Guarding a whistleblower’s back. In the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act of 2010, Congress encouraged employees—including in-house lawyers—to report corporate fraud by shielding them from retaliation. Only Dodd-Frank offers a bounty: 10%-30% of sanctions over $1 million obtained in an enforcement action based on “original information” given to the SEC. The whistleblower must file a complaint with the Secretary of Labor not more than 180 days after facing retaliation and must exhaust administrative remedies before suing the employer under Sarbanes-Oxley. Under Dodd-Frank, explain attorney Kelly Crawford and law student Gerardo Adrian Galvan, the whistleblower may sue the employer first—and within six years.
The statutes overlap in naming the circumstances to which the anti-retaliation shield applies. A whistleblower under Dodd-Frank is an employee who reports to the SEC, while a whistleblower under Sarbanes-Oxley is anyone who reports to the SEC, another federal agency, Congress, or the person’s in-house supervisor. The Supreme Court reaffirmed this Dodd-Frank limitation in Digital Realty Trust Inc. v. Somers (2018), so in-house lawyers who are fired after reporting suspected corporate fraud must proceed under Sarbanes-Oxley.
Can counsel shoulder the ethical burden? SEC regulations seem to respect the attorney/client privilege by barring in-house counsel from disclosing to the SEC information that is subject to the privilege or that was discovered while representing the client. Significant exceptions, the authors point out, cover disclosures made to protect the company or the shareholders from serious financial harm, to remedy such harm, or to keep the company from committing perjury or fraud in front of the SEC. Dodd-Frank also incorporates SEC regulations that allow lawyers who practice before the SEC to report directly to it if a specified chain of in-house attempts to report “up the ladder” fails.
Does US law gut fiduciary duties? SEC regulations say they supersede lawyers’ fiduciary duties under state law, creating a safe harbor from state-law violations for compliance in good faith with the regulations. In-house counsel’s duties of confidentiality vary by state, the authors note. In most states, the duty covers all information needed to represent the company. Some states have adopted the ABA Model Rules’ exceptions, but the federal exceptions—particularly the Dodd-Frank whistleblower’s bounty—are broader and therefore are troubling for companies. The states impose a uniform duty of loyalty on in-house counsel, all of whose actions must benefit the company; but under the Model Rules, loyalty bans any conflict of interest, which a bounty might create.
Two factors lessen the threat that bounties might pose to both fiduciary duties. First, the evidentiary burden is greater for permitted external disclosures than for the SEC’s required internal disclosures. Second, the SEC may withhold a bounty from counsel whose information breaches the attorney/client privilege or falls outside the SEC’s exceptions to confidentiality. Furthermore, whistleblowing could be consistent with the duty of loyalty, since counsel owes it to the company, not to management.
Will federal courts flesh out the legal skeleton? Federal courts have begun considering how Dodd-Frank and Sarbanes-Oxley interact with state ethics rules. A California federal court held that in-house counsel could be a whistleblower under the federal statutes because the SEC rules preempt the state’s very strict duty of confidentiality. The case is on appeal* and, the authors surmise, the holding will be limited because counsel reported internally, not to the SEC, before being fired (and thus falling outside the Dodd-Frank definition of a whistleblower).
Timing is also key to a case now pending in the Eastern District of Pennsylvania. In-house counsel seeks Dodd-Frank protection from retaliation for reporting to the SEC while still an employee. The company has counterargued that, prior to the report, it gave notice that counsel would be fired. A decision in the District of New Jersey denied Dodd-Frank protection to an attorney fired for reporting to FINRA, rejecting the argument that this was tantamount to reporting to the SEC, which supervises FINRA, while still employed.
*Editor’s Note: The Ninth Circuit remanded the case on February 26, 2019, affirming in part and vacating in part. See also commentary on the remand from Sheppard Mullin lawyers.
Abstracted from: The Dilemma Of In-House Counsel As Whistleblower: When And Where To Blow The Whistle? By: Gerardo Adrian Galvan and Kelly Crawford SMU Dedman School of Law (GAG); Scheef & Stone, Dallas TX (KC) Securities Regulation Law Journal Vol. 46, No. 3, Pgs. 223-252