When blowing the whistle is a conflict of interest

Employees generally owe duties of loyalty to their companies (at least under US law), but for some time whistleblowing has not seen as a breach of such duty.   This was the underpinning of an important Supreme Court case thirty years ago – Dirks v SEC  – which held that an employee who told a securities analyst about a fraud at the employee’s company had not breached a fiduciary duty to the company (and hence under applicable law the securities analyst could not be prosecuted for insider trading based on this disclosure). But not all duties of loyalty are the same, and lawyers (and other professionals) are typically seen as having a stronger duty in this area than are employees in general.   Additionally, the related obligation to protect the confidentiality attorney-client  privileged information is stronger than is the general obligation employees have to protect the confidential information of their employers. These differences, in turn, impact the analysis of whistleblowing by lawyers.

The propriety of attorney whistleblowing  (in the US)  is  generally addressed by state bar ethics rules and also (to some extent) by SEC Rule 205 promulgated pursuant to the Sarbanes-Oxley Act.  More recently, the prospect of  an attorney blowing the whistle to recover a bounty for her efforts has been the subject of concern with the promulgation of Dodd-Frank Act whistleblower bounty provisions, which permit bounties of 10-30% of certain securities-law related recoveries by the SEC, CFTC or DOJ where a whistleblower’s “original information” contributed to the recovery. This latter type of whistleblowing was analyzed in an important (for attorneys, that is) opinion issued last month by the New York County Lawyers Association  (“NYCLA”).

The Opinion notes initially that “SEC whistleblower rules exclude from the definition of ‘original information’ most material that lawyers, in-house or retained, are likely to gain in the course of their professional  representation of clients, and thus generally preclude attorneys, in most instances, from receiving  a bounty for revealing such information. SEC Rule 21F-4(b) acknowledges the importance of the attorney-client privilege, as well as state ethics rules, and presumptively excludes the use of privileged or confidential information from the definition of eligible original information under the whistleblower rule. Indeed, the SEC warns lawyers that there will be no financial benefit to lawyers who disclose such information in violation of the attorney-client privilege or their ethical requirements.”  However, the above-mentioned requirements (concerning privilege and state ethical standards) are determined not by the SEC itself but by various state bar entities, like the NYCLA.

Turning to those state law requirements, the Opinion notes that under NY’s Rules of Professional Conduct (“RCP”)  the situations in which a lawyer may disclose a client confidence are even narrower than they are under  applicable SEC rules.  Moreover, the RPC’s exceptions to confidentiality mandates generally permit disclosure only to the extent necessary to correct/prevent (the defined categories of) wrongful conduct – and seeking a whistleblower bounty would not seem to meet that requirement. Thus, even if permitted by SEC rules, the RPCs could independently prohibit a lawyer from seeking a whistleblower bounty in cases involving representation of a client.

Most significantly for the purpose of this blog, the NYCLA faced the issue: “Is a conflict of interest under RPC 1.7 presented when a corporate lawyer, functioning as a lawyer, seeks to collect a whistleblower bounty?” Their answer was presumptively yes. “A lawyer confronted with potential corporate wrongdoing must evaluate and consider varying requirements under SEC and state ethics rules and then make some difficult decisions: Is the potential violation material? Is the potential violation criminal? Should the lawyer report the wrongdoing up the corporate ladder? Should the lawyer report the wrongdoing to an outside body, and if so, when? These complex and potentially inconsistent considerations call for the exercise of objective, dispassionate professional judgment. A lawyer who blows the whistle prematurely could harm the client and be professionally responsible for the precipitous disclosure of client confidences. A lawyer who fails to report credible evidence of corporate wrongdoing up the ladder, if it amounts to an independent violation of the securities laws, could potentially be prosecuted by securities regulators, subject to professional discipline by the SEC, and subject to reciprocal discipline by state bar counsel. Especially under these delicate circumstances, a financial incentive [of the type offered by the Dodd-Frank bounty provisions] might tend to cloud a lawyer’s professional judgment.”

The NYCLA also noted that the ethical rules discussed in the Opinion “would not affect or apply to lawyers who are not representing, or did not represent clients. For example, a corporate officer or compliance officer who happens to be a lawyer may not necessarily be representing a client in the performance of his duties, depending on the facts of the individual case. To the extent that the lawyer is not representing a client, our opinion would not apply to that conduct simply because the lawyer happens to be a licensed attorney.”

For further reading…

Two points from earlier posts in this blog about attorneys, confidential information and compliance:

–          While providing strong protection of the attorney-client privilege is sometimes seen as catering  to corporate stonewalling, a more accurate view (to my mind) is that such protection encourages companies to get legal advice and thus promotes C&E – as discussed here.

–          The fact that client confidences and relationships should be protected does not mean that lawyers have no right or obligation to report wrongdoing of any kind.  See this prior post for a review of lawyer reporting obligations that do not involve client confidences  – and how certain behavioral ethics factors can inhibit compliance with such duties.

A  recent obituary for a famous whistleblower in the tobacco industry  who was a paralegal, and whose disclosures included attorney-client communications.

And, a piece about comparative conflicts of interest analysis.

 

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