Whistleblower case raises implications for in-house counsel

By Russell Boniface | May 13, 2016


PHILADELPHIA - In December, attorney David Danon alleged in a lawsuit filed in Philadelphia federal court that investment company Vanguard had wrongfully terminated him after he raised concerns internally about alleged tax violations.

According to the Securities and Exchange Commission, an attorney or individual should not have to first report misconduct to the SEC to fall under the protections of the Dodd-Frank Wall Street Reform and Consumer Protection Act's whistleblower program.

Under the program, an individual who reports violations of law or misconduct is entitled to a monetary incentive for reports leading to a successful SEC enforcement action.

Danon, however, did not reach out to regulators until his employment was terminated, after he allegedly reported the wrongdoing internally.

In a March amicus brief submitted in a different case at the U.S. Court of Appeals for the Sixth Circuit, the SEC advocated for a much broader reading of the Act regardless of when the report is made to the SEC to avoid creating a two-tiered system that discourages internal reporting.

The SEC noted that internal reporting is an “important component of the overall design of the whistleblower program.”

The Second and Fifth circuits are currently split on the interpretation of the Act, leading to the question of whether this issue may reach the U.S. Supreme Court.

“The SEC's suggested interpretation of Dodd Frank would substantially broaden the scope of individuals who most companies believed were initially covered under the Act's provisions and has wide-ranging implications," Jeanine Conley, partner at the national law firm BakerHostetler, recently told the Pennsylvania Record.

The case raises ethical implications for when in-house counsel blows the whistle on his or her current or former employer.

In Danon’s case, a New York state court judge had already dismissed his case, finding that he violated ethics rules by disclosing confidential tax information.

“At least the state court held that the attorney was not entitled to a bounty because the attorney client privilege does apply,” said Conley

The SEC will deny whistleblower protection to attorneys who learned the information they wish to report through a communication subject to attorney-client privilege or through legal representation of a client. The SEC also recognizes that under both state and federal law, there are exceptions to this rules - for instance, if the attorney knows securities laws are being violated.

“Companies must recognize the importance of training all employees, even in-house attorneys, and make sure to follow up on internal reports from all employees properly and maintain strong policies against retaliation,” Conley said.

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