By Nate Raymond
The battle over whether a securities class action against
Lockheed Martin Corp can move forward despite recantations by
several confidential witnesses cited in the complaint is over:
U.S. Senior District Judge Jed Rakoff in Manhattan ruled Friday
that the case can proceed.
In a brief order, the judge denied Lockheed's motion for
summary judgment, which was based on the contractor's assertion
that four of the six former employees quoted anonymously in the
plaintiffs' complaint "completely disclaimed the allegations
attributed to them." Rakoff not only rejected the company's
request to toss the lawsuit but in a separate second order
certified the shareholder class and appointed the firm
responsible for the disputed witness interviews -- Robbins
Geller Rudman & Dowd -- as lead counsel.
Rakoff's reasoning isn't yet clear, since the judge, in his
typical fashion, said he'd issue a longer written opinion at a
later date. But Rakoff at an October hearing in which five of
the once-confidential Lockheed witnesses took the stand
questioned the credibility of three of them. At the hearing,
Rakoff said it was "a more plausible possibility that they said
all sorts of nasty things about the company to (Robbins Geller's
investigator) for a variety of reasons and then chose to try to
cover it up when they were embarrassed by its coming out."
Rakoff's eventual ruling will probably be more significant
for his analysis of the more nuanced questions of hearsay
evidence. Robbins Geller's outside investigator, who was hired
to dig up evidence that Lockheed Martin misrepresented the
performance of its information technology division, also
testified at the hearing before Rakoff in October. After
reviewing the investigator's notes and phone records, the judge
called him credible but pondered the reliability of the
information that he obtained, since the investigator said he
didn't always check if the former employees had direct knowledge
of the information they conveyed. Rakoff said he would have to
"look as to whether the information that plaintiff in good faith
relied on was, as it turns out, double-triple hearsay or worse."
Even without a full explanation from Rakoff, his two brief
orders mark a victory for the securities class action bar, which
has recently encountered a series of defense challenges to the
use of confidential witnesses. The Private Securities Litigation
Reform Act of 1995 barred discovery until after a case survives
a motion to dismiss, leaving plaintiffs with few options to
scrape up evidence of securities fraud. That's why so many
complaints now rely heavily on allegations garnered from former
Shareholder lawyer Max Berger of Bernstein Litowitz Berger &
Grossmann defended the use of confidential witnesses at a
conference the New York City Bar Association hosted
Tuesday. Still, his firm and others have had to face defense
accusations in cases against Medtronic, BankAtlantic and Regions Financial Corp that they misrepresented statements by former
employees. Such recantations typically come after defendants
learn the identity of the informants, some of whom have
severance or retirement packages subject to confidentiality.
Berger noted the leverage that defendants have over former
employees as a result of such benefits because the onetime
workers still have friends at the company. "We don't know what
precisely is said, but we do know at times large corporate
defendants can be very intimidating to witnesses who have
nothing to gain by cooperating with us," he said.
But Scott Musoff of Skadden, Arps, Slate, Meagher & Flom,
who was speaking on the same panel as Berger, said that when
defendants reach out to confidential witnesses, the former
employees frequently say they didn't realize they were being
interviewed by plaintiffs' investigators. Witnesses, according
to Musoff, frequently think they were speaking with a corporate
representative, or else claim that the plaintiffs have taken
their statements were out of context. There are "numerous times
where you do a little digging on the defense side and you find
that out," he said.
Neither a spokeswoman for Lockheed nor its lawyer, John
Hillebrecht of DLA Piper, responded to requests for comment.
Samuel Rudman of Robbins Geller declined comment.
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