Who’s Behind Door Number One?: Problems with Using Confidential Sources in Securities Litigation

This Note analyzes the use of confidential sources in securities litigation cases. The fraud at issue in securities cases generally takes place behind the closed doors of the corporate boardroom, and an inside, anonymous source is often needed to substantiate these allegations of fraud. However, in response to what it perceived as an unacceptably high number of securities litigation cases, Congress adopted the Private Securities Litigation Reform Act (PSLRA), which frus-trated the common practice of relying on confidential sources. The purpose of this act was twofold: reduce the number of vexatious securities cases but nonetheless encourage valid claims, thus promoting the proper regulation of the securities markets. In order to accomplish these goals, Congress raised the pleading requirements. The PSLRA now requires that plaintiffs pleading a securities action plead their claims with greater particularity. In response, courts have struggled with how to evaluate the use of these crucial sources within the new standard.The author discusses three standards that courts take in addressing this problem. Some courts completely discount allegations made by a confidential source. Other courts allow the com-plaint to proceed, provided that the plaintiff has described the source in adequate detail. Finally, some courts take a middle approach and remain highly skeptical of confidential sources but nonetheless refuse to discount their allegations. The author suggests that courts should apply a middle-ground approach. A middle-ground approach is sufficiently lenient, promoting the regulatory effect offered by securities complaints, and ap-propriately skeptical, thus discouraging vexatious litigation.

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