Myth of the Attorney Whistleblower
Posted: 26 Feb 2019 Last revised: 19 May 2019
Date Written: February 10, 2019
When faced with attorney involvement in Enron, one of the most egregious incidents of corporate fraud in a generation, Congress passed Section 307 of the Sarbanes Oxley Act (“Sarbanes”), which required the Securities and Exchange Commission (“SEC”) to amend its standards governing the conduct of attorneys practicing before the SEC (“SEC Standards”). In response, the SEC and the American Bar Association (“ABA”) drafted or amended rules to remind attorneys that the client is the company, not its agents, and to enable attorneys to disclose information. The new rules require attorneys to report suspicious activity up-the-chain, going as far as the board of directors if necessary, and permits attorneys to “blow the whistle” by reporting externally in some extreme circumstances. These changes were fueled by a belief that a well-informed, willing, and diligent attorney can act as a gatekeeper, stopping its clients from committing corporate fraud, or, if the client cannot be stopped, acting as a whistleblower to mitigate harm to the market. Notwithstanding the political grandstanding and legal regimes put in place to prevent the next Enron, this Article explores whether attorney whistleblower provisions provided in the SEC Standards and Model Rules are effective. Not only are those provisions ineffective, but the entire premise behind those regimes is fundamentally flawed because of its failure to understand the attorney-client relationship, corporate structure, and corporate criminal wrongdoing. For any and all of these reasons, the idea of an attorney as a whistleblower is a myth.
Even worse, the failure of Congress to understand corporate and attorney behavior has left the market available to extraordinary criminal wrongdoing with only after-the-fact investigations, if anything, available to deter. More importantly, these regimes have left people - you, me, and our families - vulnerable to be preyed on in the name of a corporate profit. This is because at its core corporate fraud scandals are about deception in conjunction with the use of tactics and structures that are legal and at times complex. Legal corporate structuring renders the whistleblowing mandate found in Sarbanes ineffective. We need only look at three recent examples: the false promise of Theranos’ single drop of blood testing, The Weinstein Company’s cover-up of decades of sexual assault, and the General Motors ignition switch failure which lead to deaths and an eventual government bailout. These scandals show that clients still have tools that were essential to the pre-Sarbanes fraud and market manipulation — the ability to use business structures and rules defining the attorney-client relationship to evade detection. A cultural change must accompany a change to the way attorneys think about the attorney-client relationship to effectively mitigate attorney participation in corporate fraud.
Suggested Citation: Suggested Citation