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Detective Work Yields Controversial Evidence for Plaintiffs in Class Action Securities Case

October 02, 2014

Posted in Business Litigation, Corporate Law

photo - detective work by MatitoA corporate whistleblower can be a plaintiff’s best friend when it comes to starting a lawsuit and providing evidence to support it. A case in San Francisco federal court resulted in an unusual evidentiary decision in the plaintiffs’ favor in a securities class action case.

In these types of cases plaintiffs’ attorneys are caught in a Catch-22. Complaints must contain detailed and specific allegations of fraud, but the attorneys can’t seek information or documents from the defendant which can substantiate those allegations until the defendant has sought, but failed, to dismiss the complaint.

To resolve this chicken and the egg situation, plaintiffs’ securities class action firms seek out current or past corporate employees to gather evidence to flesh out their claims so the complaints will be substantial enough to survive a motion to dismiss. Defendants may claim information from an employee, or ex-employee, can’t be used if that person signed a confidentiality agreement or leaks documents that belong to the defendant.

In a class action securities case against mobile communications company Vocera the judge found such documents could be used, despite a confidentiality agreement, in part because the information and documents were handled with great care.

  • The lead plaintiffs’ firm’s investigator found the company’s former audit director, who granted an interview and provided a binder of internal documents related to the fraud investigation.
  • The investigator felt some of the documents could be privileged and the firm sequestered the material before any lawyers at the firm even saw it. The firm also hired an ethics advisor to help them handle the issue.
  • He contacted Vocera’s lawyers with a request that they review the documents and notify him whether they were privileged.
  • The company instead informed plaintiffs’ attorneys that the former audit director had violated his severance agreement and misappropriated internal documents.

Vocera asked the Hon. Edward Chen, the judge presiding in the case, to prevent use of the material in accordance with a 1995 federal law governing private securities class actions. It argued plaintiffs’ attorneys should not be the ones deciding which documents may or may not be privileged, which ones can and cannot be used.

Judge Chen ruled against the company stating plaintiffs could use the information from the interview as well as the documents (as long as they’re not privileged). The dispute, according to the judge, boils down to timing: Were shareholders permitted to use material they could obtain through post-dismissal discovery before they survived Vocera’s dismissal motion? The judge said yes. According to an article by Reuters,

“The documents were not provided by Vocera in response to a document production request; they were already in the possession of a third party who handed them to (the) investigator,” Chen wrote. “While opposing this motion and negotiating a protective order imposes some cost on Vocera, that cost is different in quantity and quality from the burdensome discovery costs Congress had in mind in enacting the discovery stay provision. Vocera is not being subjected to a broad-based fishing expedition.”

Judge Chen considered plaintiffs’ attorneys handling of the disputed material.

  • Vocera didn’t claim that the firm played any role in the purported misuse of the documents,
  • Plaintiffs’ lawyers didn’t solicit the materials, and
  • Didn’t make use of them before it asked the court to rule whether it could.

The judge instructed Vocera to identify privileged documents and stated that documents would be covered by a protective order to prevent publication of proprietary corporate information. Otherwise, the plaintiffs are able to use the documents when an amended complaint is drafted.

Though litigation has a reputation for being a knock down drag out affair (and it can be that way at times), this case shows how handling a sensitive issue with some finesse can result in dividends for clients. Plaintiffs’ attorneys could’ve studied the documents and quoted them chapter and verse in filings, but instead they held off and sought judicial approval of how to properly handle them.

If you’re a shareholder involved in or considering litigation, or in management defending a legal action, and have questions about applicable laws and procedures, contact my office so we can talk about the matter.