## Facts

- Lighthouse Financial Partners, LLC was an investment advisory firm whose manager and majority owner, Benjamin DeHaan, operated a multi-year scheme misappropriating client funds.
- Lighthouse represented to regulators that it operated a “no custody” model in which client funds were held by qualified custodians, not by Lighthouse.
- In practice, Lighthouse used a “Client Holding – Pass Through” account into which client funds were deposited before purported transfer to outside custodians; DeHaan diverted funds from this account for personal use.
- Page Perry, LLC served as Lighthouse’s securities and regulatory counsel from approximately 2008 to 2012 under an engagement providing advice on registration, licensing, and regulatory requirements.
- The receiver alleged that the law firm performed compliance-related services, learned facts suggesting Lighthouse had custody of client funds, and warned DeHaan multiple times that Lighthouse might be out of compliance with custody rules.
- After DeHaan pled guilty to wire fraud and an enforcement action froze Lighthouse’s assets, a court-appointed receiver sued the law firm for legal malpractice, breach of fiduciary duty, and breach of contract.
- The receiver’s theory was that the firm “knew or should have known” of custody-related violations and misconduct, had a duty to report to regulators, and that non-reporting allowed the fraud and resulting losses to continue.

## Issues

1. Whether Georgia law or the Georgia Rules of Professional Conduct impose on a lawyer representing a regulated client a duty to report the client’s suspected fraud or regulatory violations to government regulators, supporting malpractice, fiduciary duty, or contract claims.
2. Whether the complaint plausibly alleged breach within the scope of the engagement and proximate causation of losses, given the client principal’s intentional criminal conduct.

## Decision

- The court granted the defendants’ Rule 12(b)(6) motion and dismissed all claims.
- The court held the receiver identified no legal authority creating a duty for counsel to report a client’s regulatory noncompliance or suspected fraud to regulators under the circumstances alleged.
- The court concluded the engagement to advise on regulatory requirements did not transform counsel into an external compliance monitor or oblige counsel to notify regulators.
- The court found the pleadings reflected that counsel communicated compliance concerns to the client’s decisionmaker, satisfying the ordinary duty to advise the client.
- The court further determined the complaint did not plausibly plead proximate causation because the losses flowed from DeHaan’s independent fraudulent acts.

## Legal Principles

- Under Georgia law, a legal malpractice theory requires a cognizable legal duty; courts will not infer a novel duty to report client misconduct to regulators absent supporting statute, case law, or governing ethical rule.
- Attorney fiduciary duties primarily run to the client and generally do not create obligations to protect third parties by disclosing client confidences to outside authorities, absent a recognized exception.
- An engagement to provide regulatory advice does not, without clear contractual language, impose a duty to act as a watchdog for regulators or to guarantee compliance.
- Proximate causation is not plausibly alleged where the asserted damages are primarily attributable to a client’s intentional criminal fraud rather than the attorney’s alleged omission.

## Conclusion

The court dismissed the receiver’s malpractice, fiduciary duty, and contract claims against the firm because Georgia law did not recognize a duty for counsel to report a client’s suspected fraud or regulatory violations to regulators, and the alleged losses were not plausibly tied to the firm’s conduct rather than the client principal’s independent wrongdoing.


Hays v. Page Perry, LLC, 26 F. Supp. 3d 1311 (N.D. Ga. 2014)