COLUMN-A confidential witness walks it back – but a securities case moves forward

By Jenna Greene

March 30 (Reuters) - Confidential witnesses are near-ubiquitous in securities fraud class actions, relied on by plaintiffs’ lawyers to bolster allegations of intentional wrongdoing by company leaders.

But what happens when a witness recants?

That question landed before a federal judge in Manhattan this month, when a key confidential witness disavowed many statements attributed to him in a complaint targeting European semiconductor giant STMicroelectronics.

U.S. District Judge Alvin Hellerstein refused to toss the suit, ruling instead that issues related to witness credibility “are misplaced at this stage” of the litigation. He ordered the case to proceed to discovery.

STM and plaintiffs’ lawyers from Pomerantz declined comment.

The episode highlights a long-running tension in securities fraud class actions. Under the Private Securities Litigation Reform Act, plaintiffs’ lawyers must provide detailed, specific allegations that corporate defendants intentionally deceived investors — a formidable pleading standard. At the same time, shareholder lawyers aren’t entitled to discovery from defendants until they’ve survived a defense motion to dismiss.

The challenge for plaintiffs’ lawyers is how to get the requisite insider information up front, without the benefit of discovery.

Enter confidential witnesses — typically disaffected current or former employees or contractors of the company being sued, who agree to speak to the plaintiffs' lawyers provided they are not identified by name in the filings.

Here, STM was hit with an investor class action in 2024 after its stock, which trades on the New York Stock Exchange, dropped from a high of $42 a share to under $26 over a six-month span. Potential damages could be in the hundreds of millions of dollars.

The plaintiffs allege STM, its CEO Jean-Marc Chery and its CFO Lorenzo Grandi misled investors about STM’s financial health, offering rosy public statements that hid a significant deterioration in its business.

STM denies wrongdoing and has argued the executives’ comments were protected, forward-looking statements.

The complaint, which survived a motion to dismiss last year, leaned heavily on information from “Confidential Witness 1,” who served as president of STM's automotive division from 2012 until he was fired in 2023. According to the complaint, the witness said he lost his job because he objected to STM’s “artificial financing reporting” and sales tactics “designed to conceal the Company’s true exposure to a decline in demand.”

But the man — whose name was later revealed by the Italian press as Marco Monti — said in a sworn declaration earlier this month that he was never given an opportunity to review the complaint before it was filed.

The allegations attributed to him are “untrue or inaccurate,” Monti said under penalty of perjury, offering a point-by-point refutation of the claims. Plaintiffs “should not use me as a ‘confidential witness’ in their lawsuit,” he said.

Monti could not be reached for comment.

He isn’t the first confidential witness in a securities fraud class action to repudiate his testimony in the early stages of the case — but how judges respond has varied considerably. Some have dismissed the cases with prejudice, while others have allowed the matters to proceed, opting to weigh the significance of the recantations later.

STM’s lawyers from Sullivan & Cromwell in a motion for reconsideration urged Hellerstein to rethink his prior decision refusing to dismiss the case. “Plaintiffs’ claims are built on fabricated evidence,” defense counsel wrote. “All that now remains are insufficient allegations of ordinary business conduct.”

Plaintiffs' lawyers from Pomerantz responded that Monti continued to cooperate with them for months after the suit was filed without sounding any alarm. They said they’re confident they accurately recounted the information he provided.

The belated recantation “raises very serious concerns of intimidation and undue pressure on the witness,” Pomerantz partner Omar Jafri wrote in a March 9 letter to the court, alleging that Monti repeatedly expressed fear of retaliation from STM.

Hellerstein in his March 18 decision allowing the case to move forward made no call on Monti’s credibility — at least not yet.

Instead, the judge pointed to 2015 decision from the Northern District of California involving another recanting securities fraud witness. In that case, the court held questions arising when a witness walks back allegations should be considered at a later stage, “after the benefit of full discovery, or for consideration by a jury.”

For STM, that means that despite a star witness recanting, there’s no escape hatch — at least not now — from the suit.