Expect More Challenges to the SEC “Gag Rule” 

John Paul Brophy – Legal disputes often end with a settlement. When the Security and Exchange Commission (the “SEC”) settles a dispute, it requires the opposing party to include a “no deny” clause in the resulting settlement agreement. The purpose of the SEC’s “no deny” clause is to prevent the settling party from being able to deny wrongdoing after settling—a tactical clause that the SEC has employed in its settlement agreements since 1972. Despite its decades-long successful applicability, repeated challenges to the SEC’s “no deny” clause prompts further consideration into its constitutional legitimacy. 

Reminiscent of Seditious Libel, the SEC adopted the inclusion of its “no deny” clause, also refered to as the “gag rule,” to preserve its public reputation. The SEC protects its legitimacy by preventing public criticism against it by those who were subject to an SEC an enforcement proceeding or complaint. It provides that no one who settled with the SEC may publicly refute the allegations or even create an impression of innocence, and if they do the SEC may reopen the case or seek for a court to hold them in contempt. For example, an individual would be unable to explain that they settled to avoid the expense of litigation or speak of any unethical conduct of the SEC that would bring into doubt whether they committed any wrongdoing. Just as in criminal proceedings, where 11% of those exonerated by DNA evidence still pled guilty when faced with long prison terms, it is to be expected that some of those who settle with the SEC do so despite innocence.

There have been several unsuccessful challenges to the SEC gag rule. For example, the Cato Institute (“Cato”) lost a challenge to the SEC gag rule in 2021. Cato contracted to publish a book written by a businessman who previously settled with the SEC, but maintains his innocence. Because the businessman’s settlement agreement contained a gag order, Cato challenged the enforceability of the clause in the agreement. However, the District of Columbia Circuit Court of Appeals did not decide the case on the merits, but rather determined that Cato lacked standing because the court could not prevent district courts in other circuits from enforcing their judgments.

Similarly, former Xerox executive, Barry Romeril, challenged the “no deny” clause of its settlement agreement with the SEC in 2019. Ultimately affirming for the SEC,  the Second Circuit found that Romeril could not assert his First Amendment or due process rights because he waived those rights by signing the settlement that included the gag order. Romeril eventually sought certiorari at the Supreme Court, where amici included First Amendment scholars and former targets of SEC enforcement, such as Elon Musk and Mark Cuban. The scholars argued that the gag order was content and viewpoint based and reflected the SEC’s prior restraint on speech. Their brief contended that the very purpose of the gag order—to prevent criticism of the government—was the reason it was unconstitutional. Nonetheless, the Supreme Court denied certiorari in June 2022.

In yet another failed challenge to a gag order, just one month following the Supreme Court’s denial of Romeril’s petition for certiorari, the Fifth Circuit Court of Appeals affirmed a district court’s denial of Rule 60(b) relief from a settlement’s gag order. Christopher Novinger sought to have the “no deny” clause removed from his settlement steming from allegations that he made false misleading statements to investors when selling securities. The court reasoned that the plaintiff did not meet the burden of showing the judgment is void under Rule 60(b)(4) or the burden of showing that changed circumstances warrant relief under Rule 60(b)(5). However, two judges took the opportunity to concur “to note that nothing in the opinion (or in the district court opinion, for that matter) approves of or acquiesces in the SEC’s longstanding policy . . . on parties’ giving up First Amendment rights.” Recognizing “[a] more effective prior restraint is hard to imagine,” the concurrence noted that courts will have to decide the First Amendment issue eventually.

 In October 2022, the Southern District of New York ordered the SEC to justify the “no deny” clause’s purpose and Constitutionality under the First Amendment. While Judge Ronnie Abrams approved of the consent agreement, finding it consistent with binding circuit precedent, she wrote a nine-page order highlighting the shaky legal footing upon which gag orders often rely. While the Second Circuit in Romeril’s case found that that Romeril waived his First Amendment rights, Judge Abrams in her opinion & order emphasized that the inclusion of gag orders “raises the specter of violating the unconstitutional conditions doctrine.”

Though the SEC likely hopes for challenges to its “no deny” clauses to come to an end, with members of the bench recently noting concern on the policy suggests that more challenges are likely. Because gag orders are perpetual, anyone who signs a settlement agreement is under an obligation not to discuss their case in any way that would expressly or implicitly deny wrongdoing—and asserting one’s truth is no defense. Further, it is unlikely that requiring an admission of wrongdoing would prevent future challenges. Especially, as the 2013 attempt to require an admission of wrongdoing to settle with the SEC under certain conditions resulted in admissions in only 2% of cases.

Whether the SEC begins to require an admission of wrongdoing to settle or continues with the “no deny” policy, the SEC is seeking to ensure respect for the government. However, only the “no deny” provision dictates what a person can and cannot say. As Andrew Hamilton said in defense of John Peter Zenger, “the Laws of our Country have given us a Right,—the Liberty- both of exposing and opposing arbitrary Power (in these Parts of the World, at least) by speaking and writing Truth.” Going forward, it is likely that courts will have to determine the First Amendment issue of gag orders as the challenges against them are sure to continue. 

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