Yesterday, the Securities and Exchange Commission announced that it had “charged a California-based attorney and his wife with insider trading on confidential information obtained from a corporate client.”  According to the SEC’s complaint, the attorney had tipped material non-public information concerning a client, Spectrum Pharmaceuticals, Inc., to his spouse.  According to the SEC’s complaint, the attorney “had a duty not to divulge Spectrum’s confidential information outside the attorney-client relationship.”

I certainly don’t take any issue with the SEC’s assertion that a California attorney owes a duty “To maintain inviolate the confidence, and at every peril to himself or herself to preserve the secrets, of his or her client.”  Cal. Bus. & Prof. Code § 6068(e)(1).  However, I do find it richly ironic that the SEC would make this claim in light of its explicit invitation to attorneys to violate client confidences in Rule 205.3(d)(2) and the possibility that an attorney who does so may be financially rewarded under the SEC’s whistleblower program.  See Conflicting Currents: The Obligation to Maintain Inviolate Client Confidences and the New SEC Attorney Conduct Rules.

The SEC’s rules on whistleblower bounties do not categorically exclude attorneys from receiving awards. Nonetheless, they do require that awards be “original information”.  To qualify as original information, a report must, among other things, be derived from “independent knowledge or independent analysis”.  Rule 240.21F-4(b).  This would appear to bar claims by attorneys because the rules specify that the SEC won’t consider information to be derived from a person’s independent knowledge or independent analysis if the information was obtained through a communication subject to the attorney-client privilege.  However, the rule provides an exception when disclosure is permitted by an attorney pursuant to Rule 205.3(d)(2), the applicable state attorney conduct rules, or “otherwise”.  Although I disagree with the SEC’s claim to preemptive authority, Rule 205.3(d)(2) does purport to authorize attorneys to make reports to the SEC in three circumstances.  This certainly opens the door to attorneys reaping the rewards of betraying their clients.