Negating Former Employees’ Confidential Witness Testimony

Entering the fourth quarter of 2025, the Northern District of California remains a hotspot for securities litigation. In a year marked by turbulent market conditions, tech companies have faced a series of challenges—including earnings misses, workforce reductions, and stock price declines.

These events often trigger securities class actions as plaintiffs’ firms seize on negative market reactions to allege companies defrauded investors. When layoffs coincide with stock drops, companies face an additional challenge—the use of confidential witnesses.

Confidential witnesses are usually former employees whose anonymous statements are cited in securities class actions to support allegations of fraudulent intent. They’re portrayed as insiders with firsthand knowledge of the practices that allegedly misled investors. As insiders, their statements can carry weight—often becoming the key allegations that allow a securities case to avoid early dismissal.

Confidential Witnesses Allegations

Congress enacted the Private Securities Litigation Reform Act of 1995 to curb the reflexive filing of securities fraud suits and to prevent plaintiffs from using discovery as a fishing expedition. The statute requires plaintiffs to allege detailed and specific facts before gaining access to discovery—a heightened pleading standard that has reshaped the early stages of private securities litigation.

To meet this standard, plaintiffs’ firms often turn to private investigators who scour social media to identify former employees who have left the company during key periods. These investigators find individuals willing to speak with them and provide statements that will add more substance to the complaint.

Sometimes confidential witnesses are biased against their former employer—particularly if they were laid off, demoted, or terminated under contentious circumstances. Their statements may reflect personal grievances rather than reality, and they may lack insight into broader company operations or decision-making. Confidential witnesses are also sometimes unaware of the role they’re playing in litigation. They may not realize their offhand comments to an investigator have been quoted in a complaint or used to support allegations of fraud.

The methods used to elicit statements can also raise concerns about their reliability. The plaintiffs’ private investigators may imply the company is “under investigation” before asking leading or suggestive questions. This framing can influence how former employees interpret their experiences or recollections.

As a result, statements may be incomplete, out of context, or mischaracterized in the complaint. It isn’t uncommon for witnesses to later disclaim or recant statements—particularly once they understand how their words have been used in the broader context of the litigation.

Reluctance to Dismiss

Even when faced with allegations that appear exaggerated, unsupported, or demonstrably inaccurate, Rule 11 sanctions remain elusive. In practice, courts rarely impose sanctions without concrete evidence of bad faith. As a result, sanctions motions are filed infrequently and rarely granted.

Courts have also been reluctant at the pleadings stage to consider declarations signed by witnesses recanting the statements that have been attributed to them in the complaint.

Defendants have had more success leveraging the plaintiffs’ own allegations to challenge statements made by witnesses.

Within the Ninth Circuit, confidential witness statements must both suggest scienter and be described with enough particularity to establish personal knowledge and reliability. If a witness didn’t work for the company during the relevant period, lacked access to key information, or offers secondhand accounts, courts are less likely to credit their statements.

However, courts are required to accept the complaint’s allegations as true and may not weigh credibility or resolve factual disputes. This means that even questionable statements—if presented with enough detail—can force defendants into discovery. The inability to challenge the substance of allegations early in the case can be particularly frustrating for companies facing litigation based on statements a witness later disavows.

A key test for confidential witnesses often comes at summary judgment, when defendants can present deposition testimony and documentary evidence that refutes the allegations in the complaint. By this time, witness identities have been disclosed and their statements tested in deposition—often focusing on whether they made the quoted statements and how they were approached by plaintiffs.

While courts don’t weigh credibility at summary judgment, they do assess whether there is a genuine dispute of material fact. If testimony refutes the allegations in the complaint or reveals problems in how the statements were obtained, it can help demonstrate that plaintiffs lack sufficient evidentiary support to proceed to trial.

Handling Confidential Witnesses

When litigating securities fraud cases, defense counsel should focus on developing a clear record while being cognizant that courts are inclined to be deferential to individuals who are willing to testify against their former employers. Counsel should:

• Clarify the witness’s role in the case during their deposition. Taking the time to provide a background on the litigation, including who the defendants are, what they have been accused of, and the plaintiffs’ theory of the case.
• Consider approaching depositions as opportunities to establish basic, uncontested facts such as limited experience or lack of firsthand knowledge. These depositions don’t need to be adversarial; often, a straightforward chronology of events or clarification of roles is enough to undercut the allegations.
• Maintain a neutral tone. Courts are sensitive to the risk that witnesses feel intimidated by their former employer’s counsel.

Pre-Litigation Strategies

Given the challenges posed by allegations, companies should take proactive steps to reduce risk before litigation begins:

• Plaintiffs’ investigators sometimes contact current or former employees under the guise of informal networking or even without a clear purpose. Train key personnel how to respond to unsolicited outreach by investigators and advise them on when to escalate the issue.
• Confidential witnesses may include individuals with performance issues or unresolved grievances. Coordinate with HR to conduct memorialized exit interviews and preserve performance evaluations, which can help contextualize or discredit statements during litigation.
• Preserve records of key decisions, strategic response memos, communications, and performance metrics. This information can be critical in rebutting vague or inaccurate allegations.

Confidential witnesses remain a challenging aspect of securities class actions. Plaintiffs often cite their statements to survive early dismissal—even when those statements later fall apart under scrutiny. By preparing in advance and approaching these witnesses strategically, companies can maintain control over the litigation and reduce their overall exposure.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Jessica Lewis is partner in WilmerHale’s Palo Alto office focusing on high-stakes securities litigation, class actions, and trial work.

Chris Johnstone is a litigator in WilmerHale’s Palo Alto office focusing on high-stakes securities, antitrust, and complex cases.

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