Securities Lawyers Spar Over Use of Confidential Witnesses
Justin Scheck
The Recorder
04-12-2005
law.com
There's a reason why securities fraud informants like to stay anonymous.
"The plaintiff view is, 'My god, if we were to tell you who they were, they'd sleep with the fishes,'" said Jordan Eth, a partner with Morrison & Foerster who defends companies in securities class actions.
The cement shoes may be a rarity, but plaintiff lawyer Reed Kathrein says retaliation is a real fear for people who want to blow the whistle on fraud without publicly ratting out their bosses.
"They're in the industry, they want to get other jobs, and they don't want to get retaliated against," said the partner with Lerach Coughlin Stoia Geller Rudman & Robbins.
Defense lawyers like Eth don't dispute this. But they say anonymity is sometimes used to shield witnesses whose claims don't stand up.
The issue is coming to a head in two San Francisco suits in which lawyers have sought sanctions against their opponents.
In one case, Kathrein wants a Latham & Watkins partner held in contempt for allegedly disclosing witness names in violation of a court order.
In a separate suit, a federal judge in December ruled against a defense motion to sanction Kathrein and his co-counsel after seven confidential witnesses told defense lawyers that plaintiffs misstated their claims.
Confidential witnesses have become a staple of securities litigation since the 1995 Private Securities Litigation Reform Act and court interpretations of it. Plaintiffs must now allege specific wrongdoing at the pleading stage to proceed to discovery. Without discovery, plaintiff lawyers must often rely on company insiders for specifics.
"There may be no alternative for them other than going out and doing the most thorough investigation they can without the benefit of discovery," said David Furbush, a partner with O'Melveny & Myers.
Furbush is defending Exodus Communications Inc. and its former CEO, Ellen Hancock, in In re Exodus Communications, 01-2661-MMC, a securities suit brought by Kathrein in U.S. District Court for the Northern District of California.
Lawyers in that suit have been fighting over motions to dismiss since 2001, with the latest spat involving witnesses who allegedly gave different testimony to defense counsel than to the plaintiff lawyers.
The issue started, Furbush said, when his team was able to figure out the identities of several of 12 confidential plaintiff witnesses.
In signed declarations provided to the defense, seven of those witnesses say plaintiff investigators and attorneys misstated their testimony. Furbush relied on the declarations in asking U.S. Magistrate Judge Maria-Elena James to strike the testimony and order sanctions. She declined.
Kathrein says the suit illustrates why it's sometimes necessary to keep witness names secret.
"We're trying to keep people confidential to keep [defense counsel] off the phone and from intimidating them," he said.
Boris Feldman, a defense lawyer with Wilson Sonsini Goodrich & Rosati, puts it differently.
"It's partly because they want to shield them from the defense and keep the defense from finding out what they really said," Feldman said.
At an upcoming hearing, Kathrein will argue that Latham & Watkins partner Jay Pomerantz should be held in contempt in another Northern District suit, In re CV Therapeutics, C-03-3709-SI.
Witnesses' identities in that suit were kept confidential through pleadings, but were disclosed to defense counsel during discovery on the condition that their names not be revealed.
"Defendants have blatantly violated this order," Kathrein wrote in a motion last month. He claims Pomerantz told one confidential witness the identities of two others and threatened to depose him unless he retracted the statements he made to Kathrein's firm.
Pomerantz said Thursday that he did not want to discuss the contempt motion. In a letter to Judge Susan Illston in response, Latham partner John Tang wrote, "Pomerantz did not state unequivocally that if [a witness] provided an affidavit, there would be no deposition."
Tang then complained about the plaintiff attorneys' conduct, which he said included "sending a process server to Mr. Pomerantz's home, which is in a secluded location on a private road, at night, when only his wife was home."
Tang, who didn't return a phone call, ended the letter with, "To be clear: Defendants and their counsel have no interest whatsoever in retaliation. There has been no retaliation, and there will be no retaliation."
The pointed exchanges show how crucial confidential witnesses can be in the battle to reach the discovery stage. Once there, says Solomon Cera, a partner with Gold Bennett Cera & Sidener who represents plaintiffs, the witnesses are of less value.
"Typically in a securities case, the case is won or lost on the documents" produced in discovery, he said.
The use of confidential witnesses to reach that stage bothers Joseph Grundfest, a Stanford University professor and frequent critic of the securities plaintiff bar.
"If that gets you to discovery on a series of false premises, you're creating a clear engine for fraud that can never be tested," he said. Grundfest advocates a discovery process to verify such witnesses' statements.
But Kathrein says using such witnesses is only fair. "The defense are in control of 99 percent of the evidence. It would be unfair to close the door on us."
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