Are Confidential Witness Reforms Looming On The Horizon? Can The Plaintiff’s Bar Stop Them?

by Orrick - Securities Litigation and Regulatory Enforcement Group
Contact

http://blogs.orrick.com/securities-litigation/files/2013/05/HandOnBible.jpgA decision is expected shortly in the highly publicized so-called confidential witness “scandal” involving the Robbins Geller Rudman & Dowd law firm.  Judge Suzanne B. Conlon of the United States District Court, Northern District of Illinois, will decide whether to impose sanctions on the plaintiffs’ firm for its conduct regarding a confidential witness in the City of Livonia Employees’ Retirement System v. Boeing Company case, No. 1:09-cv-07143 (N.D. Ill.).  The decision could have a lasting impact over the use of confidential witnesses in securities fraud complaints.

Judge Conlon will decide this matter following the Seventh Circuit’s remand in late March 2013 on the narrow issue of whether to impose Rule 11 sanctions for (1) providing multiple assurances to the court that the confidential source in their complaint was reliable even though none of the lawyers had spoken to the source or (2) failing to investigate after plaintiffs’ investigators expressed qualms about the confidential source.  (Previous blog post here).  In remanding the case, the Seventh Circuit ruled that making “representations in a filing that are not grounded in an inquiry reasonable under the circumstance or are unlikely to have evidentiary support after a reasonable opportunity for further investigation or discovery violate Rule 11.”  City of Livonia Empls.’ Ret. Sys. v. Boeing Co., 711 F.3d 754, 762 (7th Cir. 2013).

This scandal first arose when plaintiffs alleged that Boeing misled investors about the production schedule for its 787 Dreamliner plane, whose first flight was delayed for years.  Robbins Geller filed its first complaint against Boeing based on publicly available information.  But after Boeing successfully defeated that complaint through a motion to dismiss, the firm hired investigators to find sources with knowledge about the alleged fraud in the production schedule for the 787 Dreamliner.  These investigators contacted a confidential source, Mr. Singh, who claimed that he worked for Boeing during the alleged time frame and provided the investigators information regarding the 787 Dreamliner.  The investigators, however, discovered that a few leads Mr. Singh provided were false or misleading.  When the investigators attempted to contact Mr. Singh again, he refused to participate or help plaintiffs in their case.  Nevertheless, plaintiffs filed a Second Amended Complaint (“SAC”) relying on the information Mr. Singh had allegedly provided.

Boeing moved to dismiss the SAC, and during argument and briefing, the Robbins Geller lawyers represented that they had a reliable confidential witness who was in an ideal position to know about the purported fraud firsthand, who had smoking gun evidence, and whose information alone would satisfy the Reform Act’s pleading requirements.  The lawyers also claimed that it had verified the information with Mr. Singh twice before filing the SAC.  Relying heavily on counsel’s representations about its confidential witness, the court denied Boeing’s motion to dismiss.

However, as the case progressed, investigation and discovery revealed the following facts:  Mr. Singh was never actually a Boeing employee, but rather worked for an independent contractor; he was not a structural analyst or “chief engineer” for Boeing, but rather a low-level contractor working on an entirely different plane months after the production of the 787 Dreamliner; he had no access to any files regarding the 787 Dreamliner; and he had never verified any information in the SAC before plaintiffs filed it.  Moreover, after Boeing noticed Mr. Singh for deposition, he repudiated all of the claims that Robbins Geller attributed to him.

Can Robbins Geller overcome these Rule 11 sanctions?

In response to potential Rule 11 sanctions, the plaintiffs’ lawyers have characterized the issue as whether the allegations relating to the confidential witness were utterly lacking support at the time plaintiffs filed the complaints.  Robbins Geller has contended that Mr. Singh got “cold feet” and changed his story.  Thus, at the time plaintiffs filed the complaints, the allegations were supported by specific information obtained by experienced outside investigators who interviewed Mr. Singh.

The firm has further argued that Mr. Singh’s story changed after he met with the FBI regarding the possible disclosure of Boeing’s proprietary information and he was subpoenaed to be deposed by Boeing.  As evidence to support their argument, the plaintiffs’ lawyers point to numerous emails between Mr. Singh and Boeing officials, including one in which Mr. Singh claimed in his resume to be a “chief engineer” at Boeing who was responsible for the 787 Dreamliner, similar to the story he originally told plaintiffs’ investigators.

The lawyers also refuted Boeing’s argument that they should be sanctioned because their conduct is similar to the firm’s conduct in other securities cases involving confidential witnesses.  The Robbins Geller firm noted that it has never been sanctioned for its conduct in any of the cases Boeing identified.

Ultimately, the crux of Robbins Geller’s argument is that Rule 11 sanctions should be determined by what counsel knew at the time the complaint was filed, not what was subsequently learned in discovery.  Robbins Geller has argued that there is a reasonable dispute as to whether their conduct warrants Rule 11 sanctions.

Nonetheless, if sanctions are awarded against the plaintiffs’ lawyers, this case would likely have a significant effect in how plaintiffs’ firms use confidential witnesses in drafting complaints and could encourage judges to allow early discovery of confidential witnesses before determining the sufficiency of the pleadings.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Orrick - Securities Litigation and Regulatory Enforcement Group | Attorney Advertising

Written by:

Orrick - Securities Litigation and Regulatory Enforcement Group
Contact
more
less

Orrick - Securities Litigation and Regulatory Enforcement Group on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.