The Seventh Circuit several years ago questioned its ability to rely on confidential witness allegations in securities class actions governed by the Private Securities Litigation Reform Act. In the often cited Higginbotham v. Baxter Int'l Inc., 495 F.3d 753, 756-57 (7th Cir. 2007), the court said: "It is hard to see how information from anonymous sources could be deemed 'compelling' or how we could take account of plausible opposing inferences. Perhaps these confidential sources have axes to grind. Perhaps they are lying. Perhaps they don't even exist."
In City of Livonia Employees' Retirement Sys. v. The Boeing Company (7th Cir. Mar. 26, 2013), the Seventh Circuit affirmed the dismissal of a securities class action against Boeing in light of baseless confidential witness allegations and remanded for determination of whether plaintiffs' counsel should be sanctioned under Rule 11.
In Boeing, plaintiffs brought a class action against Boeing and two executives who were alleged to have deceived investors regarding the Company's 787 Dreamliner aircraft specifically the testing of the aircraft, its delivery schedule and its planned "First Flight." After Boeing announced that the Dreamliner's First Flight had been canceled due to anomalies in certain wing tests and the aircraft's delivery would be delayed, Boeing's stock price dropped and litigation ensued.
The district court dismissed plaintiffs' amended complaint because there was no support for the allegation that Boeing's top executives had made optimistic statements regarding the First Flight at a time when they knew the optimism was unfounded. In other words, i.e., plaintiff had not shown a "strong inference" of scienter as required by Tellabs, Inc. v. Makor Issues and Rights Ltd., 551 U.S. 308, 324 (2007).
In a second amended complaint, plaintiffs added four paragraphs concerning a confidential witness described as "Boeing's senior structural analyst engineer and chief engineer." The new allegations stated that the witness had worked on the wing tests at issue and "had direct access to, as well as first hand knowledge of the contents of, Boeing's 787 stress test files that memorialized the results of the failed 787 [wing tests]." Expressly relying on these new allegations to establish scienter, the district court denied the defendants' motion to dismiss.
The witness, subsequently identified as Bishnujee Singh, then provided a declaration and deposition testimony in which he denied that he was the source of the information attributed to him. In fact, Singh had never been a Boeing employee; he had been employed by a contractor for Boeing. He began working at Boeing months after the events at issue, and he denied having any personal knowledge of the...
