According to the United States Securities and Exchange Commission (“SEC” or the “Agency”), an attorney – or any individual, for that matter – should not have to first report misconduct to the SEC to fall under the protections of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank” or the “Act”). In an amicus brief submitted in late March 2016, the SEC requested a broader reading of Dodd-Frank in support of a former in-house attorney for Vanguard Group Inc., a mutual fund company. The attorney, David Danon, had filed an action in the United States District Court of Philadelphia in December 2015 claiming that Vanguard had wrongfully terminated him after he raised concerns internally about alleged tax violations.
Under the Dodd-Frank whistleblower program, an individual who reports violations of law or misconduct is entitled to a monetary incentive for reports leading to a successful SEC enforcement action that recovers above $1 million in monetary sanctions and protection under the anti-retaliation provisions of the Act. Previously, these incentives and protections were understood to apply only to those who first reported violations of law or misconduct to the SEC. Danon, however, did not reach out to regulators until his employment was terminated after he allegedly reported the wrongdoing internally. In its brief to the district court, the SEC advocated for a much broader reading of the Act regardless of when the report is made to the SEC to avoid creating a two-tiered system that discourages internal reporting. The SEC noted that internal reporting is an “important component of the overall design of the whistleblower program.” Additionally, the SEC argued that if its interpretation was not adopted, its authority to pursue enforcement actions against employers who retaliate against employees who report internally would be “substantially weakened.” The Agency sought parity for individuals regardless of when they blow the whistle and to whom they report first. The Second and Fifth Circuits are currently split on the proper interpretation of the Act, leading to the question of whether this issue may one day reach the Supreme Court.
In the attorney context, however, the case raises an entirely different set of issues that was not the focus of the SEC’s brief – namely, what are the ethical implications when in-house counsel blows the whistle on its current or former employer? These confidentiality issues can arise when in-house counsel could breach attorney-client privilege by exposing confidential information in its report to the SEC about the misconduct, or in its own defense, if the attorney’s employment is terminated and the attorney brings suit. Danon’s dilemma falls directly into the second scenario, as a New York state court judge has already dismissed his case for whistleblower bounty, finding that Danon had violated ethics rules by disclosing confidential tax information.
The rules surrounding attorney-client privilege and lawyer-client confidentiality are central to the lawyer-client relationship. Although the SEC did not substantively address this issue in its brief, it does highlight the tension between the government’s interests in exposing and eliminating misconduct and the competing interest to uphold one of the most sacred elements of the lawyer-client relationship. It also mentioned that under the Sarbanes-Oxley Act of 2002, Congress directed the SEC to issue rules requiring attorneys practicing before the SEC to report material violations of securities laws or any breach of fiduciary duty to certain company officials. Under Sarbanes-Oxley, attorneys are not required to make reports to the SEC and may be precluded from doing so because of ethical obligations to their clients. Additionally, the SEC will deny whistleblower protection to attorneys who learned the information they wish to report through a communication subject to attorney-client privilege or through legal representation of a client. The SEC also recognizes that under both state and federal law, there are exceptions to this rule that allow an attorney to report in certain circumstances, for instance, if the attorney knows securities laws are being violated and the result will cause substantial financial injury to investors. The difficulty is that states differ in their confidentiality rules, making this an issue that does not lend itself to definitive answers. This challenge is further heightened when considering the potential conflict an attorney could face if incentivized by the bounty awarded by the SEC.
It is becoming increasingly important for employers to provide processes for employees to report wrongdoing and misconduct internally, with the understanding their employer will not retaliate against them for such action. Training on the whistleblower and retaliation laws is key. Congress has taken steps in recent years to encourage internal company reporting and compliance efforts with its amendments to several securities laws. As the SEC noted, “these internal reporting processes can help companies to promptly identify, correct, and self-report unlawful conduct by officers, employees, or others connected to the company.” Additionally, having the proper processes in place to report misconduct internally could help prevent an employee from diving into the murky waters of attorney-client privilege and confidentiality violations if the employee who wishes to make the report happens to be the company’s own in-house counsel. BakerHostetler can provide training on these issues.