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Conflicted Counselors: Retaliation Protections For Attorney-Whistleblowers In An Inconsistent Regulatory Regime

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Conflicted Counselors: Retaliation Protections For Attorney-Whistleblowers In An Inconsistent Regulatory Regime by SSRN

Jennifer M. Pacella

City University of New York, Baruch College, Zicklin School of Business



Attorneys, especially in-house counsel, are subject to retaliation by employers in much the same way as traditional whistleblowers, often experiencing retaliation and loss of livelihood for reporting instances of wrongdoing about their clients. Although attorney-whistleblowing undoubtedly invokes ethical concerns, attorneys who “appear and practice” before the Securities and Exchange Commission (“SEC”) are required by federal law to act as internal whistleblowers under the Sarbanes-Oxley Act (“SOX”) and report evidence of material violations of the law within the organizations that they represent. An attorney’s failure to comply with these obligations will result in SEC-imposed civil penalties and disciplinary action. Recent federal case law, however, holds that whistleblowers who report violations internally within their organizations are not eligible for the robust retaliation protections available under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) and must report to the SEC to be protected. Given that external reporting by attorneys would run contrary to professional ethical rules in a number of states, lawyers currently find themselves caught in a “catch-22” making it exceedingly difficult to comply with the conflicting regulatory regimes to which they are held. This Article will address this emerging problem by considering a question that no court has yet addressed — whether the SOX attorney-reporting rules preempt conflicting state law — and will propose amendments to such rules to clarify when external reporting is appropriate. This Article will also consider a state-based solution to this conflict adopting a modified version of Model Rule 1.13, the ethical rule governing the behavior of attorneys when they represent organizations and are called to act as whistleblowers. This Article will also contribute to the ongoing scholarly discussion of “new governance” approaches to regulation by placing attorney-whistleblowers in this context and considering how their gatekeeping role ensures regulatory compliance within the organizations that they represent.

Conflicted Counselors: Retaliation Protections For Attorney-Whistleblowers In An Inconsistent Regulatory Regime – Introduction

The year 2014 was tagged, “The Year of the Whistleblower,” representing an era in which whistleblowers privy to inside information about their employers’ misconduct have become empowered to remedy violations of the law. Despite recent trends heralding whistleblowers as essential players in effective compliance and moving away from negative connotations like “snitch” and “traitor,”2 whistleblowers are still commonly the victims of retaliation for their reporting. Recently, it has been said that “retaliation against whistleblowers [is at an] all-time high,” both on the rise nationally and a problem at companies that outwardly appear committed to ethics and integrity. Retaliation against whistleblowers commonly emerges as loss of employment, ostracism, alienation, or blacklisting from one’s industry and results in both devastating financial and psychological effects for the whistleblower. Such retaliation occurs despite research showing that most whistleblowers report only internally to their employers and superiors, never venturing from the four walls of their places of employment to reveal information.

Attorney-whistleblowers, especially in-house counsel, are no strangers to such negative reactions when they themselves report internally on their clients’ misconduct. Although attorneys tend not to fit the mold of the typical whistleblower, this group of professionals is required by federal law to blow the whistle internally, or “up-the-ladder,” on organizational clients. In 2002, Congress mandated the Securities and Exchange Commission (“SEC”) under Section 307 of the Sarbanes-Oxley Act (“SOX”) to issue rules establishing “minimum standards of professional conduct” for lawyers who “appear and practice” before the SEC, requiring attorneys to report evidence of material violations of securities law, breaches of fiduciary duty, or other violations by their corporate clients to the chief legal counsel or chief executive officer, and, if no appropriate response is taken, up-the-ladder to the board of directors. Congress was prompted to enact this mandate in the wake of scandals like Enron and WorldCom that begged the question of “where were the lawyers?” as clients committed devastating levels of fraud. The SEC issued these “Part 205 Rules,” as they will be named herein, in 2003, imposing civil penalties and disciplinary authority on attorneys who fail to adhere to the reporting rules. Junior attorneys appearing and practicing before the SEC are also subject to the rules and fulfill their duties by reporting material violations to their supervisory attorneys, who must then comply with the up-the-ladder reporting requirements.

The Part 205 Rules also allow permissive disclosures under which attorneys may reveal to the SEC, without the issuer-client’s consent, confidential information pertaining to the attorney’s representation of the client in certain instances. As such, attorneys may provide the SEC with information about their clients “to the extent [they] reasonably believe necessary” to prevent an issuer from committing a material violation of the law likely to cause substantial financial injury to investors, committing perjury, or to rectify the consequences of a material violation for which the attorney’s services were used.



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