Corporate Counsel Had No Duty to Report Owner-Manager's Possible Fraud to SEC

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April 2 — A law firm that advised an investment services company had no duty to report the principal owner/manager's possible fraud to the SEC, the U.S. District Court for the Northern District of Georgia held March 17, throwing out a malpractice suit against the firm. 

The lawyers fulfilled the advisory role they were hired to perform, the court said, by giving the manager correct advice about complying with federal and state law, which he then flouted. “Securities lawyers are not informants for the SEC,” Judge Thomas W. Thrash Jr. declared.

Receiver's Suit Thrown Out

The malpractice suit was brought by the receiver for Lighthouse Financial Partners LLC in the SEC's civil enforcement action against Lighthouse and its majority owner/manager, Benjamin DeHaan.

The receiver asserted that Page Perry LLC and its lawyers knew or should have known that Lighthouse had custody of its clients' funds in violation of applicable regulations and that DeHaan was converting those funds for personal use. The lawyers' failure to notify regulatory authorities allowed DeHaan to continue stealing from the company's clients, the receiver contended.

Last year the court flatly rejected the receiver's theory and dismissed the suit for failure to state a claim.

In his strongly worded opinion dismissing the case, Thrash said “[o]utside corporate attorneys—with or without knowledge of suspicious activity—are not insurers of good behavior by the client” and that “Georgia law never obligates a lawyer to report even the most serious client misconduct to regulators.”

“Securities lawyers are not informants for the SEC.”Judge Thomas W. Thrash Jr.

In denying reconsideration, Thrash stuck to his view that it would be “a strange perversion of lawyers' professional responsibilities” to hold that lawyers have a legal duty to inform authorities of regulatory violations. The receiver's legal theory was “profoundly flawed,” he said.

The receiver didn't claim, Thrash noted, that the lawyers were negligent in performing the services for which they were retained—that is, advising Lighthouse about regulatory compliance.

Rather, the receiver contended that the lawyers had a separate duty, independent of the service they agreed to perform, to report violations to a regulatory agency. Not one single Georgia statute or court case imposes such a duty on attorneys, the judge said.

No Violation of Rule 1.13

Thrash rejected the receiver's attempt to ground this “reporting out” duty on Georgia Rule of Professional Conduct 1.13, which sets out ethical duties in representing organizations.

Although Rule 1.13(c) allows lawyers to notify an external agency of a corporate constituent's suspected wrongdoing in some circumstances, the wording of the rule indicates that step is not compulsory, Thrash said.

Thrash said that the lawyers fully complied with Rule 1.13(b), which requires a lawyer to notify the highest authority of a corporate client about legal violations in some circumstances.

During the years in which Page Perry represented Lighthouse, DeHaan was the highest authority at the company, and the lawyers advised him against maintaining custody of clients funds, the court said. DeHaan's theft was possible, it said, because he ignored this advice.

Confidentiality Concern

The duty asserted by the receiver would have dire consequences for the attorney-client relationship, Thrash said.

If that duty were recognized, the risk of civil penalties would cause lawyers to “err on the side of disclosure when in doubt,” and potential clients would be deterred from seeking legal advice, he said.

The receiver argued that the lawyers would not have violated attorney-client confidentiality by reporting DeHaan's actions because Lighthouse, not DeHaan, was their client. But this argument incorrectly assumes, Thrash said, that the lawyers could have reported DeHaan without reporting Lighthouse.

The receiver also contended that the crime-fraud exception displaced any confidentiality issues for the lawyers. Calling that argument “absurd,” the court said it conflates attorney-client confidentiality with the attorney-client evidentiary privilege.

“That certain confidential information may be discoverable does not mean that attorneys may volunteer such information outside of a judicial proceeding, much less be required to do so under the threat of civil penalties,” Thrash said. The lawyers could be disbarred for disclosing confidential information, he noted.

No Causal Link for Other Alleged Breaches

In trying to build a malpractice case against Page Perry, the receiver also claimed that mock audits the lawyers performed for Lighthouse were inadequate, and that they had a conflict of interest when they represented DeHaan before the SEC.

Those claims were not viable, the court ruled, because the complaint did not state a causal link between these alleged breaches and the damage to the client.

Dovin Malkin & Ficken LLC represented the receiver. Page Perry LLC and the other defendants were represented by Hawkins Parnell Thackston & Young LLP.

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Full text of previous opinion at

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