Lawyer who reported suspected wrongdoing can't collect whistleblower award, DC Circuit says
An in-house lawyer who reported suspected wrongdoing to the U.S. Securities and Exchange Commission can’t recover a whistleblower award, a federal appeals court has ruled. (Image from Shutterstock)
An in-house lawyer who reported suspected wrongdoing to the U.S. Securities and Exchange Commission can’t recover a whistleblower award, a federal appeals court has ruled.
The John Doe attorney can’t recover because he discovered the possible fraud during representation of his company, and disclosure wasn’t authorized by the applicable state bar rule, the U.S. Court of Appeals for the District of Columbia Circuit ruled in an opinion made public Aug. 16.
Doe’s disclosure about “Individual 2” led to an SEC investigation of his company. Individual 2 did not have a formal role at Doe’s company, but the attorney suspected that his company was implicated in the securities fraud, the D.C. Circuit concluded.
SEC regulations allow attorneys to recover whistleblower awards for information gathered during a representation when disclosure is permitted by the applicable state bar rules. The applicable ethics rule in Florida allows disclosure when a lawyer reasonably thinks that it is necessary to serve a client’s interest.
“Having repeatedly stated to the commission that he believed at the time he submitted his tip that his client was implicated in wrongdoing, Doe cannot now unring the bell,” the D.C. Circuit said.
“We hold that the commission’s determination—based on Doe’s own statements—that Doe could not reasonably have believed that his disclosure was necessary to serve his client’s interests was supported by substantial evidence and was not arbitrary or capricious.”
Law360, Reuters and Bloomberg Law covered the decision, while the Legal Profession Blog published highlights.
While the D.C. Circuit did not identify Doe, the lawyer revealed in a court filing that the SEC case was SEC v. Palm House Hotel, according to Law360. The case involved an alleged scheme to defraud foreign investors seeking EB-5 visas, which provide green cards based on U.S. investments that provide jobs.
Doe’s lawyer, Max Maccoby, commented to Bloomberg Law and Law360.
Doe “did the right thing” by reporting the fraud, Maccoby said.
“Unfortunately, the D.C. Circuit disqualified him from any award because it decided that he did not sufficiently insulate his own corporate client (which itself was ultimately implicated in the fraud), which may seem counterintuitive but is nevertheless a rule of professional conduct,” Maccoby said in an email.
