The attorney-client privilege is alive and well. In a little-noticed opinion, the District Court for the Northern District of Georgia dismissed a legal malpractice claim against a law firm. Taking all the allegations of the Complaint as true, the Court held that the “Defendants were hired to provide legal advice which they did. Securities lawyers are not informants for the SEC.” In the wake of the multitude of current opinions suggesting that attorneys become gatekeepers for the SEC or the public in general, this opinion reaffirms that a lawyer’s duty is to his or her client – not to others. Hays v. Page Perry, LLC, No. 1:13-CV-3925-TWT (N.D. Ga. March 17, 2015).
In 2008, Page Perry, LLC, a law firm, began representing Lighthouse Financial Partners, LLC, an investment services firm, with respect to SEC and state securities licensing and registration requirements. The retainer agreement made clear that Page Perry’s responsibilities did not include compliance matters. During the representation, Page Perry attorneys conducted two “mock audits” in which they identified deficiencies in Lighthouse’s accounting, including that Lighthouse was impermissibly in custody of client funds. Page Perry advised Lighthouse to take actions to fix the deficiencies.
In December 2011, the Georgia Securities Commissioner notified Lighthouse of a planned audit and in March 2012, the SEC subpoenaed the manager and majority owner of Lighthouse, Benjamin DeHaan. Page Perry represented him before the SEC. In June 2012, Page Perry withdrew as counsel for Lighthouse. With DeHaan’s consent, Page Perry then reported his criminal activity to the SEC. In 2013, DeHaan pled guilty to one count of wire fraud.
The Receiver for the LLC then sued Page Perry for malpractice alleging, among other things, that the law firm should have notified regulatory authorities of the violations committed by DeHaan and Lighthouse and that such notification could have mitigated the ensuing damage. The Court rejected all of the Receiver’s arguments.
The Court found no legal precedent that suggested Page Perry had any duty to report out the fact that Lighthouse was not in compliance with all regulations. Even if the Georgia Bar Rules did impose a duty (which they did not), they did not require reporting out. Georgia Bar Rule 1.13(b) required reporting to the “highest authority that can act on behalf of the organization.” Page Perry did so when it advised DeHaan, the manager and majority owner of Lighthouse, of the non-compliance. In contrast, Georgia Bar Rule 1.13(c) states that notifying an external agency is “permissive, but not mandatory.” Thus, the Georgia Bar Rules did not require reporting out.
The Court, citing its earlier order, reiterated that requiring Page Perry to divulge client confidential information to the regulators “would have dire consequences for the attorney-client relationship.” As the Court said:
Under the Plaintiff’s proffered duty, the risk of civil penalties would cause attorneys, out of self-preservation, to err on the side of disclosure when in doubt. Consequently, such a rule could even deter potential clients from seeking advice from a lawyer.
In response to the Receiver’s arguments, the Court ruled that disclosing information on DeHaan would have violated Lighthouse’s privilege and also that the crime-fraud exception, which is an evidentiary principle, did not somehow create a duty for Page Perry to affirmatively disclose privileged information.
Finally, the Court summarily rejected the Receiver’s arguments that Page Perry conducted an inadequate mock audit and that it was malpractice for Page Perry to represent DeHaan before the SEC. The Court’s conclusion protects the attorney-client privilege: “The Defendants were hired to provide legal advice which they did. Securities lawyers are not informants for the SEC. The Plaintiff’s legal theory is profoundly flawed.”
Lawyers should be wise counselors and zealous advocates. They should not be “informants” for the public or any government regulator without careful consideration of their ethical obligations to their client.