Protecting Truth-Tellers and Policing Misconduct: Why Former Employees Matter in Private Securities Litigation

December 16, 2025

By Adam Hollander

Private litigants play a critical role in holding publicly traded companies and their senior executives accountable under the federal securities laws. Although agencies including the SEC and DOJ have vast and important enforcement powers, their resources are limited and particular enforcement actions or subject matters may be subject to the changing priorities of presidential administrations or agency heads. Plaintiffs’-side attorneys and the (frequently large institutional) investors they represent not only fill gaps but typically have capacity and focus that government agencies at times may not. 

At the same time, private securities litigation faces substantial obstacles that the government does not, including heightened pleading standards, and limited tools to gather relevant information in the early stages of an investigation or litigation. Adequately pleading these cases—let alone proving them—requires a very high degree of specificity and frequently nonpublic information about misconduct at large companies, with every incentive and ample opportunity to keep misconduct hidden. Former employees (FEs) can be the difference-makers between litigation that succeeds in holding wrongdoers to task and securing a meaningful recovery for wrong investors, and a complaint that gets dismissed while investors are left holding the bag. The securities defense bar and their corporate clients understandably seek to discount and discredit FEs and their accounts with the goal of shielding fraudsters from liability. But corporate accountability, the proper functioning of capital markets, and investor protection depend on FEs having the courage and protections necessary to shed light on wrongdoing, even (and especially) given the personal and professional risks they face. 

Recent commentary in the New York Law Journal takes aim at the use of what the authors call “confidential witness” allegations in securities complaints—portraying them as unreliable, biased, and motivated by personal grievance. But FEs have ample reasons to keep their identities confidential, especially in a case’s early stages. There is no financial gain or glory in voluntarily and expressly making yourself a witness in large, complex litigation that may include the collection and production of documents, depositions, and the sort of formal and informal threats and intimidation that defendants may bring to bear. 

I have litigated many large securities class actions that have relied on FEs at the pleading stage, and I currently represent numerous FEs in my practice. The FEs I’ve had the privilege to work with in both capacities are largely credible, upstanding, and altruistic, but also concerned about undue retaliation. I wish those concerns were unfounded, but they are not. I regularly speak with FEs who have been contacted by a company’s lawyers who attempt to (subtly or not) coerce retractions and clarifications to neuter what would otherwise be powerful allegations in a securities plaintiff’s complaint. And nearly every motion-to-dismiss brief that addresses FE allegations will urge courts to disregard those accounts as unreliable and self-motivated. In my experience, those claims ring hollow. What motivates FEs is not, generally, self-interest. They receive no financial or other benefits for stepping forward and exposing themselves. Rather, what they stand to gain-and what motivates them–is usually a mix of bravery and righteousness, and the desire to at least increase the likelihood that a case will be able to proceed, investors will get some relief, and the public will learn the truth about what happened at a publicly traded company that benefits and relies on massive infusions of public capital and trust.

Indeed, former employees are frequently critical to meeting the demanding pleading standards that Congress and the courts have imposed on securities fraud claims. To survive a motion to dismiss and enable discovery, plaintiffs must plead facts showing “falsity” and “scienter” (the defendants’ knowing or reckless state of mind) with a high level of detail and specificity that federal law and procedural rules require in private securities actions. Those facts rarely come from public filings or news reports; they come from people who saw how information flowed inside the company. FEs—people who understand the relevant internal reporting structures, compliance gaps, and decision-making processes—are often the only ones who can fill that gap. 

That’s precisely why confidentiality is critical for FEs at the pleading stage. The law protects these individuals not to hide their credibility, but to prevent retaliation and encourage truth-telling in an environment where participation carries real cost. Courts recognize this balance, and regularly credit FE accounts as reliable at the pleading stage. 

The terminology also matters. For an audience unfamiliar with private securities litigation, the “confidential witness” moniker may suggest some improper, clandestine, backroom dealing, and that allegations are based on rumor and innuendo rather than honest factual information. Ample guardrails prevent attorney misconduct in the process. Plaintiffs’ counsel are bound by Rule 11 and ethical duties to ensure that every allegation has a good-faith factual basis. Courts generally require complaints to describe an FE’s role, tenure, and access to information with specificity. And, if and when a case moves into discovery, defendants are able to test FE allegations through the discovery tools available to them, as with any other allegation that parties work to prove or disprove in discovery.

To broadly paint FEs as biased or self-serving flies in the face of the truth-seeking function of litigation and underscores the lengths corporate wrongdoers will go to in order to avoid accountability. But for private securities litigation to meet its promise of helping to enforce the federal securities laws as a valuable counterpart to government enforcement, returning billions of dollars to defrauded investors year after year, individuals who are willing to step forward at their own personal risk must be protected and empowered. The question isn’t how to attack those voices, but how to protect them, so that legitimate claims can be tested on the merits and investors do not lose such powerful firsthand windows into corporate abuses and fraud.