The B.C. Court of Appeal Wednesday tossed out a case against a law firm that was being sued for warning a man’s stockbroker that he may be violating U.S. securities laws.

The plaintiff in this case, Rene Hamouth, sued a Florida-based law firm for defamation after it wrote to a man’s brokerage firm in Vancouver, alleging he was violating U.S. securities laws in his trading of the stock of one of its clients.

The law firm, Edwards & Angell, claimed it was protected from suit by absolute privilege for communications made in the course of judicial proceedings, specifically an investigation by the U.S. Securities and Exchange Commission. It claimed this protection because it had written a letter to the brokers in which it stated the SEC had initiated an inquiry into trading activities in the company’s stock.

The lower courts found that the letter wasn’t protected under this privilege.

However, the appeal court has reversed that finding, saying, “The SEC inquiry into trading activities in the company’s stock was a quasi-judicial proceeding. The law firm was acting within the scope of its duties to its client in alerting the brokers, who were potential witnesses, to the inquiry. The fact of the SEC inquiry was a necessary fact in establishing whether the respondent had a claim against the law firm.”

The appeal court notes that the powers of the SEC, “to investigate, inquire into and impose sanctions on participants in securities transactions who violate United States securities laws and regulations are notorious… From my perusal of these provisions, I conclude that the SEC is a public body exercising quasi-judicial functions and absolute privilege applies to communications made with reference to and in the course of such proceedings.”

It notes that the law firm was acting for a public issuer that had a responsibility to its shareholders to limit its exposure to investigation and sanctions that could affect the company’s business.

“The law firm was acting within the scope of its duties to its client in alerting the brokers, who were potential witnesses or parties, to the SEC inquiry,” the appeal says. “Granting absolute privilege to lawyers when they act in the course of their duties to their clients is for the public benefit. It frees lawyers from fear that in advocating their client’s cause they will be sued if what they say on behalf of a client is found not to be true.”