided contains the confidential witnesses whose identification Defendants now seek. However, this argument is not persuasive. It is clearly established that Defendants may discover the facts upon which Plaintiffs base their allegations and such facts include names of witnesses from whom counsel obtained their information. The Reform Act, 15 U.S.C. § 78u-4(b)(1), dictates that in securities fraud cases, plaintiffs shoulder "the burden of identifying the sources for allegations pled on information and belief." Id. (citing 15 U.S.C. § 78u-4(b)(1)). That Mr. Brown has provided Defendants with a list of 130 individuals, arguing that Defendants can "conduct their own investigation" to determine the identities of the seven confidential witnesses among them, smacks of a needle-in-haystack search: time-consuming, wasteful and expensive.
(Emphasis added, internal citations and quotations omitted.) Nor did the court cotton to plaintiff’s argument that public policy required shielding the identities of the confidential witnesses. As it pointed out, the discovery rules are liberal, and the plaintiff’s argument that he had provided the identities among 123 other names undermined his argument against specifying further.
So what can defense lawyers learn from this case? In securities class actions with confidential witnesses, it is worth spending an interrogatory to learn their identities.