Originally published March 8, 2012
Keywords: confidential witnesses, disclosure, discovery obligations
In the last few years, plaintiffs in securities actions have increasingly relied on allegations attributed to "confidential witnesses." Plaintiffs are especially likely to use statements by these witnesses—often alleged to be former employees or officers—to satisfy the tough scienter pleading requirement of a Section 10(b) claim under the Securities Exchange Act of 1934. However, after relying on the allegations of confidential witnesses to establish essential elements of their claims, plaintiffs sometimes attempt to shield the identity of these witnesses from disclosure during discovery, claiming either that their identities are protected by the attorney work product privilege or that the witnesses would be subject to retaliation by their employers.
In two recent decisions, however, judges in the Southern District of New York have rejected plaintiffs' attempts during discovery to keep the identities of witnesses confidential. In both cases, the plaintiffs relied on statements by confidential witnesses to defeat motions to dismiss and then refused to disclose the witnesses' identities during discovery.
On November 14, 2011, Southern District Court Judge Paul Engelmayer rejected a claim by plaintiffs that the identities of 11 witnesses were protected by the attorney work product privilege. Plumbers and Pipefitters Local UnionNo. 630 Pension-Annuity Trust Fund v. Arbitron, Inc., No. 08 Civ. 4063 PAE, BL 291048 (S.D.N.Y. Nov. 14, 2011). At the outset of discovery, defendant Arbitron, through an interrogatory, sought the names of witnesses cited by plaintiffs in their complaint and requested that plaintiffs produce all documents provided to them by the confidential witnesses. Instead, the plaintiffs listed 83 relevant former employees and stated that the 11 were among them.
The plaintiffs also refused to produce the requested documents, treating the request as derivative of the interrogatory response. They contended that their response was sufficient to satisfy their discovery obligations under the Federal Rules of Civil Procedure, that identifying the 11 confidential witnesses and their documents would violate the work product privilege, and that the witnesses would be subject to retaliation by their current or future employers.
Judge Engelmayer quickly rejected the argument that the plaintiffs had satisfied their discovery obligations with their limited responses. He further held that the witnesses' identities, as well as any information they provided, were clearly relevant or were likely to lead to the discovery of relevant evidence. Therefore, in the absence of any privilege, they were subject to discovery.
The plaintiffs also argued that identifying confidential witnesses would violate the work product privilege by suggesting to opposing counsel which witnesses the plaintiffs considered most relevant. The court was not persuaded by this argument and held that providing the names of confidential witnesses would, at most, allow opposing counsel to surmise that the remaining witnesses were considered less helpful to plaintiffs. Furthermore, because the plaintiffs had already identified the 83 individual witnesses, the identity of the original 11 would be unearthed during their depositions. Any work product protection the information enjoyed was therefore slight, and avoiding disclosure in an interrogatory response would not ultimately protect the information but would merely serve to drag out the discovery process and impose unnecessary costs on all parties. The burden imposed on defendants to search for this information through numerous depositions outweighed any limited work product privilege.
Judge Engelmayer also considered the interests of the parties in the motion to dismiss and subsequent discovery. He noted that a party may not use the work product doctrine as "both a shield and a sword"—plaintiffs who satisfied the pleading requirements and survived a motion to dismiss by "showcasing" statements from confidential witnesses could not thereafter refuse to disclose the identities of those witnesses on the grounds of work product privilege.
Finally, Judge Engelmayer agreed that retaliation against confidential witnesses is a legitimate concern. However, the simple assertion that all 11 witnesses were potentially subject to retaliation was insufficient to overcome the disclosure requirement. The plaintiffs were permitted more time to offer evidence particular to each confidential witness that would substantiate the concern of possible retribution.
The reasoning employed in Arbitron was subsequently followed in large part by Judge Sweet, also of the Southern District, in In re Bear Stearns Companies, Inc. Securities, Derivative, and ERISA Litigation, 08 MDL No. 1963 (S.D.N.Y. Jan. 27, 2012). In Bear Stearns, the plaintiffs used allegations from seven confidential witnesses in support of their opposition to a motion to dismiss. In response to an interrogatory request, the plaintiffs provided defendants with a list of 148 individuals who might have relevant information, but refused to confirm whether the confidential witnesses were among those listed. The plaintiffs also claimed that the confidential witnesses would not be used to provide evidence at trial, even though they had been used in opposition to the motion to dismiss. Adopting the reasoning in Arbitron, Judge Sweet found that there was no basis for granting work product protection to the identities of confidential witnesses and ordered plaintiffs to disclose the identities of the confidential witnesses to the defendants.
These cases represent an emerging consensus in dealing with the increased use by plaintiffs of confidential witnesses in federal securities class actions.
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