Over the years and, most certainly, since the passage of the Private Securities Litigation Reform Act, plaintiffs' lawyers have used confidential witnesses in their pleadings.
Plaintiffs' lawyers, typically, do not name these witnesses in their complaints to avoid motions to dismiss and other legal actions. However, over the last several years, court decisions have become increasingly critical of this approach, requiring confidential witness disclosure to occur, most notably, in Federal Rule of Civil Procedure 26 initial disclosures. Not to be outdone, Plaintiffs' lawyers have responded by trying to hide these confidential witnesses among other witnesses named.
Nonetheless, recently, some courts have even required that these so-called confidential witnesses be named at the motion to dismiss stage to assist the court in determining if the defendants motion to dismiss should be granted. Most notably, the Second Circuit Court of Appeals has approved this process in the Campo v. Sears Holdings Corp., 2010 WL 1292329, No. 09-3589-cv (2d Cir. Apr. 6, 2010).
Additionally, plaintiffs have also run a risk that, when they refuse to name a confidential witness, their action could result in dismissal and/or sanctions. Some cases have revelaed that confidential witnesses may, ultimately, recant their story as the litigation progresses. This was vividly seen in the City of Livonia v. Boeing Company case, http://scholar.google.com/scholar_case?case=7885063100490608775&hl=en&as_sdt=2,39, where the confidential witness recanted, subjecting plaintiffs to a Federal Rule of Civil Procedure 11 sanctions.
Thus, there are dangers in using confidential witnesses in securities litigation, and defendants should be ready to respond.