In an opinion today allowing a securities class action to be dismissed without prejudice, Judge Engelmayer expressed concern about the lawyers using confidential witnesses in complaint without confirming the accuracy of the statements attributed to them or warning the witnesses that their identity might have to be revealed. On the first point, the complaint’s 11 confidential witnesses were not given the chance to confirm the statements attributed to them and at least four believed they were misquoted or misleadingly quoted.  This risk of error, Judge Engelmayer concluded, counsels in favor of better diligence before filing a complaint. On the second point, Judge Engelmayer concluded that it was a matter of “decency” to alert confidential witnesses that their identities might eventually be revealed:

The issue presented by a law firm’s practice of not notifying an interviewee—unless he asks—that he will be designated as a Confidential Witness is therefore, predominantly, not one of law. It is one of basic decency. When 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. The interviewee may still work at the defendant company, or in the same industry or community. Disclosure of the interviewee as a source of negative information or leads may affect his employment, employability, or reputation. Disclosure of the interviewee as a source may also harm the interviewee’s co-workers, friends, or family. To fortify their Complaint in this case, however, plaintiffs’ counsel exposed 11 interviewees to such risks, without notice and without ascertaining whether the benefit to quoting the witnesses justified the potential harm. Counsel did not ask of any of the 11 interviewees whether he was willing to bear the risk of public disclosure of his identity. Nor did counsel ask any of the 11 what the consequences to him of being outed as an informant . . . might be. Nor had plaintiffs’ investigators, when they earlier interviewed these witnesses, surfaced these risks. The Court, the public, and above all such witnesses have the right to expect better of counsel. They have a right to expect counsel to treat witnesses with decency. They have a right to expect counsel, before designating a person as a CW, to take into account how that person might be affected were this designation to lead to his identification. They have a right to expect counsel to consider thoughtfully, for each person who submits to an interview, whether the consequences of potentially outing that person are justified—genuinely justified—by counsel’s duty of zealous representation of their clients. By globally identifying 11 interviewees as Confidential Witnesses with no advance notice to them and no consideration given to their situations and interests, counsel here treated these people shabbily. The Court’s hope and expectation is that, in future cases, counsel will aspire to better.

Judge Rakoff expressed his own misgivings about the general practice of using confidential witnesses in securities class actions in case covered here