When Can a Corporation's Lawyer Blow the Whistle?

Attorneys — in-house and outside counsel alike — often stand at the crossroads of corporate misconduct. At one time, attorneys’ duty to maintain corporate clients’ confidences was thought to be virtually absolute. But that changed over time, as relevant rules and laws gave lawyers greater discretion to make public disclosures to avert clients’ anticipated or ongoing wrongdoing. And now, since the enactment of the whistleblower provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, attorneys will sometimes have not only discretion and employment protections, but also a financial incentive to blow the whistle. Imagine this scenario: You are in-house counsel to a public corporation. In the course of your legal work, you discover that your employer — your client — is making materially false statements about the corporation’s financial performance in its soon-to-be-filed annual report. You have reported the problem up the issuer’s chain of command and tried to persuade your client to correct the false statements. Can you report your client’s misconduct to the Securities and Exchange Commission, and what will happen if you do so? One of Dodd-Frank’s key provisions requires the SEC to establish a whistleblower program that would offer significant employment protections and monetary awards to individuals who report possible federal securities violations. Attorneys are eligible to participate in this important investor-protection program. Under Dodd-Frank, the SEC is required to pay monetary awards — between 10 and 30 percent of the total monetary sanctions collected by the SEC and in other related enforcement actions — to individuals who voluntarily provide the SEC with original information leading to an enforcement action in which the agency obtains at least $1 million in sanctions. The statute also provides robust employment protections that prohibit retaliation against an employee who provides information about possible securities violations to the SEC, in accordance with the program’s implementing rules. In the event retaliatory action is taken, it establishes significant remedies, including reinstatement with equivalent seniority, two-times back pay with interest, attorney fees and other related expenses. Significantly, whistleblowers may report possible violations anonymously if represented by counsel.

Although Dodd-Frank permits attorneys to participate in the SEC Whistleblower Program, their ability to receive monetary awards is limited. Specifically, the implementing rules prohibit attorneys from using information obtained through a communication protected by attorney-client privilege or through the representation of a client, unless the attorney-client privilege has been waived, or if disclosure of the otherwise confidential information is permitted either by SEC Rule 205.3 or by the applicable state attorney conduct rules.