Late last year, Labaton Sucharow, a top securities class-action firm, disclosed key information to the Securities and Exchange Commission: one of its clients, a JPMorgan executive, admitted that the bank had steered investor clients to its own products – allowing it to collect more fees – without disclosing the conflict of interest to consumers.
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the SEC provides claims to most other whistleblowers through its much-disputed bounty laws, allowing payments of up to 30 percent of money collected. The SEC netted $307 million in sanctions, granting a $40 million whistleblower claim to the executive, with an undisclosed amount in attorneys fees.
“We knew when we approved this claim, it would get attention,” said Dan Gallagher, a former SEC Commissioner, during the annual Stein Lecture, in which a panel of attorneys and regulators discussed attorney whistleblowing, as well as a number of other ways of “Protecting the Attorney-Client Relationship” at the Cardozo School of Law on February 9.
During today’s era of whistleblowing, many federal agencies rely on tips as critical sources of fraud disclosure, and on the bounty laws to make up for “professional, personal and emotional disincentives,” as enshrined in SEC regulations. Dodd-Frank research has pointed out that “54.1 percent of fraud schemes in public companies are detected by whistleblowers” compared to a 4.1 percent by external auditors.
Should the company’s wrongdoing have been reported by one of its lawyers rather than an executive, could the lawyer claim the whistleblower bounty, or would the lawyer’s disclosure to the SEC violate the duty of confidentiality? It was a subject of lively debate at the annual program.
Section 205.3 of the SEC rules permit an attorney to make an external disclosure of confidential information to the SEC following “up-the-ladder” corporate reporting in three circumstances: to prevent the issuer from committing a violation of the likely to cause substantial financial injury to investor; to prevent a company from committing perjury in an SEC proceeding; or to rectify the consequences of a securities law violation in which the attorney’s services were used. But at the same time, the rules bar lawyers who act unethically from collecting whistleblower bounties, and some state ethics rules forbid disclosures in all circumstances, despite the conflicting federal laws.
The panel struggled with how to reconcile these ideas.
Bruce Green, the Director of the Louis Stein Center for Law & Ethics, argued that corporate lawyers may rely on the permission given by the SEC rule to report corporate misconduct to the SEC. While acknowledging that the issue was unsettled in the courts, his view was that, based on the Constitution’s Supremacy Clause, the SEC rule trumped confidentiality rules of states, such as New York, that took a narrower view of lawyers’ authority to report clients’ misconduct. “If the SEC didn’t want lawyers to violate state ethics rule, why would the SEC waste the paper with a rule allowing the lawyer permission to disclose confidences?” Green remarked during the annual Stein Center event that explores current issues in corporate representation. “But attorneys should view whistleblowing as a last resort and proceed with care,” he added.
Along with Green, a noted scholar on criminal law and legal ethics, and former SEC Commissioner Gallagher, participants in the panel discussion were Nicole Hyland ’02, the Chair of the Committee on Professional Ethics of the New York City Bar Association; Harry Weiss, a former SEC enforcement attorney who chairs the Securities Litigation and Enforcement Practice Group at WilmerHale; and Michael Stone, who now teaches as an adjunct professor at Cardozo and Fordham law schools, who served as moderator.
Mr. Weiss took the view that the SEC rules gave primacy to lawyers’ ethics rules, while Mr. Gallagher acknowledged the unfortunate ambiguity of the rules but cautiously predicted that Professor Green’s view would prevail.
Besides attorney whistleblowing, the speakers also covered waivers of attorney-client privilege, litigation reserves and the common interest rule – all matters that illustrate the attorneys’ crucial place in an exceedingly complex and thorny corporate landscape.
“When it comes to ethical guidance, in-house lawyers get the short end of the stick,” Hyland noted. “Corporate legal departments – and by extension in-house lawyers – are simply appended to the definition of a law firm, despite the fundamental differences between those two practice models, especially in corporate matters.”