Yesterday Judge Rakoff published an unusual “memorandum” in a securities case that had already settled to point out how heightened pleading requirements in securities cases created unintended consequences:  plaintiffs’ lawyers seek out disgruntled employees before suit for “gossip” or “dirt” to support the complaint, and, then, in discovery, those same employees are forced to account to their employers. In the case that settled, Judge Rakoff had ordered that the confidential witnesses and the plaintiffs’ investigator appear at a hearing to testify about the investigation.  At the hearing, “it appeared to the Court that some, though not all, of the CWs had been lured by the investigator into stating as ‘facts’ what were often mere surmises, but then, when their indiscretions were revealed, felt pressured into denying outright statements they had actually made.” Judge Rakoff observed:

It seems highly unlikely that Congress or the Supreme Court, in demanding a amount of evidentiary detail in securities class action complaints, intended to turn plaintiffs’ counsel into corporate ‘private eyes,’ who would entice naïve or disgruntled employees into gossip sessions that might help support a federal lawsuit. Nor did they likely intend to place such employees in the unenviable position of having to account to their employers for such indiscretions, whether or not their statements were accurate. But, as it is, the combined effect of the PSLRA and cases like Tellabs are likely to make such problems endemic.

(H/T Alison Frankel)