N.Y. Lawyers Barred From Bounties, NYCLA Says
New York lawyers are presumptively barred from collecting whistleblower bounties in exchange for divulging confidential information about their clients, according to a new opinion from the Professional Ethics Committee of the New York County Lawyers' Association.
NYCLA Ethics Opinion 746, issued Oct. 7, addresses the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and potential ethical pitfalls confronting attorneys bound by the New York Rules of Professional Conduct.
The act, and regulations enacted in response to it by the Securities and Exchange Commission, allow whistleblowers who report "material" securities violations to the government to recover up to 30 percent of any fine levied by the SEC. Since fines begin at $100,000, the whistleblower's minimum bounty is $30,000, and could amount to millions of dollars.
But the New York rules allow attorneys to disclose confidences in limited circumstances, such as when the attorney "reasonably believes [disclosure] is necessary" to prevent the client from committing a crime. The rules do not permit New York attorneys to reveal confidential information regarding a securities law violation that does not rise to the level of a crime.
The NYCLA committee, cochaired by Barry Temkin, a partner at Mound Cotton Wollan & Greengrass, and Richard Maltz, counsel to the legal ethics and professional responsibility group at Frankfurt Kurnit Klein & Selz, said attorneys in New York generally cannot accept a bounty for revealing confidential information, even where allowed by SEC rules. It expressed concern that "a financial incentive might tend to cloud a lawyer's professional judgment" and that the "prospect of financial benefit could place the attorney's personal interests in potential conflict with those of the client."
In an interview, Temkin said SEC rules and the New York Rules of Professional Conduct seemingly agree that an attorney can disclose a confidence in order to correct a perjury or when a fraud is perpetrated through a lawyer's services—such as when a lawyer writes a prospectus and later learns that the document contains false statements.
"Even if the New York rules say it is a permissive disclosure, it doesn't mean it is a good idea for the lawyer to accept a whistleblower bounty from the government," Temkin said. "In interpreting the Rules of Professional Conduct, we believe that there is a significant risk that a lawyer's professional judgment on behalf of a client would be adversely affected by a personal interest of the lawyer in seeking to collect a whistleblower bounty. The lawyer's decision to make a disclosure should be based on the facts and the law and not, in our view, on the lawyer's personal interests."
Temkin acknowledged "there may be some circumstances we haven't considered yet in which disclosure might be mandatory under New York law," and if the lawyer has no choice but to disclose a confidence, accepting a bounty may not be unethical.
But in general, Temkin said New York ethics rules would deem it a conflict of interest for an attorney who was not required to reveal a certain confidence to collect a bounty for doing so.
"Under those rare and exceptional situations in which the lawyer is affirmatively required by law or the Rules of Professional conduct to report out the client's misconduct, it is our opinion that the financial incentive could be less of a factor in determining the existence of a significant risk of a conflict with the lawyer's personal interest," Temkin said. "However, while our opinion gives general guidelines for the practicing bar, any analysis of the risks of a conflict in a particular situation would be fact-specific."