Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Tuesday, October 7, 2014

Pacella on Whistleblowers

Jennifer M. Pacella has posted Advocate or Adversary? When Attorneys Act as Whistleblowers on SSRN with the following abstract:

In today’s era of relying on whistleblower tips as critical sources of fraud disclosure, the role of attorneys as whistleblowers has become increasingly muddled. The Securities and Exchange Commission has adopted rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”) allowing whistleblowers to collect bounties, or rewards, in exchange for information. Although Dodd-Frank generally excludes attorneys from eligibility for bounties, the statute provides exceptions making it possible for lawyers to blow the whistle and cash in on confidential client communications in certain circumstances. This Article will examine the SEC’s rules under Dodd-Frank, which incorporate by reference provisions from the Sarbanes-Oxley Act of 2002 (“SOX”) requiring attorneys to reveal client confidences in certain instances. This incorporation by reference results in a glaring inconsistency between the two statutes, as SOX was enacted at a time when whistleblower bounties were not yet available. This Article will suggest that lawyers who collect bounties have an obvious conflict of interest offending state ethical rules governing professional responsibility. This Article will highlight recent litigation supporting this argument, specifically the Second Circuit’s decision in Fair Laboratory Practices Associates v. Quest Diagnostics, which held that lawyers violate their ethical duties when using confidential client information to bring lawsuits under a related whistleblower statute, the False Claims Act, which also allows bounties. In light of these concerns, this Article will supplement existing whistleblower research by suggesting that attorneys are an improper fit for the bounty model. Rather, this Article proposes that attorneys are better suited to reinforce the goals of the “structural model,” a defining feature of SOX that was first explored by Professor Richard Moberly as a method of encouraging internal whistleblowing to challenge corporate cultures of silence in the face of fraud.

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