[Updated June 2020] Lawyers have a duty to protect their clients. Under our legal system, even the worst and most depraved criminals are entitled to legal representation. Our Founding Fathers wisely decided that the right to counsel was so important, that it needed to be part of the constitution and protected for all time’s sake. There are limits, however.
While a lawyer can represent a criminal, lawyers aren’t allowed to participate in criminal behavior nor can they assist their clients in the commission of a crime. Things get complex, however, when a lawyer files a whistleblower claim against a wrongdoing client.
There are several layers to the debate about lawyers as whistleblowers.
Some programs, such as the SEC whistleblower program, offer specific guidelines for a would be lawyer turned whistleblower. We will start there first. The SEC program has three broad categories for whistleblowers, two of which can be denied an award.
First, there are those who simply aren’t eligible to receive an award. These folks are defined by statute and regulation and include SEC employees, those who lie to the Commission and those guilty of criminal conduct related to the very behavior for which they seek an award. (Think of a kidnapper turning himself in to collect an award.)
Another ineligible group are auditors who are legally required to report misconduct to the SEC and instead file a whistleblower claim seeking an award. (Think of a cop seeking an award for turning in a kidnapper.)
The second group includes lawyers and accountants. The SEC generally won’t pay awards to whistleblowers who use “privileged” information in seeking an award or who are acting as whistleblowers while simultaneously representing the company or individual they are turning in. Yet another rule excludes lawyers hired to investigate possible securities violations.
If you think that shuts the door on lawyers receiving whistleblower awards, think again.
The SEC has publicly stated that they have no interest providing a “financial benefit” for lawyers “submitting information in violation of [their] ethical obligations.” Sounds pretty clear? Well, the SEC also says that it will accept “confidential” information from lawyers if the disclosure would be permitted under the SEC’s lawyer conduct rules or under state bar ethical rules.
The SEC’s Attorney Conduct Rules are codified in Part 205. These rules only apply to lawyers who are working for an issuer. If a lawyer is working on a public offering, for example, the SEC says that lawyer has certain reporting requirements. Those requirements are internal, meaning to others in the chain of command of the issuance. But these same rules also permit reporting to the SEC.
A lawyer operating in these narrow confines can report confidential client information to the SEC and still qualify for a whistleblower award.
The broader exception looks to state attorney ethics rules. In virtually all states, that rule is known as Rule 1.6. These rules prohibit a lawyer from disclosing confidential information of the client unless the disclosure falls into a specific exception. In some states those exceptions are quite narrow while in others they are much broader.
Generally, those exceptions include the following categories (but not every category is available in every state.)
Crime Fraud Exception – Future Crime. Virtually every state allows an attorney to disclose information to prevent the client from committing an intended or future crime.
Crime Fraud Exception – Past Crime. Some states allow lawyers to disclose confidential information if necessary to prevent or mitigate financial injury that has or is likely to occur from prior criminal activity.
Crime Fraud Exception – Ongoing Crime. State bar rules generally allow disclosures to avoid assisting the client from engaging in an on-going crime.
Crime Fraud Exception – Fraud. Many states allow lawyers to disclose information needed to prevent or stop a client from committing fraud that causes harm to others.
Correcting False Statement. Lawyers have a duty of candor to judges, courts and agencies before which they appear. A lawyer often has an ethical obligation to correct prior misstatements made to courts and tribunals. (See also Rule 4.1)
The above categories are general. Each state has very specific rules and case law interpreting those rules. Also, in some states, the rules “permit” disclosures while in other states, such as Pennsylvania, disclosure is “required.”
Our discussion thus far has related to the SEC’s Whistleblower Program. The bigger and older program is the federal False Claims Act, which traces its roots back to the Civil War. While there are no formal rules as with the SEC, the state bar rules apply but in a different manner.
The SEC uses the state bar rules to help determine whether a lawyer as whistleblower is entitled to an award. There are no such formal rules in false claims act but a judge generally has discretion to determine the eligibility for and size of whistleblower awards. In addition, lawyers who make a wrongful disclosure could find themselves on the wrong size of an ethics complaint.
Bottom line? Lawyers have an ethical duty to their clients but sometimes they have an ethical duty to report wrongdoing, particularly when the wrongdoing is ongoing, involves fraud or involves a criminal act. Unfortunately there are not any uniform rules, so caution is needed when filing a whistleblower complaint against a former client.
Why is This Important?
Companies want to know that conversations with their in-house and outside counsel is protected from disclosure. The thought process is that no one would seek guidance from a lawyer if they feared that what they told their lawyer could later serve as the basis of a whistleblower complaint.
Regulators understand the right to counsel but worry about when lawyers cross the line and assist in or help conceal fraud or criminal behavior.
Where the line should be drawn between these two sometimes competing interests isn’t always clear.
There are lawyers who want to do the right thing and report fraud and corruption just as there are companies who want assurance that they can consult with counsel without fear of having their conversations serve as the basis of a future whistleblower case.
Wadler vs. Bio-Rad – The Court Rules In Favor of Lawyer Whistleblower
Up until this point, the debate has been mostly theoretical. We litigated this issue in the Vanguard case where the New York Supreme Court ruled in favor of Vanguard and against the in house attorney – turned – whistleblower. In 2020, a federal judge in California ruled in favor of the lawyer – whistleblower.
Sanford Wadler was hired as Bio-Rad Laboratories in house counsel 1989. While serving as their general counsel, he investigated potential bribery involving payments to public officials in China. After internally reporting these violations he was fired. That was in 2013.
Wadler sued Bio-Rad for whistleblower retaliation. The company said his termination was for “poor work performance and bad behavior” and had nothing to do with retaliation.
Bribery of foreign government officials is a crime. Under the Foreign Corrupt Practices Act (FCPA), the SEC can pay rewards to whistleblowers reporting these activities. Both the SEC and Justice Department investigated the FCPA claims. Wadler’s retaliation complaint was handled by the U.S. Department of Labor.
As part of its defense, Bio-Rad claimed that Wadler’s retaliation complaint contained information protected by the attorney – client privilege and attorney work-product privilege. Asserting those privileges, Bio Rad refused to turnover documentation related to Wadler’s internal complaint or the investigations of his complaint by outside counsel.
Bio Rad asked for Wadler’s retaliation complaint to be dismissed in its entirety. They also asked the court to exclude “all testimony that may be based on information [Mr. Wadler] learned in the course of his service as Bio-Rad’s general counsel.” This meant “virtually all of the evidence and testimony [Mr. Wadler] might rely upon to prove his case.”
The company argued that California law on attorney client privilege should apply instead of federal law. That meant that Wadler wouln’t be able to prove his retaliation claim because to do so would require documents and evidence precluded under California law. They argued that whistleblower retaliation claims could only be pursued where they could be adjudicated without breaching the attorney client privilege. Effectively that meant that Wadler had no access to the courts simply because he had been employed as the company’s lawyer.
Sanford Wadler argued that federal Sarbanes Oxley and Dodd Frank laws applied. He said those laws allow lawyers to use attorney client privileged information in whistleblower cases. He also said that the SEC had previously argued that these laws preempts common law.
In siding with Wadler, the court noted the same thing we have said, there is very little case law out there. Courts must carefully balance the rights of clients to expect to that their communications with their lawyers be protected but those protections are not absolute.
The court said,
“[T]he SEC implemented Section 307 by enacting Standards of Professional Conduct for Attorneys, 17 C.F.R. Part 205. Part 205 requires attorneys to report material violations ―up the ladder by making a Part 205 Report and to continue to report up the ladder until the attorney receives an ―appropriate response. 17 C.F.R. § 205.3(b)…
That statement is sufficiently broad to support the conclusion that it applies to whistleblower claims asserted in litigation. Further, such a rule appears to be both within the authority granted under Section 307 and to reflect a reasonable balancing of conflicting policies to the extent it protects attorney whistleblowers from retaliation even as it requires them to report violations. Therefore, the Court concludes that to the extent California‘s ethical rules allow for more limited disclosures of privileged and confidential communications in connection with Sarbanes-Oxley whistleblower retaliation claims than is permitted under the regulations promulgated by the SEC, there is a direct conflict that gives rise to preemption of California‘s ethical rules.”
By saying California’s rules are preempted, it means the SEC’s more liberal rules apply. That meant Wadler could use privileged information to prove his case.
Many of our whistleblower clients are compliance professionals. While the Bio-Rad decision is an important victory for whistleblowers, it is limited to SEC cases. Remember, the SEC has some very specific rules on how lawyers and compliance professionals can report corporate wrongdoing. Those rules don’t exist in False Claims Act and IRS whistleblower cases, although there are still the general crime fraud exceptions discussed at the beginning of this post.
If you are interested in reporting Some are even lawyers. If you are a lawyer or compliance professional, we suggest you start with our eBook on Lawyers, Auditors and Compliance Officers as Whistleblowers. You can read that eBook at the link above.
All inquiries protected by the attorney – client privilege and kept confidential. (That statement is lost on us, as your outside counsel we can maintain confidentiality as long as you don’t ask us to participate in a crime or are not actively engaged in an on-going one.) We accept cases nationwide.