Sounds like pretty bad advice to blackmail the manager. Find a new job, then blow the whistle if it is what needs to be done. Don't try to blackmail the manager to keep the job, because if you succeed you will be an accessory to whatever the crime is.
If it was up to me, I would have whistleblown already. I said that first.
I guess the manager understands that the OP will not whistleblow. Indeed, the OP doesn't seem to have considered it an option. This is exactly what allows the manager to treat the OP this way. The OP needs to show the manager otherwise.
Even if the OP finds a moderately nicer job later on, which I am sure they will, they need to do more to avoid reaching such a position in the first place. Or, this will happen again.
Just to be perfectly clear, blackmail is not an option, as it is both illegal and unethical, and I will not do anything of the sort.
I would also like to ensure that I correct the original comment in that I do not have sufficient legal knowledge to be certain that anything illegal or improper was done, which is why I am consulting with counsel before acting.
Not much to add given that you are consulting with counsel, but be aware that one extremely valuable attribute of legal counsel is that is where you deposit any documents that you think might be relevant -- you will surely be required to surrender all employer IP if fired, if you think there are legal issues that require you to retain documents, it's almost necessary to have them in a lawyer's care (and the lawyer will tell you what to say). I think and (IANAL) it would be something like "I was concerned about the circumstances of my termination, and I felt I needed to consult a professional to be sure I took the right steps." Which is true, yet vague, yet also not overtly threatening.
I would be wary of whistleblowing, but I would also be very wary of saying anything more to your employer than what is legally required (or than your lawyer advises). I don't see that we have socially made whistleblowing worth the risk to you, therefore, you should not take that risk, but if it helps your case, your severance, whatever, for your soon-to-be-former employer think that you might make trouble for them if they piss you off even more, that might be okay (if they're certain that you might make trouble for them, that's another matter and maybe a problem).
For the non-legal and probably more useful advice, this does not sound like a job that is worth keeping. You can't fix a bad boss, you're not paid enough to fix a bad boss (it ought to be the case that you would get a massive bonus for fixing a bad boss, but sadly the world does not work that way) better to look out for your own sanity and well-being. Don't burn bridges, don't slack off, I also don't recommend knocking yourself out in an attempt to save your job because (you wrote here for advice, here it is) it's not worth saving, DO prepare a resume and send it out, and follow the usual recipe of applying to as many places as you can stand managing all at once. It ought to take a few weeks for the sent resumes to turn into interviews, so it's not that likely to take too much of your (not-slacking-off) time. Ask your lawyer exactly what to say if a potential employer asks why you're leaving, because it's a delicate dance and there's things you probably cannot safely say (for example, what you've said here...).
