Recanting Confidential Witnesses in Securities Litigation

This Article examines the contentious and recurring issue of how courts should handle confidential witnesses in securities litigation who recant the information attributed to them in complaints or deny that they ever provided such information to plaintiffs’ counsel and/or investigators. The use by plaintiffs of confidential witnesses has become ubiquitous in recent years, as a primary unintended effect of the Private Securities Litigation Reform Act of 1995. That legislation raised the bar for pleading securities fraud and established an automatic stay of all discovery and other proceedings during the pendency of a motion to dismiss, absent application of one of two narrow exceptions. The vise-like combination of these features forces plaintiffs to plead their cases with particularity while barring them from obtaining discovery to bolster their scienter and other allegations until all motions to dismiss have been resolved. In response, plaintiffs have turned to confidential witnesses, who typically are current or former employees of the defendant. These witnesses provide information anonymously for use in complaints, mainly because they are fearful of retaliation by defendants. In a recent series of high-profile cases, courts have been confronted with allegations that plaintiffs’ confidential witnesses either have recanted the information attributed to them, or denied ever providing such information. This Article examines the contrasting approaches taken by courts to alleged recanting, and provides some specific recommendations for avoiding or resolving this problem in the future

Federal Discovery Stays

In federal civil litigation, unless a discretionary stay is granted, discovery often proceeds while motions to dismiss are pending. Plaintiffs with non-meritorious cases can compel defendants to spend massively on electronic discovery before courts ever rule on such motions. Defendants who are unable or unwilling to incur the huge up-front expense of electronic discovery may be forced to settle non-meritorious claims. To address multiple electronic discovery issues, Congress amended the Federal Rules of Civil Procedure in 2006 and the Federal Rules of Evidence in 2008. However, the amendments failed to significantly reduce costs and failed to address the critical issue of discovery timing. This Article contends that a mandatory stay is the most effective solution to the problem of electronic discovery during the pendency of motions to dismiss. In 1995, the Private Securities Litigation Reform Act imposed a mandatory stay of all discovery while motions to dismiss are pending in actions alleging violations of securities laws, absent application of two limited statutory exceptions. This Article examines the operation of the mandatory stay in securities actions and concludes that it should be extended to electronic discovery in all federal civil litigation, unless an exception applies. Imposition of a mandatory stay of electronic discovery before the disposition of motions to dismiss is the most equitable and effective solution to the unresolved problem of coercive settlements

Accounting Fraud: Pleading Scienter of Auditors under the Private Securities Litigation Reform Act

This paper examines the current judicial approach to assessing the scienter of auditors under the Private Securities Litigation Reform Act. The paper concludes that the current approach is inadequate and should be modified