Here’s a new twist on an old story. A securities class action firm in the early stages of a fraud case tracks down a former employee of the defendant. The former employee dishes dirt about the company to an investigator, a boon for plaintiffs’ lawyers who have to draft a detailed complaint about corporate wrongdoing without the benefit of discovery from the defendant. The company protests, asserting that former employee was under a confidentiality agreement.
Often what happens next is that former employees recant their testimony, creating considerable awkwardness (or worse) for shareholder lawyers. But U.S. District Judge Edward Chen of San Francisco described a different scenario in an opinion Thursday in a securities fraud class action against the healthcare mobile communications company Vocera – which resulted in quite a different outcome for class counsel. In fact, securities lawyers who want to avoid controversy over confidential informants ought to consider adopting the strategy of Vocera class counsel from Labaton Sucharow.
As you know, under the Private Securities Litigation Reform Act of 1995, plaintiffs’ lawyers aren’t permitted access to discovery from defendants until after their complaints have withstood defense motions to dismiss. Yet to meet pleading standards, their complaints must provide detailed and specific allegations of fraud. So securities class action firms have little choice but to seek out corporate employees or former employees to flesh out their claims and push their cases beyond dismissal.
After Judge Chen appointed Labaton to lead the shareholder class action against Vocera, the firm’s chief investigator, Jerome Pontrelli, scored big when he found the company’s former audit director, who had only recently left Vocera’s employ. In addition to an interview, the former employee gave Pontrelli a binder of internal documents related to the fraud investigation.
Pontrelli, according to Labaton’s brief, was concerned that some of the documents might be privileged. Labaton partner Jonathan Plasse immediately recommended that the firm sequester the material before any lawyers at the firm even saw it. Labaton also hired ethics advisor Peter Jarvis, now at Holland & Knight. “We wanted to do everything appropriately,” Plasse told me. Labaton, he said, has never faced precisely the same circumstances as those in the Vocera case but was involved in a 2002 case in which plaintiffs’ lawyers obtained a ruling in San Francisco federal court that former JDS Uniphase employees were permitted to talk to shareholder investigators.