Corporate in-house and outside counsel routinely handle their clients’ most sensitive and confidential information, so the idea that a “trusted advisor” would turn whistleblower—particularly given the potential for substantial monetary awards for blowing the whistle—is a concern for companies. But can lawyers be paid whistleblower awards? In a recent decision addressing the intersection of attorney ethics and whistleblower incentives, the U.S. Court of Appeals for the D.C. Circuit, in Doe v. SEC, 114 F.4th 687 (D.C. 2024), upheld the Securities and Exchange Commission’s denial of a whistleblower award to an in-house attorney who reported suspected misconduct by his client.
Legal Framework
The SEC’s whistleblower program, established by the Dodd-Frank Act of 2010, permits the Commission to provide monetary awards to whistleblowers who voluntarily provide original information leading to successful enforcement actions with monetary sanctions exceeding $1 million. However, SEC Rule 21F-4(b)(4)(ii) limits attorneys’ eligibility for such awards when the information was obtained through client representation. Under this rule, attorneys may only receive awards if their disclosure was permitted by applicable state attorney conduct rules or SEC attorney conduct regulations.
The SEC’s adoption of Rule 21F-4(b)(4)(ii) reflected a careful balancing of competing policy interests. On the one hand, the SEC recognized that attorneys, particularly those serving in-house roles, are uniquely positioned to detect securities law violations due to their access to sensitive corporate information. On the other hand, the SEC sought to preserve the sanctity of attorney-client communications and avoid creating incentives that might undermine clients' ability to seek candid legal advice. The rule attempts to strike this balance by allowing attorney whistleblowers to receive awards only when their disclosures would be permitted under existing ethical frameworks.
Case Background
In Doe v. SEC, an unidentified in-house counsel ("John Doe”) discovered information suggesting that funds from his employer's securities offering were being misappropriated. Doe submitted a tip to the SEC, stating that an individual was misappropriating investors' funds and requesting that the SEC act to protect investors. The SEC’s subsequent investigation resulted in judgments against multiple parties, including Doe’s client company.
When Doe applied for a whistleblower award, he primarily relied on two Florida Rules of Professional Conduct: Rule 4-1.6(b), which requires attorneys to reveal confidential information necessary to prevent a client from committing a crime, and Rule 4-1.6(c)(1), which permits disclosure of confidential information necessary to serve the client’s interests. Doe argued his disclosure served his client’s interests by preventing further misappropriation and potentially enabling completion of the project the offering was meant to fund.
The Arguments and Analysis
Doe’s primary argument rested on Florida Rule 4-1.6(c)(1), contending that his disclosure served his client’s interests in multiple ways. He asserted that preventing further misappropriation of funds would benefit the company by preserving its assets and that completing the intended project would fulfill the company’s obligations to investors. He also initially attempted to characterize his client as a potential victim of the misappropriation rather than a perpetrator.
However, Doe's own subsequent statements to the SEC undermined these arguments. In a sworn declaration, he acknowledged that when making his tip, he "fully expected” and "intended" to trigger an SEC investigation of his client. He admitted that his "goal" was to prevent his client "from committing a crime" and that he intended for the Commission to investigate the entire securities offering, including his client’s role.
The SEC denied Doe’s application, finding that his disclosure was not authorized by either Florida rule. The Commission emphasized that Doe’s own statements indicated he suspected his client was already implicated in wrongdoing when he made the tip, rather than seeking to prevent future crimes. Moreover, the SEC found that subjecting one’s client to an SEC investigation could not reasonably be viewed as serving the client's interests.
The D.C. Circuit agreed with the SEC’s analysis. Writing for the court, Judge Wilkins emphasized that while preventing misappropriation might have provided some benefit to the company, Florida Rule 4-1.6(c)(1) requires that disclosure be "necessary" to serve the client’s interests. Given that Doe’s tip foreseeably subjected his client to an investigation and enforcement action, the court found it could not have been "necessary" to serve the client’s interests.
The court also rejected Doe’s argument that only his contemporaneous tip, which he claimed portrayed his client as a victim, should be considered in evaluating his motives. Instead, the court found the SEC properly considered Doe’s subsequent statements, including his sworn declaration acknowledging that he "fully expected" and "intended" his tip to trigger an investigation of his client.
Conclusion
The court’s ruling reinforces that attorneys’ ability to profit from whistleblower awards remains sharply limited when the disclosure involves client information. It suggests that attorneys cannot receive whistleblower awards when they report suspected client misconduct, even if they attempt to characterize their disclosure as serving the client’s interests. The case also establishes that the SEC and courts may look beyond the content of the initial whistleblower tip to evaluate an attorney's true motives and intentions in making the disclosure.
The case underscores that while the SEC’s whistleblower program has become an important tool for detecting securities violations, attorneys’ fundamental duties to their clients remain paramount and cannot be overcome by the prospect of monetary awards.
For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, or Joshua Korr.
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