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Corporate lawyers in America may now “snitch” on their clients.

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Lawyers as whistle blowers: Guardians of corporate integrity

If you asked most managers and corporate executives which government legislation they most wished have never been enacted, odds were they will angrily choose the False Claims Act which was dramatically revamped in 1986. The False Claim Act, whose goal was to combat fraud against the federal government, protects and reimburses whistleblowers for participating in the process of pursuing a false claims act case in the court and for their courage and integrity in coming forward with evidence of corporate wrongdoing and fraudulent conduct (False Claims Act Resource Center, 2014).

Even though the potential rewards of exposing corporate wrongdoing have ballooned in America, choosing to come forward with evidence that an employer or company may be committing fraud against the government can still be considered a brave and honorable act. The fact that the whistle-blowers in America can claim up to 30 percent of fines imposed on a culprit has, to a reasonable extent, became a big incentive that enhanced their willingness to participate in the detection, investigation and prosecution of fraud by the government. To date, whistle-blowers initiate as much as 80 percent of all the cases pursued under the False Claims Act (Whistleblower Lawyers, n.d.; Economist, 2014). It should thus not come as a surprise that U.S. executives can only confide on their company lawyers since, being bound by strict ethics rules and by the principle of attorney-client privilege, they are the only insider which the former can trust not to spill the beans.

Unfortunately, this attorney-client privilege and other forms of confidentiality is currently under threat in U.S. Broadly speaking, since the passage of Dodd Frank Act of 2010 – an act that increased whistleblower bounties and protections - there has been an increase in the number of American lawyers prepared to “snitch” on their companies in return for money. Given that the recipients of whistleblower compensations can opt to remain anonymous and that a number of cases are moving forward under seal, it is impossible to be sure which corporate lawyer have received a payout yet.

United by ethics, divided by deeds

From an entirely professional standpoint, lawyers are supposed to be the gatekeepers of their clients’ secrets. But today, a large number of corporate executives (especially the law-breaking types) in America has become concerned that the growing federal support for whistleblowers – a support that appears to go to the soul of what it means to be a lawyer – can turn many corporate lawyers into whistleblowers who would be willing to squeal their company’s secrets for a few million.

Ideally, when it comes to “attorney-client” privilege, there is usually a gap between strict state ethics rules and more permissive federal laws and regulations. It is these loopholes that those lawyers aspiring to become whistleblowers aim to exploit. Of course it is sometimes permissible for American lawyers – who are licensed by their individual states – to breach client’s confidentiality especially on issues related to client perjury or to prevent their clients from committing a serious crime. But even in such cases, the lawyers involved are allowed to disclose only the minimum amount of information necessary for the case. As a disincentive to lawyers who may want to exploit this loophole by becoming whistleblowers, many lawyers associations(particularly the New York lawyers association) and legal experts agree that since the prospects of financial gains would cloud their professional judgment, lawyers should be prevented from claiming a bounty even in the rare cases where state laws allows disclosure. These experts are also of the view that any practicing lawyer should have their state licenses revoked if they seek payment in return for “snitching” on their clients (Daily, 2011; Economist, 2014).

But, unfortunately for the clients, it does not always work out that way, for two reasons. First, since the Sarbanes-Oxley corporate governance reforms of 2002, rules written and refined by the Security and Exchange Commission(SEC) permit disclosure in broader circumstances, especially for civil violations of securities laws as well as the award of cash bounties. Second, since the SEC has federal powers, its regulation of lawyers conduct trumps any state rules that clashes with it provisions (SEC, 2003). The implication of this is that it is the federal court which decides what lawyers can and cannot reveal, and whether they can be paid for it. But sometimes state and federal laws can be in agreement on issues of whistleblowers compensation, even though the later may be lawyers. Thus a recent case involving allegations of kickbacks at Quest Diagnostic (a medical laboratory firm) in which a federal appeals court affirmed a lower court's dismissal of a suit brought by three whistleblowers on the ground that the participation of Quest’s former general counsel represented a breach of ethics can be a consolation for those attorneys who regard attorney-client privilege as sacrosanct (Nathan, 2013; Economist, 2014).

The bottom line

At this point it is worth asking what the long-term impact which whistleblowing lawyers would have on the quality of legal representation in America. Broadly speaking, a client-lawyer relationship can only work well if, and only if, bosses are willing to be candid with their counsel. But when bosses a leery about speaking frankly with their council due to their concern that the latter might blew the whistle on them, it becomes hard for the council to give them good advice. The bottom line here is that the payment of bounties to whistleblowers might end up leaving most lawyers and their corporate clients worse off even though it will enrich few members of the legal profession.

References

Daily J. (2011): The Lincoln Lawyer. Law and the Universe. Retrieved June 16, 2014 from http://lawandthemultiverse.com/2011/05/27/the-lincoln-lawyer/

Economist (2014): Corporate Whistleblowers. Retrieved June 15, 2014 from http://www.economist.com/news/business/21601883-house-counsels-lips-migh...

False Claims Act Resource Center (2014): Federal False Claims Act. Retrieved June 15, 2014 from http://www.falseclaimsact.com/federal-false-claims-act

SEC (2003): SEC Adopts Attorney Conduct Rule Under Sarbanes-Oxley Act. SEC Press Release. Retrieved June 16, 2014 from http://www.sec.gov/news/press/2003-13.htm

Nathan D. (2013): 2nd Circuit Tosses False Claims Act Suit Against Quest Diagnostic. Thomson Reuters. Retrieved June 16, 2014 from http://blog.thomsonreuters.com/index.php/2nd-circuit-tosses-false-claims...

Whistleblower Lawyers (n.d.): Whistleblower Claims. Retrieved June 15, 2014 from http://whistleblower-claims.com/

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