Sarbanes-Oxley and "Whistleblowing" by Corporate Lawyers: The Untold Story
By now, every general counsel in America undoubtedly has received courtesy packets from their outside counsel summarizing the SEC's proposed regulations under Sarbanes-Oxley Section 307. However, no summary of the proposed regulations themselves can tell a complete story about the real issue at stake, how that issue has rocked the American Bar Association for decades, and how corporate lawyers (both inside and outside) must already wrestle with the ethics of "whistleblowing."
Most of the proposed Sarbanes-Oxley Section 307 regulations deal with what is called "up the ladder" reporting of possible wrongdoing by corporate constituents. Remarkably, some critics claim that requiring such intra-corporate disclosure of possible wrongdoing would somehow chill the attorney-client relationship that inside and outside counsel enjoy with corporate officers and employees. They worry that any reporting requirement will deter corporate employees from sharing secrets with company lawyers.
This criticism ignores a basic tenet of all ethics rules. Lawyers who represent corporations owe their duties to the institution, not to any individual within it. The critics of Sarbanes-Oxley's "up the ladder" reporting requirements must be advocating a system in which a company lawyer may keep secret from management any material information that the lawyer learns from company employees. This is not only contrary to well-settled ethics and agency principles, it is both inconceivable to a lawyer owing a duty of loyalty to the institution, and unworkable on a day-to-day basis. Thus, the critics of Sarbanes‑Oxley seem to miss the mark in questioning the proposed regulations' internal reporting requirements.
The critics saved their harshest attacks for the proposed regulations' requirement that lawyers representing recalcitrant clients disavow tainted work product and (if they are outside lawyers) withdraw from the representation. These proposed provisions have drawn a firestorm of criticism from bar groups and individual lawyers. The critics fear an erosion in the attorney-client relationship, a fundamental shift in the role that lawyers play, and (to some) the demise of our entire profession.
To be sure, these critics correctly identify the most important issue at stake. The real debate is not whether a company lawyer should tell management what is going on (which seems painfully self-evident), it is whether company lawyers must or should tell someone outside the company.
However, missing from the glossy summaries of Sarbanes-Oxley is the recognition that: (1) this debate has raged for years in the ABA; and (2) the ABA debate may be interesting from an academic standpoint, but is largely irrelevant for corporate lawyers, who are already governed by state ethics rules that take widely varying views on this important issue.
The ABA Model Rules have for many years contained an "up the ladder" corporate "whistleblowing" provision. ABA Model Rule 1.13. A recent ABA Task Force has recommended that Model Rule 1.13 be somewhat beefed-up, but the concept of intra-corporate reporting has a long history in the ABA Model Rules.
The real debate at the ABA has involved "whistleblowing" to someone other than the client's management. As it now stands, ABA Model Rule 1.6 (which deals with confidentiality) provides that a lawyer may reveal confidential client information to prevent a future crime ‑‑ but only if the future crime is "reasonably certain" to result in someone's death or substantial bodily harm. Thus, a lawyer acting under the ABA Model Rules (which none do, as explained below) would not have a duty to report a client's serious intent to kill someone.
Given the limited nature of this "whistleblowing" discretion, a lawyer guided by the ABA Model Rules would be prohibited from revealing a client's future intent to commit any other kind of crime, or a serious fraud. The Ethics 2000 ABA Task Force recommended the addition of such other wrongdoing to the discretionary disclosure provision of Model Rule 1.6, but the ABA House of Delegates rejected its recommendation.
The ABA Model Rules also contain an intriguing provision prohibiting a lawyer from "knowingly" failing to disclose material facts "when disclosure is necessary to avoid assisting a criminal or a fraudulent act by a client." ABA Model Rule 4.1(b). However, that Rule also contains an explicit exception that essentially eliminates its impact. Lawyers whose silence might assist a client's crime or fraud still may not make the required disclosure if it would violate the general confidentiality rule (ABA Model Rule 1.6).
Given this extreme position, the ABA Committee which drafts legal ethics opinions devised what is commonly called a "noisy withdrawal" ‑‑ in which a lawyer whose client is committing or is about to commit some wrongdoing withdraws from the representation and disavows tainted work product (but without explicitly revealing the client's ongoing or intended wrongdoing).
The ABA debate about "noisy withdrawals" has lasted for years. For instance, in a 1992 Legal Ethics Opinion (ABA LEO 366), the ABA Committee described how a "noisy withdrawal" would work in the context of a lawyer who represented a small business in connection with a loan transaction, and later discovered that the company had been fraudulently misstating the company's financial condition (meaning that the opinion was incorrect when the lawyer issued it). The Committee indicated that the lawyer could engage in a "noisy withdrawal," disavowing the opinion but without explicitly revealing the client's fraudulent conduct.
The dissenting opinion in that 1992 ABA LEO shows the vehemence of the ABA anti‑"whistleblowing" group. The dissenters accused the majority of ignoring the literal language of Model Rule 1.6, and using an analysis that "founders on the shoals of the English language." They argued that the majority was trying to improperly add a "whistle blower" duty to the Model Rules by relying on a "lexicographic coup" and "an act of linguistic prestidigitation" to support reasoning of "gelatinous consistency" (all this from a Committee dedicated to advancing professionalism!!)
Times have changed. The recent ABA Task Force recommendations suggest that lawyers be free to reveal confidential information to prevent a client from committing a crime or a fraud "reasonably certain" to result in "substantial economic loss" (if the lawyer's services "have been or are being used in furtherance of the crime or fraud"). Ironically, the Task Force's recommendation would require disclosure of such information if the lawyer "knows" that the client's conduct amounts to a crime ‑‑ meaning that a lawyer would be required to "blow the whistle" on a client about to harm someone's property, but not required to blow the whistle on a client about to kill someone. No wonder lawyers are held in such high esteem.
Because most of the lawyers sending out summaries of Sarbanes-Oxley are corporate or securities lawyers, they rarely mention this historic ABA debate over "whistleblowing" and "noisy withdrawals." Perhaps it is just as well. The ABA debate provides a fascinating view into the heart of our profession ‑‑ but has no practical effect. This is because the ABA Model Rules do not govern even a single lawyer's conduct anywhere in the world. The Model Rules are merely a suggestion from a voluntary association. The "rubber meets the road" in the various ethics rules adopted by the states where lawyers actually practice. And in those rules, the untold story is nothing short of remarkable.
States Ethics Rules
There is no more dramatically difficult decision that lawyers must make than whether to "blow the whistle" on their client's wrongdoing. If they report a client's wrongdoing when not obligated to (or, especially, when prohibited from doing do), they have not only breached their duties of loyalty and confidentiality, they have also unnecessarily condemned their client to punishment. On the other hand, if a lawyer fails to reveal information about some client wrongdoing that the ethics rules requires to be revealed, the lawyer obviously has assisted in covering up the wrongdoing. This may not violate a lawyer's duties of loyalty or confidentiality, but that would be little consolation to a lawyer whose license has been revoked, or who is facing indictment.
Each state has wrestled with this issue. And it is the greatest irony in American legal ethics that the largest variation in states' ethics rules occurs in the precise area where lawyers most need uniform and easy-to-follow guidance ‑‑ when deciding whether they must "blow the whistle" on their client's wrongdoing.
As it turns out, about 35 states (experts can't agree on the tally) follow the basic ABA approach Â– but most with some variation. About four states take an even harder line on "whistleblowing," and tend to prohibit it even in cases that the ABA would allow it. On the other hand, about ten states require "whistleblowing" in certain circumstances.
Consider my firm -- McGuireWoods LLP. McGuireWoods has offices in eight states, and the District of Columbia. As McGuireWoods' "ethics guy," I must become familiar with all of our jurisdictions' "whistleblowing" provisions.
If one of my partners were to ask how they should respond to a client's intent to commit a future crime that could result in substantial financial loss to another, how would I answer? I would say that my partner: (1) must reveal it in Florida and Virginia; (2) may reveal it (if the partner chooses to) in Georgia, Illinois, Maryland, New York, North Carolina and Pennsylvania; and (3) cannot reveal it in Washington, D.C.
If one of my partners asked how they should respond to a client's intent to commit a future crime that is not serious enough to cause substantial financial loss to another, this would be my answer: (1) the partner must reveal it in Florida and Virginia; (2) the partner may reveal it (if the partner chooses to) in Illinois, New York, North Carolina and Pennsylvania; and (3) the partner cannot reveal it in Georgia, Maryland and Washington, D.C.
If one of my partners asked how they should respond to a client's intent to engage in some action that could cause substantial financial loss to another but which is not a crime (and which does not use the lawyer's services), my answer in Maryland would be that the partner may reveal it, but the answer in all of our other states would be that the lawyer cannot reveal it.
As mentioned above, the ABA Model Rules contain a prohibition on a lawyer's silence if that silence would assist a client's crime or fraud. That Rule rarely becomes relevant in the ABA Model Rule analysis, because it does not trump the normal duty of confidentiality. What would happen at McGuireWoods if that rule came into play? If one of my partners asked me if they are obligated to disclose information if their silence would assist a client's crime or fraud, my answer would be: (1) yes in Florida, Georgia, Illinois, Maryland, Pennsylvania, Virginia and Washington, D.C.; and (2) no in New York and North Carolina. If one of my partners in a state containing such an obligation asked me whether the disclosure duty trumped the normal duty of confidentiality, my answer would be: (1) no in Florida, Georgia, Illinois, Pennsylvania and Washington, D.C. (which follow the ABA Model Rule approach); and (2) yes in Maryland and Virginia.
What lessons can be drawn from this dizzying variation among state ethics rules ‑‑ the ones that lawyers must actually follow? First, lawyers trying to comply with their ethical requirement cannot "follow their moral compass" or "use the smell test." Second, we as a profession obviously have difficulty deciding where to draw the line between preserving client confidences and protecting society by revealing our clients' ongoing or future wrongdoing. These are tough issues, and the American approach to ethics allows each state to handle them differently. Third, and perhaps most importantly, the critics' dire predictions of doom based on the modest "noisy withdrawal" provisions in the proposed Sarbanes-Oxley regulations seem misplaced. Lawyers go to work every day in states requiring far more disclosure of client wrongdoing. All in all, the American ethics system works well, and Sarbanes-Oxley will not destroy it.