North Carolina Law Review

University of North Carolina School of Law

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Chapel Hill, NC 27514

Confidential Witness Interviews in Securities Litigation

March 21, 2018

96 N.C. L. Rev. 789 (2018)


This Article examines the widespread use of confidential witnesses (“CWs”) in securities class action litigation following the enactment of the Private Securities Litigation Reform Act of 1995 (“PSLRA”). CWs are current or former employees (or, less frequently, customers or suppliers) of the defendant company who provide information to plaintiffs for use in their class action complaints, typically in an effort to bolster scienter or falsity allegations, or both. This information is furnished anonymously, in the sense that the CWs are not identified by name in the pleadings. Anonymity is provided because the witnesses are fearful of retaliation by the defendant companies against which they are providing information. Federal courts have accepted this pleading practice in recognition of the risk of retaliation. While there is some variation between the federal circuits, generally the use of CWs to establish scienter is permissible so long as: (1) the witnesses are described with sufficient particularity to establish their reliability and personal knowledge, and (2) the statements attributed to them are indicative of scienter. The required descriptions often ease the task for defendants to ascertain the witnesses’ identities.


While federal courts have accepted the use of confidential witnesses in securities litigation, that acceptance has been begrudging. Indeed, the Fifth and Seventh Circuits steeply discount (but do not automatically reject) allegations from CWs. Beyond discounting, the use of CWs has raised a host of thorny legal issues. This Article considers three of those issues, all of which relate to the pre-filing interviews of CWs conducted by plaintiffs’ counsel and/or investigators. The three issues are: (1) the use by defendants of confidentiality, separation, and severance agreements to discourage or bar interviews of employees or former employees by plaintiffs’ counsel or investigators; (2) interview practices that give rise to alleged recanting by CWs; and (3) efforts by defendants to obtain notes of witness interviews conducted by plaintiffs’ counsel or investigators.



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