Since the U.S. Supreme Court’s decision in Tellabs v. Maher Issues & Rights, 551 U.S. 308 (2007), federal courts have wrestled with its impact on the use of confidential informant allegations in federal securities complaints. There appears to be widely divergent views on this subject, partly mitigated by the differing facts of the cases in which the issue is raised. Most recently, the U.S. Court of Appeals for the Third Circuit addressed the issue in Rahman v. Kid Brands, discussed herein. No. 12-4257, 2013 WL 6038246 (3d Cir. Nov. 15, 2013).
Pre-’Tellabs’
Fed. R. Civ. P. 9(b) requires that circumstances constituting alleged fraud be stated with particularity. And, Section 21D(b) of the Private Securities Litigation Reform Act (PSLRA) also requires particularity, both in stating the facts upon which an alleged belief is based1 and in stating the facts giving rise to a “strong inference” that the defendant acted with the required state of mind,2 i.e., scienter in actions asserting claims under Section 10(b) and Rule 10b-5. To meet these particularity requirements, plaintiffs asserting such claims frequently rely upon factual allegations attributed to confidential informants, often the only or the principal information available to plaintiffs’ counsel. In assessing such allegations, courts have considered the detail provided by the confidential sources, the sources’ basis of knowledge, the reliability of the sources, the corroborative nature of other facts alleged, the coherence and plausibility of the allegations and similar indicia.3
