By Joan C.
Oct. 16 --It would be unethical under most circumstances
for present or former corporate counsel to reveal confidential information
about a company in hopes of receiving a whistle-blower bounty under federal
law, the New York County bar's ethics panel concluded Oct. 7 (New York County
Lawyers Ass'n Comm. on Prof'l Ethics, Op. 746, 10/7/13).
said that for New York lawyers who represent corporate clients, “disclosure of
confidential information in order to collect a whistleblower bounty is
unlikely, in most instances, to be ethically justifiable.” Such disclosure is
unnecessary except in rare situations and gives rise to an unwaivable conflict
between the lawyer's interests and those of the corporate client, the panel
The opinion makes clear that it does not apply to attorneys who
are serving in a role other than corporate counsel, such as a company's
The Dodd-Frank Wall
Street Reform and Consumer Protection Act of 2010 directs the Securities and
Exchange Commission to award whistle-blowers 10 to 30 percent of monetary
penalties imposed on securities law violators where the penalties exceed $1
whistle-blower bounty can be huge. For example, the SEC Oct. 1 announced a $14
million payment -- the largest bounty awarded to date -- to a nonlawyer tipster
who did not wish to be named publicly. The SEC is prohibited from disclosing a
whistle-blower's identity, according to a press statement announcing the award.
The SEC rules implementing the Dodd-Frank
provisions generally disallow awards for information obtained through
attorney-client privileged communications or through legal representation
unless disclosure is permitted by attorney conduct rules.
committee noted that Rule 1.6(b) of the New York Rules of Professional Conduct
specifies six exceptions allowing disclosure of confidential information. The
committee discussed three of those exceptions as potentially relevant to
lawyer may disclose a client's confidential information under Rule 1.6(b)(2) to
prevent the client from committing a crime. Not all securities violations rise
to the level of a crime, the committee pointed out.
1.6(b)(3) allows disclosure where the lawyer's services have been used to
perpetrate a crime or fraud and third parties are still relying on the lawyer's
work, such as where a lawyer participated in drafting an offering statement
that the lawyer later learns is materially misleading.
is authorized under Rule 1.6(b)(6) when permitted or required by other
professional conduct rules or “to comply with other law or court order.”
These exceptions would not permit disclosure to collect a whistle-blower
bounty in most situations, the committee said, because Rule 1.6(b) authorizes
disclosure under the listed exceptions only “to the extent the lawyer
reasonably believes necessary.” Even when corporate wrongdoing rises to the
level of a crime or fraud and has been perpetrated through the lawyer's
services, “preventing wrongdoing is not the same as collecting a bounty,” the
The committee noted that Rule 1.13, which covers the
responsibilities of corporate attorneys, permits disclosure outside the
organization only to the extent allowed by Rule 1.6. New York's Rule 1.13
differs in this regard from ABA Model Rule 1.13, which expressly allows outside
disclosure in certain circumstances, the panel pointed out.
“As a general principle, there are few
circumstances, if any, in which, in the Committee's view, it would be
reasonably necessary within the meaning of RPC 1.6(b) for a lawyer to pursue
the steps necessary to collect a bounty as a reward for revealing confidential
material,” the opinion states.
The committee acknowledged that SEC
rules allow lawyers to collect a bounty in exchange for disclosure in
situations not permitted under New York's professional conduct rules.
The panel emphasized, however, that SEC rules only require lawyers to
report violations up the ladder within the corporate client and permit --
rather than require -- them to report wrongdoing outside the corporate
In particular, the committee said, under SEC Rule 205 -- the
attorney conduct regulation adopted to implement the Sarbanes-Oxley Act --
reporting up the corporate ladder is mandatory, while reporting out is merely
permissible. Similarly, the SEC's whistle-blower rule “is permissive as well,
and does not mandate reporting out,” the panel said.
Another ethics problem, the committee said, is that a
conflict of interest arises in most situations under Rule 1.7 (current-client
conflicts) when a corporate lawyer seeks to collect a whistle-blower bounty.
This conflict may be unwaivable where a lawyer hopes to claim a huge payment
such as $10 million, it said, because such a large sum could influence lawyers
to disclose a violation regardless of their client's interests.
committee grounded its guidance on Rule 1.7(a)(2), which precludes
representation of a client, absent waiver, where a reasonable lawyer would
perceive a significant risk that the lawyer's professional judgment will be
adversely affected by the lawyer's own financial or other personal
Such a risk is presented, the committee said, when a lawyer
is tempted by the prospect of a Dodd-Frank whistle-blower payment. “[T]he
potential payment of an anticipated whistleblower bounty in excess of $100,000
presumptively gives rise to a conflict of interest between the lawyer's
personal interest and that of the client,” the committee said.
emphasized that an attorney confronted with potential corporate wrongdoing
must dispassionately evaluate complex considerations such as whether a
potential violation is material, whether it is criminal, whether the lawyer
should report the wrongdoing up the corporate ladder and whether the misconduct
should be reported to an outside body. A financial incentive such as a
whistle-blower award may tend to cloud a lawyer's judgment, it said.
committee limited this advice to situations that involve permissive reporting
and not the “rare and exceptional situation” in which law or ethics rules
mandate outside reporting. In those unusual circumstances where reporting out
is mandatory, the financial incentive could have less importance in
determining the existence of a conflict with the lawyer's personal interest,
the panel said.
The committee also concluded
that former corporate counsel may not seek a whistle-blower bounty by
disclosing their ex-client's confidences, even if they were wrongfully
The opinion points out that Rule 1.9(c) prohibits lawyers
from using a former client's confidences to the client's detriment except as
permitted by Rule 1.6(b). Thus, a client's former lawyer may not reveal
information that could not have been revealed while the representation was
ongoing, the committee explained.
Even when an exception in Rule 1.6(b)
might permit disclosure under Rule 1.9(c), it added, the prospect of receiving
a bounty presents a significant risk of skewing the attorney's judgment about
whether the disclosure is reasonably necessary. This conflict of interest is
beyond what Rule 1.9 was intended to allow, it said.
Lawyers owe a
fiduciary duty to former clients to maintain confidentiality and may not
violate that duty to promote their own personal interest, the committee
Moreover, lawyers have a duty not to harm their former clients,
the committee said, citing Oasis W. Realty, LLC v. Goldman, 2011 BL
130748, 250 P.3d 1115, (Cal. 2011). Any required remedial action that would
harm a former client should be done because that action is required by law or
ethics rules, not because the lawyer seeks personal gain at the client's
expense, the panel said.
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Full text at http://www.nycla.org/siteFiles/Publications/Publications1647_0.pdf.
A March 2013 report on “Retaliation and Whistleblower Claims by In-House
Counsel” from the Littler law firm is available on the firm's website at http://www.littler.com/publication-press/publication/retaliation-and-whistleblower-claims-house-counsel.
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