In 1981, SEC Commissioner Bevis Longstreth gave a speech (pdf) to the 14th Annual Securities Regulations Seminar and then published those remarks in an SEC news release. The title was "Reliance on Advice of Counsel as a Defense to Securities laws Violations." The take away from that speech?

At the outset I should stress that the "reliance defense," as justifiable reliance on advice of counsel is sometimes referred to, is not really a defense at all, but simply some evidence tending to support a defense based on due care or good faith.

[emphasis added]

Longstreth goes on to explain that the lawyer asserting this as a defense, if it is the same lawyer who gave the advice, must withdraw the representation, because the lawyer will have to submit to discovery. Yep, assert this, ahem, defense and lose some or all of your attorney client privilege.

This is not just true with the SEC, the IRS takes the same approach.

Case law sometimes reminds us, however, that while the attorney-client privilege is durable, it may be lost when a court perceives that the privilege is being abused. The U.S. Tax Court issued such a reminder in its recent decision in T.E. Johnston,1 where the IRS successfully argued that a taxpayer impliedly waived the attorney-client privilege during pre-trial litigation by affirmatively asserting good faith reliance on the advice of counsel as a defense to a civil fraud penalty asserted by the IRS under Section 6663 of the InternalRevenue Code ("the Code").2 In Johnston, the Tax Court concluded that allowing the taxpayer to retain the privilege over legal advice onwhich he intended to rely as a defense to the fraud penalty would improperly deny the government the ability to seek vital evidence it needed to challenge the taxpayer’s affirmative defense.

[emphasis added]

See, Jeffrey B. Frishman and James M. Lynch, T.E. Johnston: Reliance on Advice of Counsel Defense Leads to Implied Waiver of the Attorney-Client Privilege (If You Wield It As a Sword, You May Lose the Shield) (pdf), Taxation of Corporate Transactions, January-February 2003.

In fact, just about all courts take that approach, it’s called "the Implied Waiver Doctrine."

I’m guessing that the very knowledgeable SDNY Judge Jed Rakoff has heard of it too. According to Ashby Jones of the Wall Street Journal law blog, Judge Rakoff has—once again—refused to approve the $33 million settlement between SEC and Merill Lynch.

In short, Rakoff wants the explanation behind why a Bank of America proxy statement last November misled investors about bonuses for employees at Merrill Lynch, which was about to be acquired by the bank. On Tuesday, he stated another desire: to get the SEC to better explain why had agreed to a settlement without pressing the bank’s executives harder. Click here for the WSJ story; here for the NYT story; here for previous LB coverage on the issue; here for Rakoff’s order.

According to Jess Bravin’s story in the WSJ, the SEC has said it couldn’t investigate individual executives’ culpability because they said they relied on lawyers’ advice. Unless the executives waived their right to keep the information shielded by the attorney-client privilege, the SEC said it would face "substantial obstacles" to building a case.

Rakoff on Tuesday criticized that reasoning. If that were the regulator’s policy, "it would seem that all a corporate officer who has produced a false proxy statement need offer by way of defense is that he or she relied on counsel."

Duh, yeah. You cannot use attorney client privilege as both a shield and a sword. Once you assert reliance on counsel, which is an AFFIRMATIVE defense (that means a defense on which the defendant bears the burden of proof), you lose attorney client privilege as to those matters on which you claim to be relying. If there is, or ought to be, some exception to this rule, Rakoff is obviously giving Merill and the SEC enough rope to hang themselves a chance to prove that they may benefit from such an exception.

Good luck with that.