Hays v. Page Perry, LLC

Facts

Lighthouse provided financial advice and investment services to its clients. Its managing owner, DeHaan, diverted clients' funds and concealed his wrongdoing by representing to federal and state regulatory agencies that Lighthouse did not have custody of client funds and that the funds had been transferred to broker-dealers who served as custodians. Lighthouse retained D as legal counsel. D would 'advise [Lighthouse] regarding all registration, licensing and regulatory requirements'; assist in 'drafting, reviewing, [and] advising as to the content and form of all documents required to be filed by said regulators'; and advise Lighthouse about 'selected communications proposed to be issued,' 'general business matters relating to corporate formation and/or reorganization,' existing contracts, and 'the general legality, advisability, and regulatory implications of any actual or prospective line of business . . . .' D was not to serve as General Counsel and was not to make independent inquiry or investigation without specific request' and its responsibilities did not include 'compliance matters, except as expressly identified.' D advised DeHaan about regulations governing the custody of client funds and conducted a mock audit to identify deficiencies in client files and account records. A mock audit was performed and the 2010 financial statements referenced the Pass Through Account. DeHaan was told 'he can receive checks made payable to 'third parties,' but not checks made payable to DeHaan. If you receive checks payable to Lighthouse, you still do not have custody if you return them within 3 business days.' Another mock audit took place and DeHaan was unable to produce most of the documents that he had been asked for in advance, including bank statements and client account statements. A consultant, Walker, recommended that D investigate whether Lighthouse's clients were receiving periodic statements from the custodians Interactive Brokers and TD Ameritrade. D informed DeHaan that Lighthouse was not in compliance with custody requirements because Interactive Brokers had not been providing account statements to Lighthouse's clients. DeHaan was instructed to close the Pass Through Account and have it audited. D issued a report that delineated shortcomings in Lighthouse procedures and records. Some of the information exchanged was preserved in email messages. The State audited Lighthouse and the SEC subpoenaed DeHaan to testify. At the beginning of 2012, the Georgia Secretary of State audited Lighthouse, and on March 30, 2012, the Securities and Exchange Commission subpoenaed DeHaan to testify. Parker (D) and MacIntyre (D) assisted DeHaan during the hearing. In June 2012, D withdrew as counsel and, after obtaining DeHaan's consent, D notified the Commission that DeHaan had been purloining client funds. The Commission filed a civil enforcement action and P was appointed as a receiver. P sued Ds. For violating their duties to report DeHaan's misconduct to 'the highest authority that can act on behalf of the [business] organization,' Ga. R. of Prof'l Conduct 1.13(b). P claimed Ds failed to inquire about and disregarded 'glaring irregularities' in records that they uncovered during the mock audit. P alleged that Ds 'breached their fiduciary duty to Lighthouse by treating DeHaan as their client and putting his interest above that of Lighthouse' and breached their contract by 'failing to properly advise Lighthouse with respect to the numerous regulatory violations by DeHaan, failing to address the material regulatory deficiencies it discovered or should have discovered in the mock audits, and failing to act in Lighthouse's best interest with respect to known regulatory violations and other misconduct by DeHaan . . . .' P alleged that the senior partners of D were vicariously liable in respondeat superior for the acts of . . . Parker (D), Terry (D) and MacIntyre (D)' and were negligent in their supervision of those lawyers. The district court ruled that the complaint lacked factual material to support a claim of malpractice. Lighthouse hired D 'to perform an advisory role.' The complaint failed to identify 'a single instance in which D gave Lighthouse bad advice.' It held that there was not duty for D to inform on P. It held that 'the Complaint failed to indicate how a more adequate mock audit . . . would have prevented DeHaan's criminal conduct.' It held that 'the Complaint failed to indicate how a more adequate mock audit . . . would have prevented DeHaan's criminal conduct.' The district court ruled that the claims of breach of fiduciary duties and of contract failed because they were 'duplicative of the professional malpractice claim' and because the complaint did not identify any authority or a provision in the contract that required Page Perry to report Lighthouse. It held that the claims against Page (D) and Perry (D) failed, the district court explained, because Georgia law eliminates vicarious liability for members of a limited liability company and because the complaint did not allege, to support claims of negligent supervision and general negligence.

Issues

Rule of Law

Holding and Decision

Legal Analysis

© 2007-2024 ABN Study Partner.