Saturday, April 25, 2015

When The SEC Pays Your Lawyer For Informing On You, Is That A Good Thing? - Forbes

As we were discussing...gwc

When The SEC Pays Your Lawyer For Informing On You, Is That A Good Thing? - Forbes

by Daniel Fisher//Forbes
The Securities and Exchange Commission announced it paid a $1 million bounty to a compliance officer who blew the whistle on his employer, the second such case where the agency has paid a company official charged with rooting out misconduct for bringing evidence of it to the SEC instead.

In its news release, the SEC is careful to note it adhered to rules it developed after the Dodd-Frank Act of 2010 authorized bounties for employees who bring information about securities law violations to the SEC. To avoid obvious conflicts of interest — not to mention a potential breach of the attorney-client privilege — whistleblowers who work within a company’s compliance division must first report the suspected wrongdoing to a superior, then wait 120 days before determining nothing will be done about it and going to the SEC.

But is that enough? Some lawyers, as well as the influential New York County Lawyers’ Association, think not. By paying the very people whose job it is to make sure a company is complying with the law for information suggesting it’s breaking it, the government is giving them a strong incentive to sit back, wait 120 days, and try to cash in.

When the SEC was developing the rules for whistleblowers, “a lot of comment revolved around `we can’t have a system that allows in-house counsel and compliance officials, who are tasked to be at the epicenter of problems and solve those problems, to be incentivized to end-run their employer and go to the SEC,’” said Gregory Keating, a shareholder with Littler Mendelson and management representative on the Congressional Whistleblower Protection Advisory Committee.

The special rules for compliance officials, most of whom are lawyers, are designed to prevent unethical behavior like allowing a problem to fester so the potential bounty is larger. Compliance officials can only turn over confidential information to the SEC if they suspect the company or investors are in danger of imminent financial harm, for example.

“I would submit that’s a malleable standard,” said Keating, as is the requirement that compliance officers first notify their superiors of the situation. “What is giving them information?” he said. “A lot of times the recipient of the information will say `you’re simply doing your job,’” which is to investigate wrongdoing, report it to superiors, and then come up with a solution.

The New York County Lawyers Association took a look at the issue and, in a 2013 opinion, held that there would be a conflict of interest in “the overwhelming majority of cases,” if a lawyer effectively went to work for the government under Dodd-Frank by turning over confidential information in search of a bounty. There are well-established exceptions to the attorney-client privilege when a lawyer learns his client is engaged in fraud, say, or supplied false information that corrupted a filing with the court. The lawyer doesn’t collect a payment for alerting the government or a judge to those situations, however.

“Even when disclosure is permitted under the New York Rules, for example, when clear corporate wrongdoing rising to the level of crime or fraud has been perpetrated through the use of the lawyer’s services, preventing wrongdoing is not the same as collecting a bounty,” the New York County association said.

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