Commercial Litigation Update

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.