The Witness Recants

By raising the bar for a viable pleading, the Private Securities Litigation Reform Act and subsequent case law have made plaintiff lawyers reliant on confidential witnesses. This has resulted in a somewhat consistent pattern of revelation followed by denial, after the source gets outed during the proceedings and then pressured by the company to recant. Earlier this month, Federal District Judge Jed S. Rakoff of the Southern District of New York addressed the issue in an unusual post-settlement memorandum, in which he characterizes it as an unfortunate unintended consequence of the PSLRA and the case law, one that creates problems for both plaintiffs and defendants, as well as the confidential witness who gets placed in “the unenviable position of having to account to their employers for such indiscretions, whether or not their statements were accurate.”