The second panel I am covering here at our final day of the Securities Regulation Institute is entitled Dealing with Whistleblowers and Investigations. The speakers on this panel are Practice Center Contributor and Davis Polk Partner Linda Chatman Thomsen, Cleary Gottlieb’s David Becker, Sean McKessy of the SEC, Shearman & Sterling’s Robert Mundheim and Cheryl Scarboro of Simpson Thacher. Highlights from this panel include:
Update from Sean McKessy -Chief, SEC Office of the Whistleblower:
- Office has grown to a staff of 15, including 11 lawyers.
- They are working on their annual report to Congress which will be provided next Thursday (11/15).
- In their first year, they received 2870 tips which run the gamut of securities law violations.
- Who are the whistleblowers? Lawyers, compliance officers, current and former employees, spouses and ex-spouses, officers, market observers.
- The office made the first payment this year of $50k to a person who brought in information on a new line of inquiry. They brought in documents and information on individuals to charge. McKessy says they must maintain the confidentiality of whistleblowers so haven’t released any further information on it.
- Whistleblower tips aren’t necessarily looked at any harder than intelligence provided outside the program.
Ethical Issues for Lawyers:
- There are ethical issues for SEC lawyers who are dealing with whistleblowers in that the whistleblower can be represented by counsel for the company they work for.
- SEC rule 21F says the SEC lawyer can return the call but they must also consider the rules of whatever state they are licensed in.
- Becker says the risk falls completely on the individual lawyer and not the Commission. McKessy thinks it would be helpful to have a coordinated approach to this rather than the current ad hoc basis.
- Lawyer as whistleblower: It seems counter intuitive that lawyers would be allowed to be whistleblowers at all. McKessy says the rules generally exclude lawyers from the program with certain exceptions. Ethical rules that allow lawyers to break attorney-client privilege predate the whistleblower rules. If an attorney has an ethical obligation to break privilege, they can be a whistleblower. McKessy thinks these are exceedingly rare instances but just the type of instance that would probably provide invaluable information to the SEC.
- McKessy notes that they have only had a few tips from lawyers (all in-house) and it is extremely challenging for SEC lawyers to deal with tips from lawyers.
- Becker says companies should not try to discourage anyone, including a lawyer, from going to the Commission. However, he thinks it is within the company’s rights to ask if someone is planning on going to the Commission and no longer providing them with confidential information.
- In terms of outside counsel, Mundheim and other panelists recommend that a lawyer consult with a relevant law firm committee for guidance on what to do when they feel they have uncovered wrongdoing. Becker says the first rule in ethical issues is always to consult. You need the judgment of other people, especially when there are law firm interests at stake.
- Whistleblowing programs are here to stay.
- Dodd-Frank whistleblowing is still in its formative years.
- Over the next two years, expect to see cases where whistleblowers will have played a role.
- Anti-retaliation provisions are significant.
- Lawyers and other professionals can be whistleblowers and can be eligible for bounties.
- There are significant, and not resolved, ethical issues for lawyers.
- Ethics issues will be governed by state ethics rules, which vary.
- For government lawyers, there are ethical issues relating to invasion of privileges and protections as well as contacts with represented parties.
- For whistleblowing lawyers there are issues relating to client confidences.