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23 January 2019

SEC 'gag orders' under scrutiny in 'enormously significant' lawsuit

US think tank sues SEC in federal court to challenge decades-old 'gag orders when settling defendants in civil enforcement actions.

Mark Van Scyoc

The Cato Institute, a libertarian think tank, is challenging the routine condition of settling civil or administrative actions with defendants agreeing to a promise that they will never publicly contest, challenge, or deny any of the allegations the Securities and Exchange Commission (SEC) has made against them, even after the case has been settled and the underlying lawsuit or administrative proceeding dismissed. 

‘enormously significant’

The SEC explains the orders ‘avoid creating, or permitting to be created, an impression that a decree is being entered or a sanction imposed, when the conduct alleged did not, in fact, occur.’ The Cato lawsuit says, ‘the sole purpose of the gag regulation is to affect public perception of the SEC and the SEC’s enforcement activities,’ which it accomplishes ‘by restricting constitutionally protected speech, specifically, speech critical of the SEC itself.’ Cato adds, ‘the SEC demands blanket, perpetual gag orders of this sort in every case it settles without making any individualized determinations about the need for such an order or the appropriate scope of such an order in a given case.’ These clauses, Cato says, violate the First Amendment. Mr Robbins explained, ‘from a first amendment perspective, the Cato Institute has a very meritorious argument for the very purpose of preventing those pursued by the SEC from being required to give up what otherwise would be their Constitutional right to speak about what government has done.’ He asked, ‘what could be more antithetical?’

Professor's memoirs

Cato’s interest originates from an approach from ‘a well-known law professor’ interested in publishing a memoir about his experience of being sued by the SEC and prosecuted by the Justice Department over a business he created and ran for several years prior to the 2008 financial crisis. The think tank says the memoir ‘explains in compelling detail how both agencies fundamentally misconceived the author’s business model’ and ‘ultimately coerced him into settling the SEC’s meritless civil suit and pleading guilty in DOJ’s baseless criminal prosecution after being threatened with life in prison if he refused.’ Cato has partnered with the Institute for Justice for legal representation in what they describe as a ‘civil-rights lawsuit.’ Jeff Robbins, a partner with law firm Saul Ewing Arnstein & Lehr and a specialist in first amendment matters involving public companies, told the New York Times the Cato lawsuit is ‘enormously significant.’ 

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