When faced with allegations of securities fraud, a defendant’s reliance on a robust and well-functioning disclosure process can be a powerful tool to negate scienter, i.e., fraudulent intent. Part one of this article discussed the theory behind the disclosure process defense as well as key prophylactic steps that can be taken to strengthen the defense for when it is needed. This Part Two addresses potential privilege issues that arise from the integral role that in-house counsel typically plays in a company’s disclosure process. First, it distinguishes the superficially similar advice of counsel defense, which requires waiver of the attorney-client privilege. Then it identifies important steps that corporate counsel can take to protect the privilege when a disclosure process defense is asserted.

The Disclosure Process Defense Versus the Advice of Counsel Defense

Both the disclosure process defense and the better-known advice of counsel defense seek to rebut scienter by showing that the defendant relied in good faith on others. However, there are several technical differences between the defenses. The most pertinent concerns the attorney-client privilege.