Association of Corporate Counsel Reporting Up and Out Juggling the competing requirements of state ethical rules and SEC standards of professional conduct Association of Corporate Counsel © 2015 ACC would like to extend its gratitude to Lily Hughes, Esq. for her assistance with these materials. Ms. Hughes provided valuable insight and permitted ACC to draw from her ideas in order to enhance the content of this program.

AGENDA What Rules Apply? Reporting Up the Ladder Rule 205 & RPC Appearing and Practicing before SEC Reporting Up the Ladder When? Level of awareness Gravity of Wrongdoing Lawyer actions Permissive Reporting Out ABA Model Rule Rule 205 Preemption of ethical state rules?

HYPOTHETICAL IHC finds out that a potential round-tripping transaction is taking place within the company: A services sale contract and an equipment purchase contract are executed with the same entity at the same time Both contracts are for the same amount, and Sale contract will allow company to meet its earnings for the quarter which in turn will entail employees to receive a significant bonus (see video) Image courtesy of winnond at FreeDigitalPhotos.net

WHAT RULES APPLY? Rule 205 State ethical rules Appearing and Practicing before the SEC Not appearing and practicing before the SEC

WHAT RULES APPLY? (Cont’d) Appearing and practicing before the SEC Rule 205 Transacting business with the Commission, incl. comm. in any form; Representing issuer in: SEC admin. proceeding SEC investigation, inquiry, info request, or subpoena; Advising issuer as to documents to be submitted to SEC Image courtesy of kibsri at FreeDigitalPhotos.net

DUTY TO REPORT UP THE LADDER When? ABA Model Rule 1.13 (b) Comment 3 Rule 205 Report Actual Knowledge Violation of obligation to organization or law Related to Representation Likely substantial harm to organization Report Evidence of Material Violation In NY reporting up the ladder is one of the measures suggested by Rule 1.13 Unless reasonably believes not in the best interest of the organization

DUTY TO REPORT UP THE LADDER (Cont’d) Level of awareness Rule 205 “Aware of evidence of material violation” Credible evidence based upon which it would be unreasonable for a prudent and competent lawyer, under the circumstances, not to conclude that a material violation is reasonably likely… Image courtesy of Ambro at FreeDigitalPhotos.net

DUTY TO REPORT UP THE LADDER (Cont’d) Gravity of the Wrongdoing Rule 205 Material Violation of state or U.S. securities laws Violation of any state or U.S. law Breach of fiduciary duty Image courtesy of iosphere at FreeDigitalPhotos.net

DUTY TO REPORT UP THE LADDER What action should the lawyer take? Rule 205 Notify reporting lawyer No violation Reasonable Inquiry Supervisory attorney CLO or CLO & CEO Appropriate response Violation QLCC Notify reporting lawyer

DUTY TO REPORT UP THE LADDER What action should the lawyer take? Reasonably believes futile to report to CLO/CEO Rule 205 Audit committee Attorney Committee of disinterested persons No appropriate response – reasonable time Board of Directors Appropriate response: No material violation Appropriate remedial measures Retained attorney and implemented recommendations Retained attorney – reasonable defense must Explain Reasons CLO/CEO/Directors

DUTY TO REPORT UP THE LADDER No SEC decisions on violation of Rule 205. However… CFO and Controller inflated profits by eliminating vested employee benefits Memorandum for auditors: no legal obligation to report benefits GC received legal opinion correcting misperception GC was the cause of company’s violation of SEC rules In re John E. Isselmann JR., Securities Act Release 34-50428 (Sep. 2004) Image courtesy of iosphere at FreeDigitalPhotos.net

PERMISSIVE REPORTING OUT Rule 1.6 (NY) Exceptions to confidentiality… Lawyer reasonably believes necessary to Prevent death or subst. bodily harm Prevent a crime Rule 205.3 (d)(2) Exceptions to confidentiality… Prevent perjury or fraud Prevent material violation likely to cause subst. injury to fin. and prop. Rectify consequences of material violation to fin. and prop. in which attorney’s services have been used

PERMISSIVE REPORTING OUT Preemption of State Ethical Rules Rule 205.1 Where the standards of a US jurisdiction where an attorney is admitted or practices conflict with this part, this part shall govern. Image courtesy of iosphere at FreeDigitalPhotos.net

PERMISSIVE REPORTING OUT Safe Harbor Rule 205.6 (c) An attorney who complies in good faith with the provisions of this part shall not be subject to discipline or otherwise liable under rules of the jurisdiction where the attorney is admitted or practices. Image courtesy of iosphere at FreeDigitalPhotos.net

PERMISSIVE REPORTING OUT State Bar Reactions In the absence of case law, a lawyer should not disclose confidences unless authorized by the RPC WSBA: 2003 Interim Formal Opinion – withdrawn in 2006 CA State Bar: Letter to SEC (Aug. 2003); Ethics Alert (Mar. 2004 ); Law review (Dec. 2004) Image courtesy of zole4 at FreeDigitalPhotos.net

PERMISSIVE REPORTING OUT State Bar Reactions (Cont’d) CA State Bar law review article (Dec. 2004) Attorney disclosing confidences needs to believe strongly that: He is a lawyer appearing and practicing before the SEC Disclosure is reasonably necessary He has the ability to demonstrate “good faith” reliance on safe harbor Reliance on Rule 205 preemptive effect would be upheld by a court Image courtesy of zole4 at FreeDigitalPhotos.net

PERMISSIVE REPORTING OUT State Bar Reactions (Cont’d) NYCLA Comm. Prof. Ethics Formal Opinion 746 (Oct. 2013) RPC 1.6(b)(2) allows disclosure to prevent a crime Rule 205 allows disclosure of “material violation” Rule 205 is broader and inconsistent with RPC Image courtesy of zole4 at FreeDigitalPhotos.net

PERMISSIVE REPORTING OUT SEC Interpretation Letter in response to WSBA (2003) Speech in response to CA State Bar Corp. Comm. (2004) SEC authority to implement rules of conduct that supersede state law Disciplinary proceedings may thwart purposes of SEC rules Support to lawyers relying on preemptive effect of SEC rules Image courtesy of jesadaphorn at FreeDigitalPhotos.net

PERMISSIVE REPORTING OUT SEC Interpretation (Cont’d) Amicus curiae brief filed in Liu Meng-Lin v. Siemens AG Attorneys are not required to make reports to the Commission and, indeed, may often be precluded from doing so as a result of their ethical obligations to their clients Image courtesy of jesadaphorn at FreeDigitalPhotos.net Brief of the Securities and Exchange Commission, Amicus Curiae in Support of the Appellant, 2014 WL 663875 (C.A.2, Feb. 20, 2014) Liu MENG-LIN, Plaintiff-Appellant, v. Siemens AG, Defendant-Appellee Liu Meng-Lin v. Siemens AG, WL 3953672 (C.A.2 N.Y. August 14, 2014)

PERMISSIVE REPORTING OUT Image courtesy of 1shots at FreeDigitalPhotos.net Award eligibility original information, and successful SEC enforcement actions Not original information if obtained: Through privileged communication In connection with legal representation, In connection with process to identify, report and address violations of law… 17 CFR § 240.21F-2 (a)(2) Award eligibility 17 CFR § 240.21F-4 (b)(1)(i) Original information SEC Release No. 34-64545 (Aug. 2011) “No prospect of financial benefit for submitting information in violation of an attorney’s ethical obligations.”

PERMISSIVE REPORTING OUT NYCLA Comm. on Pro. Ethics Formal Opinion 746, Oct. 2013 Two ethical issues: Confidentiality (RPC 1.6 ) Conflict of Interest (RPC 1.7) Image courtesy of iosphere at FreeDigitalPhotos.net

PERMISSIVE REPORTING OUT NYCLA Comm. on Pro. Ethics Formal Opinion 746, Oct. 2013 Disclosure of confidential information MUST Fit within an exception to RPC 1.6, or Be necessary to correct a fraud, crime or false evidence before a tribunal (RPC 3.3) Note: even when disclosure is permitted disclosure must be limited to “reasonably necessary information” Image courtesy of Stuart Miles at FreeDigitalPhotos.net

PERMISSIVE REPORTING OUT Image courtesy of jesadaphorn at FreeDigitalPhotos.net NYCLA Comm. on Pro. Ethics Formal Opinion 746, Oct. 2013 Conflict of interest (RPC 1.7) Risk that the lawyer’s professional judgment on behalf of the client will be adversely affected Note 1: in rare situations in which report is mandatory (Model Rule 3.3(b)) the financial incentive could be less of a factor in determining the existence of conflict Note 2: former lawyers may not reveal information that could not have been revealed in the course of the representation

United States ex rel. FLPA v. Quest Diagnostics & Unilab Corp. 734 F United States ex rel. FLPA v. Quest Diagnostics & Unilab Corp. 734 F.3d 154 (2d Cir. Oct. 25, 2013) Relevant issues: (i) whether FCA preempt state ethical rules; (ii) whether former Unilab’s counsel violated N.Y. Rule 1.9(c) Conclusion: FCA does not preempt state attorney confidentiality rules Citing Bates v. Dow Agrosciences LLC, 544 U.S. 431 (U.S. 2005) Counsel reasonably could have believed that defendants intended to commit a crime but his disclosure was beyond what was necessary

PRACTICAL LESSONS Remember who your client is (Rule 1.13) Take into account state rules of professional conduct and bar opinions Prevent wrongdoing by developing and implementing an effective compliance and training program Ensure there is a clear and effective internal policy regarding up-the-ladder reporting for lawyers IRS Examples of General Fraud Investigations, Fiscal Year 2014: http://www.irs.gov/uac/Examples-of-General-Fraud-Investigations-Fiscal-Year-2014 Recent FCPA enforcement activities: http://www.millerchevalier.com/Publications/MillerChevalierPublications Image courtesy of Stuart Miles at FreeDigitalPhotos.net

Association of Corporate Counsel THANK YOU! Association of Corporate Counsel