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Proskauer Whistleblower Defense

New York Lawyers Generally Cannot Seek Bounties Under Dodd-Frank, Says New York Ethics Committee

Posted in Dodd Frank

The New York County Lawyers Association Committee on Professional Ethics released Formal Opinion 746 on October 7, in which the Committee considered whether New York lawyers can ethically collect bounties for submitting confidential information about their clients under the whistleblower provisions of the Dodd-Frank Act.  According to the Formal Opinion, New York lawyers may not disclose confidential information relating to current or previous clients except to the extent permissible under the New York Rules of Professional Conduct. 

SEC Rule 205

The SEC permits attorneys to reveal confidential information obtained as a result of legal representation of a client only when the disclosure is permitted by state ethics rules or SEC Rule 205.3(d)(2).  Rule 205 specifically permits disclosure when the attorney reasonably believes it is necessary: (a) to prevent the issuer from committing a material violation of securities laws that is likely to cause substantial financial injury to the interests or property of the issuer or investors, (b) to rectify the consequences of a material violation of securities laws in which the attorney’s services have been used, or (c) to prevent the issuer from committing or suborning perjury in an SEC proceeding. 

However, Rule 205 makes disclosure of client confidences outside the organization a last resort, not a first step.  The rule requires lawyers to first report material violations of securities laws to the company’s chief legal officer, who must report any wrongdoing up the corporate ladder.  The chief legal officer is authorized to disclose client confidences outside the company only if necessary to prevent further harm to the corporation or investors.  Therefore, reporting up the corporate ladder is mandatory whereas reporting outside the company is permissible. 

New York Rules of Professional Conduct

Under the New York Rules of Professional Conduct (“RPC”), attorneys are generally prohibited from disclosing confidential information except for six enumerated exceptions to the general rule.  Given the limited exceptions, the Ethics Committee opined that the disclosure of confidential information in order to collect a whistleblower bounty is unlikely to be ethically justifiable:

New York lawyers, in matters governed by the New York RPC, may not disclose confidential information under the Dodd-Frank whistleblower regulations, except to the extent permissible under the Rules of Professional Conduct.  This conclusion is the same for current and former lawyers, whether in-house or outside counsel.

Implications

Given these limitations, New York attorneys will likely not be able to participate in the program without violating the RPC.  However, ethical rules vary state by state and attorneys should consult the applicable rules in the state where they practice.  It remains to be seen how distinctions in ethical rules will be interpreted and whether attorneys practicing outside of New York will be held to the same standards as their New York colleagues.