Two men share securities regulation news

Breaking news and expert analysis on legal and compliance issues

[Back To Home][Back To Archives]

From Securities Regulation Daily, June 12, 2014

Law firm sued for failing to turn in crooked client

By Matthew Garza, J.D.

Claims filed against a law firm that represented an investment adviser that misappropriated client funds were dismissed after the federal district court in Atlanta found the firm did not commit professional malpractice (Hays v. Page Perry, LLC, June 10, 2014, Thrash, T.).

Lighthouse Financial Partners, LLC and its former manager and majority owner Benjamin DeHaan were subjected to enforcement actions by the Georgia Securities Commission and SEC after the advisory firm was found to be in violation of client fund custody rules. After DeHaan pled guilty, Lighthouse’s receiver sued Lighthouse’s law firm, Atlanta-based Page Perry, LLC, for failing to report the custody violations to regulators. The receiver claimed that the firm should have notified regulatory authorities of the violations in order to mitigate damages to Lighthouse clients.

Custody violations. DeHaan hid his scheme with a bank account called “Client Holding - Pass Through.” He represented that the account was only used to pass client funds to third party brokers for investment, but instead he used the account as a personal cookie jar.

During a mock audit of Lighthouse, a partner at Page Perry found references to the pass-through account while reviewing Lighthouse’s records and financial statements. He notified DeHaan that Georgia’s custody rule required checks to be made payable to third parties, and did not allow checks payable to Lighthouse. If he did receive checks payable to Lighthouse, he should return them within 3 business days and request replacements payable to one of the broker-dealers that Lighthouse claimed were acting as custodian of the funds.

Another mock audit conducted by the law firm a year later employed a former staff attorney for the Georgia Securities Commission. Despite being asked for documents in advance, DeHaan could not produce bank statements and client account statements during the audit. Further investigation showed that the third-party broker-dealers supposedly acting as custodians of the customer funds were not providing Lighthouse clients with quarterly account statements. The Page Perry partner informed DeHaan that Lighthouse was not in compliance with the custody requirements.

Audit. Lighthouse was then audited by the Georgia Securities Commission. Still unable to produce the proper records, the partner drafted a letter that Lighthouse sent to the regulator claiming that the third-party broker-dealers supposedly holding the client money had provided DeHaan incorrect phone numbers, causing him to be unable to obtain the statements. After being subpoenaed by the SEC, the law firm withdrew as counsel and, with DeHaan’s consent, reported his criminal activity to the SEC. DeHaan pled guilty to wire fraud on February 1, 2013.

Malpractice. The court stated that to establish a malpractice claim, a plaintiff must establish (1) employment of the defendant attorney, (2) failure of the attorney to exercise ordinary care, skill, and diligence in the performance of the task for which he was employed, and (3) that such negligence was the proximate cause of damage to the plaintiff.

The plaintiff argued that the law firm knew that Lighthouse had custody of the client funds and failed to notify regulators, a fact the law firm countered was immaterial because it was hired to perform only an advisory role — a role they performed with sufficient care and diligence. The firm argued that there was no independent duty to report regulatory non-compliance to a regulator, and the court agreed, noting that the receiver cited no Georgia authority imposing such a duty on attorneys.

The Georgia Rules of Professional Conduct cited by the receiver do not independently constitute legal duties which give rise to malpractice claims, said the court. In addition, the court said the facts showed that the firm complied with the cited rule. “Thus, no legal duty was breached by the Defendants’ failure to notify a regulatory authority of Lighthouse’s non-compliance with custody rules,” wrote the court.

The receiver’s theory of the requirements of the Georgia Rules of Professional Conduct would turn every corporate lawyer into a position of policing clients, despite the existence of Bar Rules that hold the attorney-client privilege “sacrosanct.” “No rational client would seek compliance advice from a lawyer, knowing the lawyer would be obligated to report the client to regulators if the lawyer detected less than complete compliance with every relevant regulation,” said the court.

The case is Civil Action File No. 1:13-CV-3925-TWT.

Attorneys: Allison S. Hines Ficken (Dovin Malkin & Ficken LLC) for S. Gregory Hays. Christine L. Mast (Hawkins Parnell Thackston & Young LLP) for (Page Perry LLC) and Estate of J. Boyd Page.

Companies: Lighthouse Financial Partners, LLC

MainStory: TopStory Enforcement FraudManipulation GeorgiaNews InvestmentAdvisers

Securities Regulation Daily

Introducing Wolters Kluwer Securities Regulation Daily — a daily reporting service created by attorneys, for attorneys — providing same-day coverage of breaking news, court decisions, legislation, and regulatory activity.

A complete daily report of the news that affects your world

  • View full summaries of federal and state court decisions.
  • Access full text of legislative and regulatory developments.
  • Customize your daily email by topic and/or jurisdiction.
  • Search archives for stories of interest.

Not just news — the right news

  • Get expert analysis written by subject matter specialists—created by attorneys for attorneys.
  • Track law firms and organizations in the headlines with our new “Who’s in the News” feature.
  • Promote your firm with our new reprint policy.

24/7 access for a 24/7 world

  • Forward information with special copyright permissions, encouraging collaboration between counsel and colleagues.
  • Save time with mobile apps for your BlackBerry, iPhone, iPad, Android, or Kindle.
  • Access all links from any mobile device without being prompted for user name and password.