(CN) - A federal judge dismissed malpractice claims against lawyers who represented disgraced investment advisory firm Lighthouse Financial Partners, concluding that attorneys are "not insurers of good behavior by the client."
Lighthouse saw its assets frozen in June 2012 when the Securities and Exchange Commission accused
it of a fraud that cost clients more than $600,000. Appointed receiver S. Gregory Hays sued the firm's Atlanta-based attorneys at Page Perry, claiming that the law firm's failure to report Lighthouse's noncompliance allowed for the continued theft of client funds.
Benjamin DeHaan, 39, of Tucker, Ga., former manager and majority owner of Lighthouse, pleaded guilty to one court of wire fraud in February 2013 regarding the fraud.
U.S. District Judge Thomas Thrash dismissed the receiver's lawsuit Tuesday, saying he did not identify "a single case or statute even intimating" that Georgia lawyers have to blow the whistle on their clients to regulators.
"In fact, Georgia law - preferring a policy that encourages the confidentiality of information obtained during the attorney-client relationship - never obligates a lawyer to report even the most serious client misconduct to regulators," the opinion states. "A lawyer is not even permitted to report his client except in the most limited circumstances - circumstances Page Perry never faced during its representation of Lighthouse until the very end when the lawyers persuaded DeHaan to allow them to report his theft of client funds to the SEC."
Ruling for Hays "would put every corporate lawyer in a position of policing his client and turning it in to authorities despite the Bar Rules under which the attorney-client privilege is held sacrosanct," Thrash concluded.
That "inherently objectionable" concept would require lawyers to "routinely violate" at least two bar rules, according to the ruling.
"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," Thrash wrote. "The plaintiff's theory would convert private corporate lawyers representing financial advisers and other regulated industry participants into unwilling government auditors required to utilize information gained in the course of their representation to the potential detriment of their clients, all in the name of protecting the corporate client from itself."
Hays also advanced a "blatant misstatement of the law" in pushing to have the court rely on Georgia law in addressing the firm's motion to dismiss.
"No authority for this preposterous statement is given," the 21-page opinion states. "Of course, federal law determines the pleading standard in ruling on a motion to dismiss in federal court."
Criticizing Hays for making "wild exaggerations, implausible inferences and selective quotations from e-mails," Thrash said the receiver failed to allege facts that showed the attorneys gave Lighthouse bad advice.
Thrash agreed with Page Perry's argument that it was hired only to perform an advisory role, and that there was no independent duty to report regulatory noncompliance to authorities.
"Even the plaintiff acknowledges that the defendants advised DeHaan against maintaining custody of client funds," Thrash wrote. "The plaintiff tries to argue that the 'highest authority' was the SEC or the Georgia Securities Commissioner. The plaintiff cites no authority for this argument and it is entirely without merit."
Page Perry has not returned a request for comment.
Hays said Monday his job as the court-appointed receiver is to go after those "who owed a responsibility to the estate for the benefit of the retirees and investors whose money was stolen in this Ponzi scheme."
"This case was modeled after other cases in similar circumstances being filed and pursued around the country and widely reported," he said. "We do not agree with a number of the legal and factual assumptions upon which the court based its order and are preparing a motion to ask the court to reconsider its ruling, and, if necessary, will appeal the decision."