By Nate Raymond
Can a securities class action complaint rely on hearsay passed
along by former employees of a company and still survive a
motion to dismiss? That's the question that could now determine
whether Robbins Geller Rudman & Dowd's securities fraud case
against Lockheed Martin Corp moves forward.
The lawsuit has been at the center of a heated dispute over
the use of material gathered from former employees who are cited
as confidential witnesses in complaints filed by securities
class action law firms.
On Wednesday, both sides filed new briefs to address a
question posed by U.S. District Judge Jed Rakoff in Manhattan at
a hearing in October: To what extent can a securities fraud case
rely on "double-triple hearsay or worse"?
In the view of Lockheed Martin's lawyers at DLA Piper, the
answer is never, with the company citing several securities
decisions to back up its argument that hearsay is insufficient
to allege the company knowingly violated securities laws. The
plaintiffs' lawyers, in contrast, say hearsay is acceptable and
charge that Lockheed is adopting a brand new argument after a
bad showing at the hearing.
Class action firms, of course, are barred under the Private
Securities Litigation Reform Act from taking discovery until
after a case survives a motion to dismiss. Plaintiffs' law firms
like Robbins Geller have over the years responded by hiring
private investigators to reach out to former employees to gather
material that might bolster their claims of fraud, quoting them
as confidential witnesses in their complaints.
But, increasingly, several securities lawsuits have been
challenged after the former employees' identities were revealed
to their erstwhile employers. That's what happened in the case
of Lockheed, which since June has sought dismissal of the
lawsuit after four confidential witnesses gave sworn statements
that they didn't say what was attributed to them in Robbins
But at the close of the all-day hearing on Oct. 2, where the
once-confidential witnesses were grilled about their statements,
Rakoff questioned the credibility of three of them. According to a transcript, he said it seemed "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 separately said he found the testimony of the private
investigator credible. But the judge nevertheless questioned
whether he could rely on the witnesses' statements in the
complaint, after the investigator said he didn't always verify
if a former employee had direct knowledge of what they told him.
Rakoff said while he did not think Robbins Geller had to
ascertain the truth of what a confidential witness said, the
court "does 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."
In its brief Wednesday, Lockheed Martin pointed to an
unpublished 2nd U.S. Circuit Court of Appeals opinion from 2010
in a securities class action against Sears Holding Corp -- as
well as to published opinions out of the 3rd and 8th Circuits in
cases against H&R Block, Inc, Possis Medical, Inc, and The Chubb
Corp -- in arguing a confidential witness must have personal
knowledge of the information they allege. "Information obtained
through intermediaries or resulting from speculation and rumor
is ordinarily insufficient to plead securities fraud," Lockheed
Robbins Geller, which contends its investigation was
conducted in good faith, argues Lockheed is mischaracterizing
its witnesses' testimony about the extent of their knowledge. In
Robbins Geller's view, confidential witnesses don't have to be
able to attest to their actual knowledge of anything attributed
to them in a complaint. Its brief suggests a holistic view must
instead be taken of its allegations. "Hearsay may constitute a
component of the totality of the allegations a court must
consider," the firm said.
How Rakoff will rule is unclear. But the judge last week
approved further discovery in the lawsuit unrelated to the
confidential witness issue, an indication that the case isn't
over yet. A hearing for summary judgment had been scheduled for
Dec. 3, though odds are that the date may change following
Hurricane Sandy's disruption of various New York court
Plaintiffs' counsel Samuel Rudman of Robbins Geller declined
to comment. A spokeswoman for Lockheed Martin declined comment,
and its lawyer, John Hillebrecht of DLA Piper, did not respond
to a request for comment.
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