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Ethics Rules Stop Most Corporate Lawyers From Seeking Federal Whistle-Blower Bounty

Wednesday, October 23, 2013

By Joan C. Rogers  

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).

The committee 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 found.

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 compliance officer.

Eye-Popping Payoffs

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 million.


“[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.”

 

New York County Ethics Op. 746

A 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.

Not Reasonably Necessary

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.

The ethics 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 whistle-blowers:

• A 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.

• Rule 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.

• Disclosure 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 committee said.

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.

SEC Rules Don't Require Outside Disclosure

“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 client.

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.

Conflict of Interest

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.

The 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 interests.

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.

The panel 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.

The 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.

Former Clients

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 discharged.

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 said.

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.

To contact the reporter on this story: Joan C. Rogers in Washington at jrogers@bna.com

To contact the editor responsible for this story: Kirk Swanson at kswanson@bna.com


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.

The ABA/BNA Lawyers’ Manual on Professional Conduct is a joint publication of the American Bar Association Center for Professional Responsibility and Bloomberg BNA.

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