By Nate Raymond
By the end of a seven-hour hearing Monday, Senior U.S. District
Judge Jed Rakoff in Manhattan had much more insight into how
four confidential witnesses ended up in an amended securities
class action complaint against Lockheed Martin, despite the
witnesses' subsequent sworn affidavits disclaiming making many
of the statements attributed to them in the complaint. But what
the judge didn't have was an answer to a question that affects a
broad swath of securities class actions: Even when judges are
confident that plaintiffs' investigators spoke with the
confidential witnesses cited in complaints, how much faith
should courts place in that unconfirmed evidence?
Rakoff, giving his non-final impressions at the end of the
hearing, said that he found the Robbins Geller Rudman & Dowd
investigator in this case to be credible when he testified about
contacting and interviewing former Lockheed employees. But the
investigator conceded that he does not always try to determine
whether the witnesses who provide him with information are
passing along their direct knowledge. That led Rakoff to ask
whether he should rely on allegations that Robbins Geller hasn't
verified. What if confidential informants are repeating hearsay
gossip, Rakoff asked. Or what if the former employee turned
informant was a conspiracy theorist? "I have a real question in
my mind what weight that should be given for the sufficiency of
the complaint," the judge said.
Those questions were left unresolved at the end of the
all-day hearing, which was prompted by Lockheed's assertions in
a summary judgment motion that the plaintiffs had misrepresented
(to put it kindly) the testimony of four former Lockheed
employees who denied the alleged facts attributed to them in the
amended complaint. Rakoff ordered the recanting witnesses to
appear before him at a hearing that offered rare insight into
the mechanics of the modern securities class action.
Allegations attributed to anonymous former employees of
publicly traded companies have become a routine fixture of such
cases, thanks to the Private Securities Litigation Reform Act's
bar on discovery until after shareholders have survived the
defense's motion to dismiss. But, as we've reported, in the last
few years confidential witnesses have become increasingly likely
to deny making the statements attributed to them once the veil
of confidentiality is lifted. Defendants assert that's because
plaintiffs' lawyers are misrepresenting what confidential
informants tell them; plaintiffs' lawyers counter that
defendants threaten and intimidate former employees who are
worried about losing severance deals.
Those were the cross-accusations in the Lockheed case, in
which four former Lockheed employees quoted anonymously in
Robbins Geller's complaint subsequently recanted once their
identities were revealed to the company and its lawyers at DLA
Piper. Rakoff ordered Monday's hearing to find out whether
Robbins Geller had a good faith basis for including those
witnesses in its October 2011 complaint.
At the end of the day, the judge did not rule on Lockheed's
summary judgment motion. But he did offer what he called "very
tentative initial impressions easily subject to change." Among
the judge's impressions: Three of the confidential witnesses
weren't credible when they denied speaking to Robbins Geller's
investigator.
For example, Pamela Hawn, a retired 30-plus-year business
area manager at Lockheed, repeatedly denied making various
statements attributed to her in the lawsuit. She said her call
with the interviewer, Kenneth Keatly of L.R. Hodges &
Associates, lasted four minutes at the most. But phone records
presented by Robbins Geller showed that she was on the phone
with Keatly for over an hour.
Another confidential witness, Kenneth Asbury, testified that
he agreed to discuss non-confidential information about Lockheed
with Keatly but did not make the statements about Lockheed's
internal financial projections that were attributed to him in
the complaint. Asbury, a high-ranking former Lockheed executive
who is now chief executive officer of ASRC Federal Holding Co,
had also testified during a deposition that one of his calls
with the Robbins Geller investigator lasted just five minutes,
but phone records tripped him up as well. They showed he was on
the phone with Keatly for 50 minutes.
Rakoff said he had "serious questions" about the credibility
of Asbury and Hawn. Rakoff similarly questioned the credibility
of Victor Morrison, a one-time senior program manager at
Lockheed. A DLA Piper memo in May presented during the hearing
reported that Morrison said he would answer "I don't know" or
say nothing if he were forced to testify in the class action.
In another consequence of the confidential witness furor,
the three former Lockheed employees all had their own counsel at
the hearing. Neither Morrison's lawyer, Washington solo David
Laufman, nor Asbury's counsel, Michael Levy of Bingham
McCutchen, responded to requests for comment. Hawn counsel
Francis Karam, a New York solo, declined comment.
Robbins Geller's investigator fared much better with Rakoff,
who found Kealty's testimony credible. (It was supported by
phone logs and contemporaneous interview notes.) But the judge
was clearly troubled by Kealty's testimony that he doesn't
always know the extent of a witness's first-hand knowledge. That
prompted Rakoff to ask to what extent he should rely on
information from confidential witnesses in securities class
action complaints.
The judge acknowledged the necessity of plaintiffs' lawyers
seeking information from former employees of the defendants. "In
30 to 40 years, I've seen a shift in the plaintiffs having to
allege very little and the plaintiffs having to allege a lot" to
survive a motion to dismiss, he said. He noted that the U.S.
Supreme Court has heightened the pleading standards for a
complaint significantly. Rakoff also said he did not think
Robbins Geller has an obligation to ascertain the truth of the
witnesses' statements, but he had to determine if any of the
allegations amount to unreliable "double, triple hearsay, or
worse."
Follow up briefing on Monday's hearing is due Oct. 15.
Keatly counsel Charles Hoge of Kirby Noonan Lance & Hoge did not
respond to a request for comment. Plaintiffs' counsel Samuel
Rudman of Robbins Geller declined comment. A spokeswoman for
Lockheed Martin declined comment, and its lawyer John
Hillebrecht of DLA did not respond to requests for comment.
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