(Article from Securities Law Alert, June 2015)
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On May 29, 2015, the Southern District of New York considered a case in which plaintiffs had voluntarily dismissed a putative securities class action in light of inaccuracies in and recantations of quotations from confidential witnesses (“CWs”) referenced in their complaint. In re Millennial Media, Inc. Sec. Litig., 2015 WL 3443918 (S.D.N.Y. 2015) (Engelmayer, J.). The court found that the case “raise[d] serious questions” as to (1) whether plaintiffs’ counsel had “take[n] proper care to verify the statements attributed to the CWs before the [complaint] was filed;” and (2) whether the CWs were “fairly treated when, without notice, they were designated as CWs in a [c]omplaint.” The court stated that the case “underscore[d] why it is a best practice — if not an ethical imperative — for counsel, before designating a person as a CW in a [c]omplaint, to notify that person of counsel’s intent to do so and to verify the statements that counsel propose to attribute to him or her.”
Background
In the case before the court, plaintiffs’ counsel attributed statements in the complaint to “persons identified there[in] as CWs, without ever (1) confirming with the CW the accuracy of the statements attributed to him or her, or (2) notifying the CW that counsel intended to quote him or her as such.” Plaintiffs’ counsel had never spoken to ten of the eleven CWs mentioned in the complaint. The quotations from those ten CWs were based on interviews with an investigator. When plaintiffs’ counsel notified the CWs that they had been quoted in the complaint, after the complaint was filed, “four CWs asked that all references to them be dropped,” and “four CWs reported material inaccuracies in statements the [complaint] had attributed to them.” Following disclosure of these challenges to the CW quotations, plaintiffs voluntarily dismissed the action.
Southern District of New York Finds Plaintiffs’ Counsel Should Have Confirmed the Accuracy of the Confidential Witness Statements Prior to Filing the Complaint
In light of plaintiffs’ voluntary dismissal of their suit, the court had “no occasion to rule on the propriety of counsel’s practices with respect to quoting persons designated as CWs.” The court nevertheless expressed its view that counsel’s failure to confirm beforehand the quotations it planned to attribute to the CWs in the complaint “create[d] significant potential for inaccuracy.” The court observed that if counsel had verified in advance “the facts and quotations that counsel proposed to attribute to” the CWs, then many of the “deficiencies [in the complaint] could have been avoided.” The court explained that “[t]he necessary refinements could have been made to ensure that quotes were used accurately; that information was presented in proper context; and that opinions, assumptions, hearsay, and speculation were not commingled and confused with representations of facts acquired firsthand by a percipient witness.”
The court found it “difficult to come up with a good reason why counsel would not attempt to confirm with a witness, let alone any of the 11 CWs, the accuracy of the statements that counsel intended to attribute to them in the [c]omplaint.” The court surmised that “[p]erhaps counsel feared that, confronted with such statements, the witness might repudiate, or unhelpfully modify or contextualize, the investigator’s account of his earlier statements.” However, the court explained that these are “not good reasons to refrain from checking factual accuracy.”
In the court’s view, the failure to make any “attempt to confirm the quotes of a witness on whom counsel proposes to rely in a public filing” does not comport with “Rule 11’s command that counsel conduct ‘an inquiry reasonable under the circumstances.’” The court stated that Rule 11 “does not require counsel personally to participate in an initial witness interview.” However, once counsel is ready to file a complaint, “it is reasonable to expect counsel . . . to attempt to confirm with the witness the statements that counsel proposes to attribute to him and to assure that the [c]omplaint is presenting these statements in fair context.” The court noted that “common sense explains why an investigator’s memo of an initial witness interview is an inadequate substitute for counsel’s independent confirmation of accuracy.” For instance, “[t]he investigator may have taken notes hurriedly while conducting the interview,” or “may have mistaken hearsay, opinion, or conjecture for facts.” Given “the growing body of cases chronicling the repudiation by CWs of statements attributed to them in securities class-action complaints,” the court found it particularly important that plaintiffs’ counsel “check, and double-check” the accuracy of CW statements prior to filing a complaint quoting those CWs.
Southern District of New York Finds It Unfair for Counsel to Quote a Confidential Witness in a Complaint Without First Notifying the Witness and Obtaining the Witness’s Consent
The court further observed that quoting from CWs in a complaint without their “foreknowledge . . . raises issues of fairness to [those] witnesses.” The court explained that designating a witness as a CW in a complaint “does not by any means assure the witness anonymity throughout the litigation.” In fact, there is “a meaningful possibility that a court will order counsel to reveal the names of CWs, so as to enable these presumably knowledgeable fact witnesses to be deposed.” During an interview with an investigator, a witness “may be unaware that, even if described as a ‘Confidential Witness,’ he is at risk of being identified by name if the case proceeds to discovery.”
The court stated that there is no “case or ethics canon requiring that plaintiffs’ counsel notify a witness of an intention to quote him or of the possibility that being designated as a CW may result in his identification.” The court further acknowledged that the “high pleading hurdles” of the Private Securities Litigation Reform Act “no doubt may tempt plaintiffs’ counsel not to alert a helpful witness of the risks to him of being quoted as a CW in a [c]omplaint, lest the witness back away.”
Nevertheless, the court found that “basic decency” requires counsel to notify an individual prior to designating him or her as a CW in a complaint. The court explained that “[w]hen counsel designates an interviewee as a CW, counsel exposes the interviewee to the risk of public disclosure of his name and, potentially, professional or personal tumult.” It is possible that the witness “may still work at the defendant company, or in the same industry or community.” The court noted that “[d]isclosure of the interviewee as a source of negative information or leads may affect his employment, employability, or reputation,” and “may also harm the interviewee’s co-workers, friends, or family.”
Here, the court found that plaintiffs’ counsel had “treated [the CWs] shabbily” with “no consideration given to their situations and interests.” The court expressed its “hope and expectation . . . that, in future cases, counsel will aspire to better.”