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 employees.

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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