Sept 20 (Reuters) - On Tuesday, U.S. Senior District Judge
Jed Rakoff ruled that lawyers at Robbins Geller Rudman & Dowdmay not see the notes that Lockheed Martin's lawyers at DLA
Piper took when they interviewed former Lockheed employees cited
as confidential witnesses in an amended securities fraud
complaint against the aerospace company. Rakoff said the notes,
as well as DLA's memos on the interviews and emails between DLA
and the witnesses, are protected by the work-product doctrine.
But that is not the end of the story for the Loc k heed
confidential witnesses. Rakoff has scheduled a hearing on Oct.
1, at which he intends to hear testimony from four former
Lockheed employees who spoke to a Robbins Geller investigator
but subsequently denied telling him any of the juicy allegations
attributed to them.
Rakoff's hearing is quite a welcome development. Someone
needs to take a hard look at a phenomenon that's become a blight
on securities class action litigation: confidential informants
who turn around and recant their assertions against former
employers. Lockheed's motion for summary judgment painted
Robbins Geller in solid black, asserting that the plaintiffs'
firm is a serial fabulist when it comes to confidential witness
testimony. But the truth is that just about every major
securities class action firm has seen witnesses say one thing to
plaintiffs' investigators and another to former employers after
their identity is revealed.
In the Bank Atlantic case in federal court in Miami, for
instance, the defendants moved for sanctions against Labaton
Sucharow and other firms partly on the basis of deposition
testimony by six confidential witnesses who contradicted
allegations the plaintiffs' firms attributed to them. Bernstein
Litowitz Berger & Grossmann, Grant & Eisenhofer and Motley Rice
faced similar accusations in the Medtronic class action in
federal court in Minnesota, in which Medtronic tried to block
class certification by arguing that the plaintiffs
"misrepresented or actively lied about" the testimony of 13 of
15 confidential witnesses cited in their amended complaint. (In
the Bank Atlantic case, U.S. District Judge Ursula Ungaro
ordered the plaintiffs to pay defense legal fees related to the
deposition of one witness. In Medtronic, U.S. District Judge
Paul Magnuson certified the class despite defense assertions;
the case settled for $85 million in August.)
Plaintiffs' lawyers believe that the rash of recantations is
due to the exposure of their witnesses' identity. Remember,
under the rules imposed by the Private Securities Litigation
Reform Act, plaintiffs in securities fraud class actions aren't
allowed to take discovery from defendants until their cases have
survived defendants' motions to dismiss. To meet the high bar
for fraud actions when they can't conduct discovery, plaintiffs
have little choice but to rely on information from former
employees of the defendant. But it's one thing for those
employees to talk to plaintiffs' investigators. It's another for
them to stick by their allegations when their former employers'
lawyers start grilling them in depositions about the
confidentiality provisions in their severance agreements.
That's what Robbins Geller seems to have been trying to show
when it moved to compel production of the DLA materials in the
Lockheed case. The letter briefs on its motion to see DLA's
notes aren't part of the docket, but in Robbins Geller's response to Lockheed's motion, the plaintiffs' firm suggests
that the witnesses, who spoke to its investigator on the
assumption that their identity would remain confidential, were
intimidated by Lockheed and afraid of breaching severance
agreements. It's telling, Robbins argued, that the only
confidential Lockheed witness who doesn't have a severance deal
"validated virtually all of the allegations attributed to him."
As I've previously reported, federal judges in New York are
increasingly unlikely to permit witnesses in securities class
actions to remain confidential, and all of the allegations of
recantation are only going to bolster defense arguments that
plaintiffs must reveal where their information is coming from.
Unless plaintiffs' lawyers can show that defendants are
frightening witnesses into backing away from their stories, the
securities class action bar is going to lose the potent weapon
of information from confidential informants.
(Reporting by Alison Frankel)
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