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Newark, N.J.-Securities litigation lawyers are battling over plaintiffs’ stepped-up use of confidential witnesses, thanks to a federal statute that forces plaintiffs to allege specific wrongdoing at the pleading stage, which in turn increases their reliance on company insiders for specifics. When a dispute over confidential witnesses surfaces in a shareholder suit, it usually boils down to plaintiffs promising anonymity to informants, usually the defendant company’s current or former employees, in exchange for their take on the alleged fraud. For their part, defendant companies seek dismissals, claiming that anonymity is being used to shield witnesses whose claims don’t stand up. The issue flared up most recently in San Francisco federal court, where securities lawyers alleged sanctionable behavior by their opponents in two suits in the Northern District of California. In one case, In re Exodus Communications, No. 01-2661-MMC, defense lawyers moved to sanction plaintiffs’ lawyer Reed Kathrein of San Diego’s Lerach Coughlin Stoia Geller Rudman & Robbins and his co-counsel after seven confidential witnesses told defense lawyers that the plaintiffs misstated their claims. Lawyers in that suit have been fighting over motions to dismiss since 2001, with the latest spat involving plaintiffs’ witnesses who allegedly gave different testimony to defense counsel than to the plaintiffs’ lawyers. The issue started when defense lawyer David Furbush was able to figure out the identities of several of 12 confidential plaintiffs’ witnesses. In signed declarations provided to the defense, seven of those witnesses allege that plaintiff investigators and attorneys misstated their testimony. Furbush, a partner in O’Melveny & Myers’ Menlo Park, Calif., office, moved to strike the testimony and sought sanctions, but U.S. Magistrate Judge Maria-Elena James declined. In another case, In re CV Therapeutics, No. C-03-3709-SI, the same plaintiffs’ lawyer wants a defense attorney, Latham & Watkins partner Jay Pomerantz, to be held in contempt for alleged disclosure of names of confidential witnesses, in violation of a court order, to get other witnesses to recant statements made to plaintiffs’ lawyers. Emerging phenomenon Under the 1995 Private Securities Litigation Reform Act (PSLRA) and court interpretations of it, plaintiffs must allege specific wrongdoing at the pleading stage to proceed to discovery. Without discovery, their lawyers must often rely on company insiders for specifics. “The value of confidential witnesses to securities lawyers is very high,” said Lawrence Rolnick, chairman of Lowenstein Sandler’s securities litigation and enforcement practice group in Roseland, N.J. “The risks are high on both sides because they have the potential to eliminate the significant procedural safeguards that were imposed by the PSLRA,” he said. “What you really have is a situation where the importance of these confidential witnesses and the effect they can have on companies and economies is huge.” ‘Bet the company’ cases These are “bet the company” cases-high-stakes litigation that threatens the company’s financial health-said Rolnick, whose corporate client list includes Lucent Technologies Inc., Wells Fargo & Co., Credit Suisse First Boston and Salomon Smith Barney. “You’re representing a small company in a suit that would never find its way into the courtroom but for anonymous sources,” Rolnick said. “You can imagine that kind of high-stakes, bet-the-company case where defense lawyers attack lawyers on the other side. Pressure overcomes the collegiality that would otherwise exist. It produces the kind of infighting and personal attacks that you see in California.” Bruce Greenberg, who represents plaintiffs in securities cases, said the recent California cases offer some lessons for lawyers on both sides. “The lesson for plaintiffs is, follow the rule for presuit investigation. For defendants, it’s ‘don’t allow your zeal to allow for intimidating tactics,’ ” said Greenberg of Newark, N.J.’s Lite, DePalma Greenberg & Rivas. “ The bottom line is that the defense often wishes that plaintiffs couldn’t rely on confidential witnesses. But defendants often have the ability to block key facts, and then file a motion to dismiss. It doesn’t level the playing field.”

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