Leaving Them Speechless: Does the SEC Silence Criticism?

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Few Americans know that when they settle a case with the SEC (or the CFTC which has a similar “rule”) that they will be forced to agree to a lifetime gag, a subject of much concern to Americans across the political and economic spectrum. Whether in small businesses or large, Americans charged by these powerful government agencies settle 98% of the cases brought against them, meaning that those defendants cannot question the strength or the merits of the government’s case against them—for life.

For nearly 50 years the SEC has settled cases in this manner even though the “rule” that purports to authorize the practice was never lawfully enacted in 1972. Join us for a litigation update forum with Peggy Little, Senior Litigation Counsel of New Civil Liberties Alliance (NCLA), to discuss whether this practice violates First Amendment doctrines forbidding prior restraint, content-based restrictions on speech, unconstitutional conditions, or suppresses rights of petition, rights of the public to hear truthful speech and due process. Does this silencing of truthful speech immunize the agencies from examination and criticism by the very people best situated to level such criticism? Congress itself could not lawfully enact such a rule, and the teleforum will explore why an administrative agency is exercising powers that Congress does not have.

Litigation and Regulatory Background and Disclosure: NCLA petitioned to amend the SEC’s gag rule in October of 2018, which led to a lively hearing before the Senate Banking Committee. NCLA similarly moved to amend the CFTC gag rule in July 2019. NCLA also represents Barry D. Romeril, former CFO of Xerox, who moved to set his gag aside in the Southern District.



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Event Transcript

Operator:  Welcome to The Federalist Society's Practice Group Podcast. The following podcast, hosted by The Federalist Society's Litigation Practice Group, was recorded on Monday, March 23, 2020, during a live teleforum conference call held exclusively for Federalist Society members.        


Micah Wallen:  Welcome to The Federalist Society's teleforum conference call. This afternoon's topic is titled, "Leaving Them Speechless: Does the SEC Silence Criticism?" My name is Micah Wallen, and I am the Assistant Director of Practice Groups at The Federalist Society.


      As always, all expressions of opinion are those of the expert on today's call.


      Today, we are fortunate to have with us Peggy Little, who is a Senior Litigation Counsel with the New Civil Liberties Alliance. After our speaker gives her opening remarks, we will then go to an audience Q&A.


Thank you sharing with us today. Peggy, the floor is yours.


Margaret A. Little:  Thank you so much and thank you to everyone who's attended this call. I know there are many issues occupying the thoughts and concerns of everyone here and thank you for taking the time to attend.


      As Micah indicated, I am one of the senior litigation counsels at New Civil Liberties Alliance, and we represent Barry Romeril, who is a former CFO of Xerox in a post-judgment challenge to set aside the gag order portion of a consent that the SEC required of him when he settled his case with the SEC 16 years ago.


      The grounds for our challenge to the consent order and the gag are many. They range from administrative law issues to standard First Amendment issues to due process issues. I'm going to list them very briefly so that everyone has a sense of how comprehensive our challenge is, the very grounds we have made, and that, I hope, will lead to a lively discussion.


The first interesting thing to know about the 1972 gag rule, which was enacted by the SEC simply by publication in the Federal Register, is that it was unlawfully enacted. The SEC slipped that gag rule into the Federal Register in 1972 and said because this is a mere housekeeping rule, we do not have to engage in prior publication or loud notice or comment, and they cited a number of statutory provisions that they said allowed for that under the 33 Act, the 34 Act, and a couple of other securities acts.


An examination of those statutes makes it quite clear that this rule does not fall within the housekeeping concerns. The major reason is because it binds others outside the agency and imposes restrictions on third parties. And so from its very inception in 1972, this has been an unlawful gag rule.


Now, for 50 years, or close to 50 years, the SEC has been telling anyone who settled his or her, or if it's an entity, their case, with the SEC that they are required to agree that they will not talk about their case in any way that questions the enforcement action or calls into doubt the fact that the SEC charges might have some merit to them.


This came to NCLA's attention in 2018. So the first step we took was to file an administrative petition with the SEC asking them to amend the gag rule. And I think the first in an important distinction for people to understand about this case is we are not asking the SEC to change the fact that people can settle with the agency on a no admit, no deny basis. Later in this conversation, I will show why that's important.


      But our petition to amend that was filed with the SEC in November of 2018 simply asked the SEC to remove the gag portions, which speak to what people can say about the charges brought against them and change the rule to say only that people might either admit to specific things, they may deny specific things, or they can agree to settle on a no admit, no deny basis, and that's it.


      There's no provisions in the rule about what people can say after they settle, and that's the change that we have proposed. Following that petition, I published an editorial in the Wall Street Journal, which came to the attention of Senator Tom Cotton. And not very long afterwards, he called Chairman Jay Clayton before the Senate Banking Committee and questioned him in quite a lively session about whether the gag rule was constitutional.


      What's interesting about that video clip—and I can make that available to any callers who are interested—is that Chairman Clayton effectively deflected the issue and treated it as if the petition was seeking to set aside the no admit, no deny settlement posture, which is a very popular way to settle cases, as you might imagine, because nobody wants to have civil liabilities follow their settlement with the SEC.


      So what I have found interesting is when challenged on the rule, the SEC ducks and deflects but does not really address the fact that their rule provides the suppression of speech. Now, subsequent to filing that petition in the Senate hearing, NCLA, which is New Civil Liberties Alliance for which I work, we were contacted by Barry Romeril, who was CFO formerly of the Xerox Corporation, who wanted to challenge that gag order.


The Second Circuit is an excellent circuit into which to bring such a challenge because there is a compelling 1963 precedent called Crosby, Crosby v. Bradstreet, which is the predecessor to Dun and Bradstreet, and that case holds that a consent agreement entered into as a settlement that provides for prior restraint of future speech is per se unconstitutional, and a court has no authority to enter into it in the first place, no authority to enforce it, and it must be satisfied as unconstitutional under the First Amendment.


So the Second Circuit is an excellent circuit in which to challenge it, and we brought that challenge in May of 2019. The First Amendment grounds that we raised, as just a whole laundry list, it's a forbidden prior restraint. It gives the SEC unbridled enforcement discretion because if you speak in a way that is not congenial to the SEC about the charges made against you, they can reopen your prosecution.


It silences the defendant in perpetuity. You cannot ever speak about your case or talk about how the charges against you may have been weak or even not legally well-founded. It also is a content-based restriction on speech because it specifically says you may not call into question the charges brought against you or somehow cast doubt upon the charges the SEC has brought against you.


Sometimes the gag order even mandates the content of speech. We found some gag orders that provided what you have to say if you're asked about your consent to -- that you specifically cannot deny any part of it so that it mandates the content of your speech, which is, again, constitutionally prohibited. If there's no compelling government interest, it does not operate by the least restrictive means. Instead, it's a lifetime gag on all of speech. It also forbids truthful speech, and I'll give an example of that in a moment.


It's an unconstitutional condition. Essentially, what the SEC is saying is if you want to settle to us, you have to agree to give up all of your future First Amendment rights about this in perpetuity. It also violates a defendant's First Amendment right to petition. If you wanted to go to, say, Congress or the SEC and say hey, these charges brought against me were not well founded or there's been subsequent evidence that shows it was brought on weak or even perjured evidence, you don't have the ability to do that. And so it impairs also your First Amendment rights of petition.


And this is an important issue, I think, for the public at large to also understand. It deprives third parties of relevant information about the prosecution. And this was a concern that was expressly addressed by the Second Circuit in the Crosby decision. In that 1963 decision, the Second Circuit said that silencing what Bradstreet could publish in the future impairs the public's right to know about truthful matters.


So one of the things and a lot of recent scholarship on the First Amendment focuses not just on the speaker's right but on the listener's right to hear the information. And that is not something that can be waived by a defendant through a prosecution. And then as a policy matter, obviously, it impairs transparency and it insulates the SEC from appropriate criticism.


NCLA also brought due process challenges to the gag orders that, obviously, they are compelled upon settling defendants. It's unconstitutionally vague because it says if you even create an impression that the charges were not well founded, that is a violation. So the vagueness is pretty obvious from the content of the rule. It also implicates the Judiciary in violating the Constitution because what it provides as penalty is the judge can reopen the prosecution against you. The gag rule is also contrary to public policy that favors transparency in government.


After NCLA's case got fully briefed to the Second Circuit, an interesting development and happy development happened, which was that the Fourth Circuit issued an opinion just days after we completed our briefing that said that the City of Baltimore cannot require gag orders in settlements of police brutality cases. And that Fourth Circuit opinion raises many of the same arguments that I've just laid out.


We advised district court judge in the Southern District of New York, Judge Cote, of that decision in a 28(j) letter, but it made no appearance in her decision. And the judge's decision is interesting for any number of reasons, but I think the most distinctive part of the opinion is how much it avoids any of these issues. It barely mentions the First Amendment.


Instead, the main holding of Judge Cote's decision is that 16 years is too long to wait and that Mr. Romeril waited too long to challenge his gag. That's an unsatisfying ground for a judicial decision on First Amendment grounds, as I think any listener could figure out, because if 16 years is too long, what, then, is the right period of time? Would it be 6 months? Would it be 6 years, 16 years? That's not how First Amendment law and doctrine work. There's really no statute of limitations on your First Amendment rights.


What is also disturbing about this district court's opinion from Judge Cote, who had entered that order 16 years ago, is that it completely ignores the Crosby decision other than saying -- questioning whether it's still good law. Now, in the Crosby decision, the consented upon gag that they had set aside was 30 years old.


And so what you have is a district court judge not only treating a Second Circuit precedent that binds her decision as essentially not good law but for reasons that 16 years is too long that the case itself proves to be faulty because that set aside a 30-year-old gag provision.


The judge also talks briefly about how due process issues were not properly in the case. And as I have set forth, NCLA, in its opening brief, set forth several due process challenges in roman numeral sections and yet, her decision -- it says in a footnote that these due process claims were only raised in a footnote in a reply brief, which is demonstrably not true.


What is unsatisfying about all of the responses of the SEC is the pattern of deflection that I see here. From the very time of the rule's enactment, the SEC was being untruthful to the public saying this was a mere housekeeping rule when it was not. When Chairman Clayton appeared before the Senate Banking Committee, he treated this as if it were a challenge to no admit, no deny, which it is not.


The district court decision brazenly decided the Crosby decision and misrepresented the arguments made to the court. And the SEC opposing papers also were really quite unfair, and they suggested that while the defendant had waived this issue and had also agreed to the gag, when on the other hand, they admit that is a requirement and it's non-negotiable. So there's a lot of deflection and distortion of what the issues are in this case, and I think it makes it both a vulnerable decision on appeal and one that would be very interesting for people who are concerned about the use of administrative power in these proceedings to challenge.


Another big concern is the way the SEC handles public relations. When the SEC settles a case with a respondent or a defendant -- I'm sorry. When they bring a case against a respondent or defendant, their press releases are notorious for their inflammatory rhetoric and the seriousness of the charges. And many of those inflammatory press releases are proven later to have been wildly overblown, if not, in fact, unproveable in reality.


And here's the problem. A defendant or respondent who's been charged with these serious and very public claims of fraud or worse has no recourse if they settle because that’s the last word the public will ever hear because they are silenced. So the issues are really quite important. Reputations are immediately destroyed. Businesses are often destroyed. Employees are put out of work, reputations tarnished for life. And if you settle with the SEC, you really have no ability to correct that record.


The statistics on how the SEC operates and how many cases settle are also relevant to this inquiry. Although, I would maintain that your First Amendment rights are absolute and whether or not the settlement numbers varied, it just still would be an important and very valid challenge. But as everybody knows, anybody charged by the SEC has huge incentives to capitulate and agree to settle very early in the process.


In Mr. Romeril's own case, the case was filed by the SEC. The press releases were very serious and very reputation damaging. And yet, three days later, he and his co-defendants settled very quickly with the SEC because that's how the negotiation process works. And that’s because the SEC wins something like in the 90 percent area, maybe high 90 percent area, of all of its cases brought before its own administrative law judges.


Furthermore, the settlement statistics are that 98 percent of people settle with the SEC. So they have tremendous leverage. And then by enacting this rule and imposing this policy that for decades now has silenced people, that means they can pretty much charge someone and say whatever they like about that person and that will be the last the public ever hears on these issues.


So we hope at New Civil Liberties Alliance to set aside this policy and allow people to settle with the SEC on a negotiated and fair basis and retain their rights of free expression going forward.


One other issue that we're interested in pursuing is SEC policy and even their rules about what is or is not a violation of the securities laws change. For example, they can issue new guidances that make something that was previously never considered to be unlawful. Whether by guidance or regulation by enforcement, conduct that everyone had thought was okay suddenly becomes the subject of SEC charges. And again, because virtually everyone settles their cases, that goes not only to silence you and about your case but future defendants are given these settlements as examples of what the SEC can do to you and why you need to conform to these new guidances or policies that in fact have never been enacted by Congress.


So the effects upon SEC's practices by enforcement by -- or rather, regulation by enforcement are quite serious. And something I'm pleased to say that SEC commissioner Hester Peirce has published about, and we have cited her insightful and thoughtful comments about that in our various petitions and other matters that we have brought to the court's attention.


I think those are the main issues. There are some other, as I alluded to, there's some other challenges to gag orders in other courts. And if folks on the call are aware of those, the CATO Institute and Institute for Justice brought a challenge, and that too was not given any real hearing by the court on a standing issue, just as our issue was not given any real hearing by the district court and operated through a policy of deflecting the real First Amendment issues at stake.


I would be very interested to open up the call to comment and questions. The major hurdle I think we face in any court challenge is that the SEC in complicity with courts have been entering these gag orders for decades. And so there will be a natural aversion on the parts of the courts to say hey, what we've been doing for decades is illegal. I think just that concern that we've been doing this forever is one of the hurdles we have to overcome. And I would enjoy discussing that with anyone who's on the call who has thoughts about that.


So at this time, we can open up the call to questions and/or comments. That would be most welcome.


Micah Wallen:  Absolutely. Thank you so much, Peggy, for those comprehensive and really enlightening remarks. We really appreciate your time being here. We'll now go to the first question in the queue.


Steve Klein (sp):  Hi, Margaret. Steve Klein, really great presentation. Really appreciate you taking the time today. What would be the penalty for violating the gag order, and has anyone ever been penalized for violating an SEC gag order?  


Margaret A. Little:  Thank you. That's a good question. The penalty is set forth in the gag order that everyone signs, and it says the SEC may reopen the prosecution and that the court retains jurisdiction. I don't know, actually, if that has happened. I do know that defendants operate under a great fear that it will happen.


      The SEC certainly maintains to anyone with whom it enters into a settlement that it has the power to do this. And because what people do when they settle, as they're trying to put this behind them, very often, this operates as suppressing speech even 16 years later. And it's not just a sense of concern, it turns out that there's collateral bar rule that certainly operates in the federal courts that prohibits a party from challenging a district court's order by violating it.


      So let's say you settled with the SEC and it turns out that whatever guidance or policy that they had brought against you has been shown to really not violate the securities law. Under the collateral bar rule, you can't go out and just say that. Or if you do, you are in violation of that rule. Instead, you are supposed to move to vacate or modify the order or seek relief in the court. That's a Second Circuit precedent.


      Barry Romeril, who does wish to engage in truthful speech, has followed that procedure and under Rule 60 has moved the court to set aside the gag portion of his rule so that he can speak.


Steve Klein (sp):  Well, it's damned if you do, damned if you don't in this situation, given the ruling.


Margaret A. Little:  It really is. Very few people would risk reopening of a prosecution. They know they face tremendous odds when they have settled, so the whole point of settlement is to set the thing behind them and to get on with their lives. And what we hear anecdotally, in enough numbers that I would say it goes beyond anecdotally, is most people settle, and they don't either know or fully understand that that means they can't talk about their case for life.


And they've entered into those agreements because it's a condition of settlement. And then they find upon years reflection, sometimes years later, that they want to talk about their case, that goal of getting the case off their back has in fact made them unable to defend themselves in the court of public opinion, which is particularly brutal when the pre-charging or the publicity at the time of charging has ruined their reputation.


      So amongst the many other concerning things about the gag rule is that people sign it and then only years later come to understand what it has really meant and why it makes them unable to repair their reputations.


Micah Wallen:  All right. We'll now move to our next question.


Caller 2:  Hi, Peggy. I just wanted to thank you very much for your wonderful work in this area. Obviously, it's a real First Amendment problem to prohibit people for life from speaking in areas like this. I would hope that perhaps the SEC might be eventually persuaded to voluntarily change its policy.


Of course, all the time, people are permitted to give up their constitutional right in a settlement, say, of a criminal proceeding. You can agree to have yourself locked up in jail for some number of years as part of a settlement of criminal charges.


So I would think perhaps there's some analogy here that there's obviously case law that limits the number of years that you can be put away for a criminal charge, that yes, you can agree to serve a two-year sentence for an armed robbery that you potentially could've served 20 years for and have a plea deal. But after those two years are up, you are free. And I would think that there must be some sort of equivalent constitutional standard that would say that yes, you can be permitted to waive your constitutional right to speak, but there has to be some reasonable time limit on that.


Margaret A. Little:  You're raising an excellent point. Under existing law, murderers can't have their rights to even publish about their crimes restricted at all and yet, they're people who have done far worse things. And in fact, U.S. attorneys in criminal cases don't enter into gag agreements. That, for me, was one of the most interesting things I had learned in doing this.


      Now, you can when you plea to a criminal action, you can agree that you admit to a specific crime. And then if you go out later tonight, there are penalties for that. We don't have a problem with that. And in fact, NCLA's petition to amend the rule does allow for admissions or denials as to specific things.


      But when you have this blanket agreement that you'll never talk about your case in perpetuity, as you point out, the proportionality, or rather the disproportionality, of the term under which you are gagged to whatever the underlying charges might be is wildly out of proportion.


      As to the -- what I call the waiver issue, which is that you can voluntarily give up your rights, the SEC certainly brought that up in their briefing. It did not play much of a part in Judge Cote's decision. But the response to the argument that yes, you can give up your rights of appeal, which of course you do when you settle a case, or other rights that pertain to the cessation of a dispute is that those are necessarily bundled in what it means to settle a case. Whereas your rights of future speech had nothing to do with the mechanics of ceasing a dispute and what it takes to do that.


      The best case on that one and one that we cite in our papers is a case, I believe it's out in the Ninth Circuit, where someone had settled their case and then had to agree not to run for public office in the future. And the Ninth Circuit appropriately set that aside as having nothing to do with the settlement of a dispute and the fact that yes, you do give up your rights of appeal and other constitutional rights because that's what it means to settle a case.


      So when you look at the issues that way, the waiver argument essentially disappears because this has to do with future speech. It is not at all necessary to these resolution of claims in the immediate action and for that reason is properly and rightfully distinguishable and should not be made a condition of settlement by any government authority.


Micah Wallen:  Thank you. I'll throw it back to you for any closing remarks you have for us today.


Margaret A. Little:  Yeah. I think if I were to crystallize this issue in one or two sentences, it would be this. Congress itself could not lawfully pass a law that said any time you settle your case with the federal government, you have to agree to be silent about it. I think most people on this call would agree A) it's almost unthinkable to think that anybody would ever propose that such a law be enacted.  It would be wildly unpopular if it came to the public's attention and was debated in Congress. Any president who correctly interpreted the Constitution would veto it. And finally, even in the very unlikely event that such a statute would get passed, a court would set it aside in a minute.


      The First Amendment says Congress shall pass no law that abridges the freedom of speech and certainly a law that said you can't talk about any case you settled, but the government does just that. So the big question and the one that NCLA hopes to settle through this litigation is if Congress itself could not enact such a statute, why should a mere administrative agency think it has this power?


      NCLA contends that the SEC and the CFTC do not have that power and that a court should properly understand that and set the gag aside.


Micah Wallen:  Well, actually, one question just popped in the line. So without further ado, we'll try and squeeze one more question in here.   


Joe Becker:  Hey, it's Joe Becker in Auburn, Alabama. I'm sympathetic to this because there was a time when I did some English language in the workplace cases where the EEOC would basically bully people into settling because it was too expensive not to. And then they would run press releases, even though there was no statute that prohibited language in the workplace restrictions. That's what they wanted the law to be, so they would basically settle the case and then run press releases that said this is what happens when you have a language in workplace regulation or whatever.


      I never remember them trying to limit the speech of the people who did that, but I can't imagine that happening. But my second point is I recently did public interest litigation in Nevada, and with the Public Records Act, states were basically -- what I remember, and it's been a couple years, but what I remember is the Public Records Act preempted the state from entering into these gag agreements because someone would just file a Public Records Act action with the state agency and say hey, I want to see what kind of settlements you negotiated. Is there anything in FOIA that would allow someone to raise this issue as a FOIA challenge?


Margaret A. Little:  Well, you raise several issues because we have some FOIA requests right now are focusing on what the heck was even in Congress -- or rather the SEC's mind when it slipped this rule into the Federal Register. And so far, the FOIA requests that we have filed in that matter, not been particularly forthcoming.


      But, of course, when someone settles their case, they have a view of it, the person who is charged. That view is never in the record if you settle it quickly, which is how most of these things happen. So even if you made a FOIA request to find out what there is to know about the case, all you're going to get is the SEC's version of events.


      If a case had gotten contested, there might be some testimony. But even there, if you were, for example, a good reporter, you'd want to hear the SEC's side and you'd want to hear the respondent's side, if you were going to write an article about it or a book about it. And unfortunately, when you call up the respondent, he has to say, mm, can't talk. I could be re-prosecuted.


      And so this is how it suppresses speech. This is how it suppresses the truth. This is how it expands the power of the SEC to bring charges that may be wildly beyond what they in fact would carry the burden of proof on in a courtroom. And yet, that worst version of events that they set forth in their press releases is the only thing that is in the record for anyone wanting to examine the operations of the agency.


Joe Becker:  So I guess if the settlement terms are such that don't allow the defendants, we'll call it, the defendant's position into the settlement agreement, then I guess the settlement agreement as a public record is basically worthless anyway is what you're saying.


Margaret A. Little:  Exactly. That's exactly what I'm saying. Yeah.


Micah Wallen:  All right. Well, with no other questions in the queue, on behalf of The Federalist Society, I'd like to thank our expert for the benefit of her valuable time and expertise today. We welcome listener feedback by email at info@fedsoc.org. Thank you all for joining us. We are adjourned.


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