Much to the chagrin of plaintiffs’ lawyers, federal law requires that a judge dismiss a securities fraud class action if the complaint doesn’t include “particularized facts giving rise to a strong inference of intent to deceive by each defendant.”  One tactic of recent vintage that securities fraud lawyers utilize to keep their suits alive is to claim that a confidential witness has certain information that demonstrates intent to defraud.  This can work unless, as happened in one case in Illinois federal court, the lawyers make the mistake of disclosing the witness’s name, and then the witness in turn disavows knowledge of the supposedly incriminating information which the plaintiffs’ lawyers attributed to him.

As discussed in a Wall Street Journal editorial, Boeing Beats the Trial Bar ($), last week, a city pension fund played the role of plaintiff for (as the judge put it) “eager class action plaintiffs’ lawyers,” filing suit against Boeing for allegedly deceiving investors about developments in the production of a jumbo jet.  After Judge Suzanne B. Conlon initially threw the complaint out of court for failing to meet the pleading requirements, the lawyers refiled, claiming that a Boeing “insider” had detailed information including documents that demonstrated fraud.  On the basis of this new information, Judge Conlon allowed the suit to proceed.

The problem was, once the plaintiffs revealed the identity of the “insider,” the defendants interviewed him, and low and behold, he didn’t in fact work for Boeing; he didn’t possess any insider knowledge or documents; and he didn’t even meet or speak with the plaintiffs’ lawyers before the defendant’s deposition.  The plaintiffs’ lawyers were forced to argue their own witness was lying; the witness retorted that the investigators for the lawyers were the ones telling lies.

Judge Conlon, who must have felt quite burned after having initially allowed the case to go forward based on the claims of this confidential witness, reversed herself in a short and to-the-point nine-page ruling, City of Livonia v. Boeing and threw out the complaint.

What happened in City of Livonia sounds troublingly like other recent instances of alleged and actual plaintiffs’ lawyer fraud.  In the still-raging environmental litigation against Chevron in Ecuador, a plaintiffs’ expert gave sworn testimony that he did not prepare or authorize reports on environmental damage in Ecuador that the plaintiffs attributed to him.  In litigation against Dole Food Company, a judge found that plaintiffs’ lawyers recruited and instructed Nicaraguan workers to mislead the court as to their supposed injuries.

A little over six years ago, WLF published an op-ed in its In All Fairness column series in The New York Times entitled “An Idiot’s Guide to Class Actions.”  It seems we’ll have to add another item to the Securities Class Action Plaintiffs’ Lawyers’ Playbook the piece lays out:

  • If the judge doesn’t buy your initial tale of fraudulent behavior, adjust your story to include a confidential witness who has inside information that proves something untoward was afoot.  Keep his name confidential and do all you can to prevent the class action defendant from questioning him.