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Clearly Established: SEC and CFTC on Notice of Their Persistent Free-Speech Violations

Russ Ryan
Senior Litigation Counsel

October 19, 2023

When a judge says something is illegal, most people stop doing it and change their ways. Not so with federal agencies like the Securities and Exchange Commission and the Commodity Futures Trading Commission.

In recent years, three different federal judges have told the SEC in no uncertain terms that the agency habitually violates the free speech rights of the people it prosecutes—hundreds of them every year. Yet because those warnings were technically not binding court decisions, the SEC has persisted undeterred. So has the CFTC.

Worse yet, as one judge acknowledged, courts have been largely complicit in the restrictions on speech.

Some 50 years ago, the SEC adopted a rule announcing that it would not agree to settle any future enforcement cases unless those accused agreed to surrender their right to deny the agency’s accusations of wrongdoing. Over time, this rule led to a non-negotiable term in all SEC settlements that forever prohibits those accused from “making any public statement” that denies the agency’s accusations—either “directly or indirectly”—or that “create[es] the impression” that the agency’s charges are without factual basis. For good measure, the accused must also agree to “withdraw” any papers previously filed in the case that denied the SEC’s charges, and to waive any court hearing on the terms of the settlement. The CFTC demands nearly identical terms in its settlements.

If that sounds like a free-speech problem to you, go to the head of the class. You’re in good company.

When my New Civil Liberties Alliance colleagues Peggy Little and Kara Rollins raised this objection on behalf of our client Christopher Novinger a few years ago, the objection was ultimately overruled on procedural grounds not relevant to the merits of the constitutional issue. But in the process two respected judges on the U.S. Court of Appeals for the Fifth Circuit—Judges Edith H. Jones and Stuart Kyle Duncan—issued a short concurring opinion that put the SEC (and by necessary implication the CFTC) on clear notice that these non-negotiable settlement gag orders effectuate an unlawful prior restraint on free speech:

[N]othing in the [court’s decision] approves of or acquiesces in the SEC’s longstanding policy that conditions settlement of any enforcement action on parties’ giving up First Amendment rights…. If you want to settle, SEC’s policy says, ‘Hold your tongue, and don’t say anything truthful—ever’—or get bankrupted by having to continue litigating with the SEC. A more effective prior restraint is hard to imagine.

[Peggy and Kara are now back in court (joined by our colleague Kaitlyn Schiraldi) using a different procedural option to challenge the SEC’s gag demand, and the case is again before the U.S. Court of Appeals for the Fifth Circuit.]

In an unrelated case last Fall, another respected federal judge—U.S. District Judge Ronnie Abrams in New York, who happens to be the daughter of one of the most prominent First Amendment scholars in the country, Floyd Abrams—issued her own warning to the SEC about its settlement gag demands:

In its normal practice of settling enforcement actions, the SEC routinely demands that defendants sacrifice the ability to ever deny the allegations against them—indefinitely silencing them from speech otherwise protected by the First Amendment. The threat held over the head of defendants by this [demand] is not easily overstated. Should they ever publicly refute the accusations against them, or even so much as “create the impression” that the SEC got something wrong, the Commission may reopen their cases or seek to hold them in contempt, thereby subjecting them to the risk of enormous financial and professional penalties, if not imprisonment. Truth is no defense. No matter how weak, or strong, the allegations in the [SEC] complaint may be—indeed, even if the testimony of key witnesses proves to be false—if defendants ever consider publicly defending themselves, the [settlement gag provision] prevents them from doing so.

Judge Abrams did not limit her criticism to the SEC, however. She also called out the federal judiciary for its “troubling” complicity in this routine violation of civil liberties, because SEC settlements in federal court cases require a judge’s sign-off:

Perhaps most concerning, the federal judiciary is made complicit in this practice—normalizing lifetime gag orders in the process. Courts are called upon to turn a blind eye to First Amendment rights being used as a bargaining chip; to endorse consent decrees, giving No-Admit-No-Deny Provisions the imprimatur of judicial sanction; and to enforce them should defendants ever step out of line. This is troubling indeed.

Despite her grave reservations, Judge Abrams approved the settlement because by that point the defendant had already signed it and declined the judge’s express invitation to raise any First Amendment objections.

But these recent judicial admonitions may be just the emerging tip of a constitutional iceberg toward which the SEC and CFTC are heedlessly—and needlessly—careening. There’s no legitimate reason for these agencies (or any other government actor) to demand immunity from criticism as a condition of settlement, least of all criticism by those arguably in the best position to shine light on the agencies’ handiwork. The settlement demand is especially odious because the agencies could not obtain this type of gag order even if they litigated their case and won on the merits.

To paraphrase Judge Abrams: What are these agencies so afraid of?