To plead securities fraud, a plaintiff must allege that the defendant made a false statement or omitted a material fact, did so with scienter, and that the plaintiff relied on that misrepresentation and suffered injury.
Many cases rise or fall on the scienter element—did defendant have the requisite “intent to deceive, manipulate, or defraud”? That’s where a familiar refrain often surfaces: “My lawyer said it was fine.” The so-called advice-of-counsel defense can be a powerful shield. When a defendant has laid out all the facts for their lawyer and acted with the lawyer’s blessing, it becomes harder for a plaintiff to prove the intent required under §10(b) of the Securities Exchange Act and related provisions.
Yet this defense carries a significant cost. As Oklahoma Firefighters Pension & Retirement System v. Musk et al., 22-cv-03026 (S.D.N.Y. 2022), illustrates, asserting an advice-of-counsel defense is likely to trigger an implied waiver of the attorney-client privilege—effectively exposing confidential communications with counsel to discovery. The rationale is simple: a defendant who claims a good-faith belief in the lawfulness of their conduct necessarily places at issue the communications that shaped that belief.
The Musk litigation arose from Elon Musk’s 2022 accumulation of Twitter stock. Under Security and Exchange Commission rules, an investor exceeding 5% ownership of a company must, within 10 days, disclose to the agency their “interest in, and intentions for” the company. Plaintiff alleges that Musk and his co-defendants crossed the 5% threshold on March 14, 2022, but did not file the required disclosure until April 4, 2022—after the 10-day window had closed. The delay allegedly allowed Musk to purchase additional shares at artificially low prices, harming investors who sold during that period.
Throughout the litigation, plaintiff repeatedly inquired whether defendants intended to invoke an advice-of-counsel defense. Defendants’ position shifted. Initially, they disclaimed reliance on advice of counsel. Later, they wrote in a court filing that they had “followed … counsel’s guidance in making proper disclosures.” Plaintiff sought clarification, asking the court to require defendants to decide whether they would assert the defense.
Defendants attempted to pursue a middle course: they took the position that they would advance an advice-of-counsel defense only if doing so would not waive the attorney-client privilege. The court, relying on United States v. Bilzerian and its progeny, rejected that approach, holding that a party cannot rely on counsel’s involvement to demonstrate good faith while simultaneously withholding the communications that informed that belief. The court accordingly precluded defense evidence relating to advice of counsel.
In Bilzerian, the Second Circuit found that where a defendant testified that he believed his actions were lawful, communications with counsel regarding that belief became “directly relevant.” This came to be known as the implied-waiver doctrine, which allows for a finding of waiver even where the privilege holder does not attempt to make use of a privileged communication. Why? A party may not wield privileged advice as both “a sword and a shield.” Once a defendant’s state of mind is said to have been informed by legal advice, the opposing party must be permitted to test that claim.
Another important consideration for defendants is timing. Typically, element-negation defenses, unlike affirmative defenses, are not waived if not plead and can be raised later in a case. Notwithstanding, courts in the Second Circuit require defendants to decide whether to invoke an advice-of-counsel defense during discovery because courts treat counsel’s advice as a factual issue. This approach ensures plaintiffs have an opportunity to obtain relevant evidence—specifically, the substance and scope of any legal opinion secured by the defendants. But it also forces defendants to make their strategic choice early, and the discovery consequences of doing so are immediate and irreversible. Where the risk of waiving privilege outweighs the potential benefit, defendants may, for example, instead seek to negate scienter by arguing reliance on advice from non-legal professionals or by marshaling circumstantial evidence that undermines intent.
From a broader policy perspective, both Bilzerian and Musk affirm the judiciary’s willingness to hold that the attorney-client privilege, while foundational, is not absolute. For defendants and their counsel, the implications are substantial. Counsel must determine early whether to pursue the defense and accept the resulting waiver, or to preserve privilege and forgo that defense.
If you have any questions or would like additional information on this topic, please contact the author of this blog or the Epstein Becker & Green attorney who regularly handles your legal matters.
