After confidential witness recants, judge in Chemours class action wants answers

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(Reuters) - Shareholder lawyers who filed a securities fraud class action against The Chemours Co — but then decided to drop the case when a confidential witness recanted his allegations — are going to have to do some explaining about who is responsible for the collapse of the class action.

U.S. District Judge Colm Connolly of Wilmington last week ordered lawyers from Saxena White and Prickett, Jones & Elliott to file the transcript of an April deposition of the witness, a former high-ranking Chemours executive, on June 3. Connolly also set an Aug. 2 hearing date to determine whether shareholder lawyers complied with Rule 11, which requires filings to be made in good faith.(When Congress enacted legislation in 1995 to discourage unwarranted securities class actions, lawmakers included a provision that specifically requires judges to ascertain compliance with Rule 11 when courts dispose of the cases. But, in practice, the provision is rarely invoked.)

Connolly entered the order signaling his concerns about the recanting witness after plaintiffs lawyers and Chemours counsel from Wachtell, Lipton, Rosen & Katz and Friedlander & Gorris filed a stipulation and joint motion to dismiss the class action, which alleged that Chemours, a 2015 spinoff from The Dupont Co, deceived investors for more than two years about its liability for remediation of contaminated environmental sites. In the joint filing, the two sides said they agreed that neither had violated Rule 11.

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Saxena White declined to provide a statement on Connolly's Rule 11 hearing order. Chemours counsel Jonathan Moses of Wachtell did not respond to my email.

Allegations from confidential witnesses, as you know, are often a critical component of shareholders’ securities fraud class action complaints. Under the Private Securities Litigation Reform Act, shareholders cannot obtain discovery from defendants until they’ve survived a motion to dismiss. Instead, plaintiffs lawyers routinely hire investigators to sniff out corporate insiders — typically, former or disaffected employees — whose information can bolster the fraud claims in their initial pleadings.

Defendants, of course, don’t look kindly on allegations premised on information from confidential witnesses, so it’s common for disputes to arise over both the truthfulness of the informants and the conduct of plaintiffs lawyers (and their investigators) in obtaining and recounting informants' evidence. In one of the best-known examples, The Boeing Co accused Robbins Geller Rudman & Dowd in 2010 of including obviously erroneous allegations from a purported Boeing engineer in a shareholder fraud complaint alleging misrepresentations about the production of Dreamliner jets. Among other problems with the witness: He was never actually employed by Boeing.

In 2014, after a remand from the 7th U.S. Circuit Court of Appeals, U.S. District Judge Ruben Castillo of Chicago concluded that Robbins Geller had failed to conduct an adequate investigation of the witness’ allegations before including them in its complaint.

But in other cases, as I’ve reported, corporate insiders who willingly provided valuable information to shareholder lawyers recanted their accounts when they realized the consequences of that cooperation. Plaintiffs lawyers will tell you, in fact, that corporations and their defense lawyers use intimidation tactics — like threatening to rescind severance agreements — to get confidential witnesses to change their stories.

Back in 2012, for instance, Robbins Geller alleged that after Lockheed Martin Corp learned the identity of shareholders' confidential witnesses through discovery, the company bullied the witnesses into recanting. U.S. District Judge Jed Rakoff of Manhattan held an evidentiary hearing at which he entertained testimony from several recanting witnesses and from Robbins Geller’s investigator.

The judge found, on balance, that the investigator was far more credible than the former Lockheed employees. He denied summary judgment to Lockheed, bemoaning “endemic” controversies in securities litigation over the credibility of confidential witnesses.

We don’t yet have enough information to know whether the confidential witness in the Chemours case — a onetime division president named Paul Kirsch, who allegedly presented a report on environmental remediation liability to the Chemours board in 2018 — recanted under pressure, was misrepresented in shareholders’ complaint or changed his tune for some other reason. The transcript of his deposition, which was conducted in April and is due to be filed with Connolly next week, should clear up a lot of the mystery.(Kirsch was easily identified because plaintiffs lawyers cited his corporate title in their complaint.)

What we do know is that allegations involving Kirsh’s report to the board were only a small piece of the fraud case that plaintiffs initially alleged. Their complaint instead centered on the allegation that Chemours revealed its crippling liability for environmental cleanup costs when the company filed a lawsuit against its parent Dupont in Delaware Chancery Court in 2019. Chemours’ Chancery Court complaint, according to plaintiffs, showed that the company knew it was insolvent at the time of the 2015 spinoff but told investors otherwise for years afterward.

In their motion to dismiss the class action, defense lawyers said Kirsch disputed shareholders’ depiction of his 2018 report to the board. In an accompanying two-page declaration, Kirsch said the complaint was “misleading,” and that his report to the board “was in no way an estimate of Chemours’ current remediation obligations,” but was instead a long-range projection of how much it would cost the company to meet ambitious environmental goals.

Kirsch’s report became the centerpiece of the case after Connolly threw out plaintiffs’ other claims in February. The judge acknowledged in that opinion that Chemours disputed the complaint's depiction of Kirsch’s presentation to the board. He said, however, that Kirsch’s apparent recantation would be more appropriately considered in a Rule 11 or summary judgment motion.

The judge did suggest in February that the two sides depose Kirsch before launching into discovery. After that deposition, shareholder lawyers agreed that the Kirsch allegations should be stricken from their complaint, according to their May 16 joint filing with defendants. Without those allegations, the stipulation said, shareholders had no live claims.

As I mentioned, Chemours and its lawyers aren’t asserting misconduct by plaintiffs counsel. Now shareholder lawyers just have to convince the judge they didn’t do anything wrong.

Read more:

Chemours must face shareholder lawsuit over 'forever chemicals'

Chemours' enviro liability complaint v. DuPont must go to arbitration - Dela. court

The confidential witness conundrum in securities class actions

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Alison Frankel has covered high-stakes commercial litigation as a columnist for Reuters since 2011. A Dartmouth college graduate, she has worked as a journalist in New York covering the legal industry and the law for more than three decades. Before joining Reuters, she was a writer and editor at The American Lawyer. Frankel is the author of Double Eagle: The Epic Story of the World’s Most Valuable Coin.