Romeril v. SEC

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CASE STATUS:
Motion for Relief from Judgment, fully briefed awaiting decision.

CASE START DATE:
May 6, 2019

DECIDING COURT:
United States District Court for the Southern District of New York

ORIGINAL COURT:
United States District Court for the Southern District of New York

 

CASE SUMMARY

When Barry D. Romeril settled with the United States Securities and Exchange Commission (SEC) in June of 2003 he didn’t know he would live to regret it 16 years later. That is because in order to settle his case, the SEC required that he agree to be bound by a Gag Order- a little known tool of the SEC meant to silence people for life regarding cases brought against them.  NCLA has moved to remove the gag order from his consent agreement because it is an unconstitutional prior restraint and content-based restriction on speech, abridging freedom of the press and Americans’ right to petition.   In October of 2018, NCLA pioneered the legal challenges to this rule by petitioning the SEC to amend its gag rule, setting forth in detail the numerous constitutional and legal infirmities of this unconstitutional and disturbing practice.

CASE DOCUMENTS

July 8, 2019 | Romeril Reply Brief

There is no merit in the SEC’s argument that a Rule 60(b) motion cannot be used to set aside an unconstitutional gag order. Indeed, the SEC itself recently argued that “the proper vehicle is review of the consent judgment[] before the court[] that entered [it],” citing this very case, SEC v. Allaire.1 Second Circuit precedent unequivocally holds that a judgment imposing a prior restraint on speech is “void” under 60(b)(4), see Crosby v. Bradstreet Co., 312 F.2d 483, 485 (2d Cir. 1963), just as the Supreme Court holds that an “injunction, so far as it imposes prior restraint on speech and publication, constitutes an impermissible restraint on First Amendment rights” and “must be vacated.” Org. for a Better Austin v. Keefe, 402 U.S. 415, 418–20 (1971).

The propriety of challenging the validity of the consent order gag though a Rule 60(b)(4) motion for relief from judgment is underscored by the collateral bar rule prohibiting a party from challenging “a district court’s order by violating it. Instead, he must move to vacate or modify the order, or seek relief in this Court.” United States v. Cutler, 58 F.3d 825, 832 (2d Cir. 1995). SEC has cited one non-binding case to the contrary, U.S. v. Berke, 170 F.3d 882 (9th Cir. 1999), and even there the court reserved decision on whether the gag could be enforced.

Click to read the full Reply

May 6, 2019 | Memorandum In Support of Motion For Relief From Judgment

PRELIMINARY STATEMENT

Movant Barry D. Romeril moves pursuant to Fed. R. Civ. P. 60(b)(4) for relief from the final judgment’s prohibition of his future truthful speech about this case. Paragraph 11 of the Consent of Barry D. Romeril (“Consent”) incorporated into the final judgment is void because it is an unconstitutional prior restraint and a content-based restriction on speech that violates the First Amendment of the U.S. Constitution, and for other reasons more fully set forth below. An Amended Consent Order omitting the offending gag provision has been submitted as part of this Motion.

Click here to read complete document.

May 6, 2019 | Motion for Relief from Judgment

Defendant Barry D. Romeril hereby moves pursuant to Fed. R. Civ. P. 60(b)(4) for relief from Judgement entered on June 16, 2001 as incorporating a void and unconstitutional prior restraint on speech in violation of the First Amendment of the United States Constitution and controlling Second Circuit case law, and for other reasons more fully set forth in the memorandum of law that accompanies this motion.

Click here to read complete document.

November 18, 2019 | U.S. District Court for the Southern District of New York Opinion and Order Denying Defendant’s Motion for Relief from the Judgment

Romeril argues that a no-deny provision in the Consent, which was incorporated into an Order of Final Judgment (“Judgment”), violates the First Amendment by forbidding him from publicly denying allegations in the SEC complaint. Romeril’s motion is untimely and, in any event, fails to allege a jurisdictional defect or violation of due process that would permit relief under Rule 60(b) (4).

Click here to read complete document.

PRESS RELEASE

May 6, 2019 | NCLA Sues to Overturn SEC’s Unconstitutional ‘Gag Order’ that Never Expires in SEC v Romeril

Washington, DC (May 6, 2019) – The New Civil Liberties Alliance (NCLA) today filed a Motion for Relief from Judgment and Memorandum of Law with the U.S. District Court for the Southern District of New York on behalf of Barry D. Romeril. Mr. Romeril served as the Chief Financial Officer of the Xerox Corporation from 1993-2001.

NCLA has asked the court to remove a gag order placed on Mr. Romeril on June 5, 2003 as part of a Consent Order with the Securities and Exchange Commission (SEC) because it violates the First Amendment of the U.S. Constitution. Despite the passage of nearly 16 years, Mr. Romeril continues to be bound by the gag order provision.

The Consent purports to permanently forbid him from contesting any of the allegations in the Commission’s Complaint against him, regardless of the accuracy of those allegations or the truth of Mr. Romeril’s remarks. He faces the threat of reopened and renewed prosecution even for truthful speech challenging the allegations. NCLA contends that the Gag Order is a content-based restriction of speech, a forbidden prior restraint, and that it gives the SEC unbridled enforcement discretion by silencing Mr. Romeril in perpetuity.

The SEC’s gag rule was promulgated in 1972 without notice and comment. NCLA petitioned the SEC to amend the rule in October 2018, contending that the Commission lacks the authority to use the Gag Rule because it directly infringes upon the First Amendment rights of Americans and hides the agency’s enforcement practices from public scrutiny.

“SEC Gag Orders are unconstitutional prior restraints that violate Americans’ First Amendment rights and their due process rights. Congress itself could not enact a law that forbade defendants from speaking about the merits of their prosecutions. Surely the SEC cannot do by rule what even Congress cannot do by statute.”
Peggy Little, Senior Litigation Counsel, NCLA

ABOUT NCLA 

NCLA is a nonprofit civil rights organization founded by prominent legal scholar Philip Hamburger to protect constitutional freedoms from violations by the Administrative State. NCLA’s public-interest litigation and other pro bono advocacy strive to tame the unlawful power of state and federal agencies and to foster a new civil liberties movement that will help restore Americans’ fundamental rights.

For more information visit us online: NCLAlegal.org.

Contact:
Judy Pino
New Civil Liberties Alliance
judy.pino@ncla.legal
202-869-5218

July 8, 2019 | NCLA Asks Court to Overturn SEC’s Lifetime Gag on Free Speech

Washington, D.C., July 08, 2019 — The Securities and Exchange Commission’s (SEC) “Gag” Rule is a regulation almost unique to the SEC. Since the Rule was created without notice and comment in 1972, it has managed to impact the freedom of speech of hundreds of Americans. Barry D. Romeril, former Chief Financial Officer of the Xerox Corporation, is one person whom this Rule has silenced for life since he entered into a Consent Order with the SEC in 2003.

The New Civil Liberties Alliance (NCLA) has filed a reply memorandum of law in support of its motion for relief from judgment in SEC v. Romeril. Despite the passage of nearly 16 years, Mr. Romeril continues to be bound by the gag order. NCLA has asked the court to remove the gag placed on Mr. Romeril as part of a Consent Order with the SEC because it violates the First Amendment to the U.S. Constitution.

The Consent permanently forbids Mr. Romeril from contesting any of the allegations in the Commission’s original Complaint against him, regardless of the accuracy of those allegations or the truth of his remarks. He faces the threat of reopened and renewed prosecution even for truthful speech challenging the allegations. NCLA argues that the gag order violates the First Amendment both because it is a forbidden prior restraint on future speech and because Romeril had no ability to waive the rights of the public to hear the truth from him about the Xerox case. In addition, the speech ban serves no valid government interest, as the SEC’s wish not to have its enforcement practices criticized is not a legitimate basis for gagging Americans’ speech.

“The Gag Rule has silenced generations of Americans and kept them from criticizing the SEC’s enforcement practices. The idea that a powerful administrative agency may force settling parties to surrender future free speech rights—a form of prior restraint that the First Amendment expressly forbids—requires the Southern District of New York’s prompt correction.”
Peggy Little, Senior Litigation Counsel, NCLA

Separately, NCLA petitioned the SEC to amend the rule in October 2018, contending that the Commission lacks the authority to use the Gag Rule because it directly infringes upon the First Amendment rights of Americans and hides the agency’s enforcement practices from public scrutiny.

ABOUT NCLA 

NCLA is a nonprofit civil rights organization founded by prominent legal scholar Philip Hamburger to protect constitutional freedoms from violations by the Administrative State. NCLA’s public-interest litigation and other pro bono advocacy strive to tame the unlawful power of state and federal agencies and to foster a new civil liberties movement that will help restore Americans’ fundamental rights.

Contact:

Judy Pino
New Civil Liberties Alliance
202-869-5218
judy.pino@ncla.legal

November 18, 2019 |U.S. Courts Must Not Ignore How the SEC Gag Rule Violates Americans’ First Amendment Rights

OPINION

Nov 14, 2018 | How the SEC Silences Criticism

One of the strongest rules in free-speech law is that the government may not engage in “prior restraint” of speech except in extreme circumstances. Yet the Securities and Exchange Commission does so routinely. Under a rule adopted in 1972, the SEC demands that parties entering into settlements with the commission be silenced about the prosecution forever. If they question the merits of the case against them, the SEC reserves the authority to reopen it.

“The result is a stew of confusion and hypocrisy,” Judge Jed Rakoff observed in a 2011 ruling. “The defendant is free to proclaim that he has never remotely admitted the terrible wrongs alleged by the S.E.C.; but, by gosh, he had better be careful not to deny them either. . . . An agency of the United States is saying, in effect, ‘Although we claim that these defendants have done terrible things, they refuse to admit it and we do not propose to prove it, but will simply resort to gagging their right to deny it.’ ”

After the 2008 economic crisis, the rule faced blistering criticism from judges and scholars, who noted that it violates the First Amendment and permits potentially collusive settlements that bilk shareholders and taxpayers and shields a powerful agency’s practices from public scrutiny.

The gag rule violates a hornbook’s worth of legal doctrine: It is a prior restraint and a content-based restriction on speech. It serves no compelling government interest while employing the most restrictive means to accomplish its ends. It prohibits truthful speech, compels government-scripted speech, violates due process, impairs the First Amendment rights to petition government, and infringes the right of the public to hear criticisms of the government.

It could not withstand the most cursory judicial scrutiny—and the SEC knows it. In fact, it has tucked away a caveat at the end of the rule that lifts the gag when a defendant testifies under oath, as long as the SEC is not a party. That suggests the SEC knows full well that its rule could silence truthful speech or even suborn perjury. What a clever device to avoid judicial scrutiny.

The SEC’s gag rule is a symptom of a broader problem: Administrative agency power tends to expand beyond its lawful scope. This is why the Founders were so obsessively concerned that the three branches of government operate publicly subject to carefully constructed checks and balances.


Originally published in the Wall Street Journal on November 14, 2018

Dec 17, 2018 | The SEC should listen to Sen. Cotton

On Tuesday Sen. Tom Cotton (R-Ark.) asked tough questions to the chairman of the Securities and Exchange Commission (SEC), Jay Clayton, during a banking committee hearing about an opaque form of regulation which has silenced Americans for far too long.

The SEC lawlessly enacted the pernicious “gag rule” in 1972 without going through notice-and-comment rule-making. The U.S. Commodity Futures Trading Commission quietly slipped a similar rule into place some years later. The rule requires that anyone who settles with the agency must remain silent about his or her prosecution — for life.

If they suggest that they might deny some or all the charges brought against them or create the impression that the prosecution was wrongheaded, the agency can reopen the prosecution. Think about that for a moment.

The gag rule violates many legal doctrines. As Sen. Cotton charged, it is a prior restraint and a content-based restriction on speech. Because it suppresses truth about regulatory and/or company failures as well as over-prosecution, it not only serves no compelling government interest, it serves no legitimate interest at all. The fact that the rule also lifts the speech ban for testimonial obligations means that the SEC knows that it suppresses truthful speech, a point scored by Sen. Cotton to which Chairman Clayton had no good response.

Because it silences the very people best-situated to level criticism of how the government works through the SEC, the gag rule impairs the First Amendment’s right to petition for regulatory reform and the concomitant right of the public to know what is going on in federal agencies.

Sen. Cotton understands the problem. “I think the SEC should probably reconsider it. It was passed at a time in 1972 when First Amendment precedent was much different and … more favorable to the government than frankly, it should have been,” said Cotton.

The senator also homed in on the vital public policies at stake, noting that the gag rule allows a company and an agency that have both failed in some way to conceal their failure from the public. As noted by S.D.N.Y. Judge Jed Rakoff, whose tart observations about the hypocrisy, confusion and over-breadth of the rule opened the proceedings, the gag rule also allows the agency to hide a record of weak cases or dubious prosecutions, whose victims are forever silenced from exposing the treatment they received. Another problem is that settlements stemming from SEC’s overly broad readings of the statutes or regulations it is enforcing can embolden new prosecutions that test — and too often exceed — the boundaries of what the law actually prohibits.

To his credit, Chairman Jay Clayton did not mount a vigorous defense of the gag rule, even conceding that, “it’s not the right approach in every matter.” But that last statement would come as a surprise to the thousands of Americans forced to sign a gag order for nearly 50 years because the SEC routinely insists upon it by citing the Rule. And Chairman Clayton’s defense of the portion that allows “no-admit-no-deny” is off base. That compromise position is not being challenged and has specifically been upheld by the courts. It is the lifetime gag and prior restraint on future speech that is under scrutiny.

Cotton called for the SEC’s prompt reconsideration of the rule and he closed the proceedings with the observation that the rule as implemented by the SEC is “quite over-broad,” “not at all narrowly tailored” and that it “undermines other legitimate public interests.”

Let’s hope the SEC listens.


Originally published in The Hill on December 17, 2019

Jun 4, 2019 | Leaving Them Speechless: A Mere Government Agency Cannot Silence Americans for Life

When government agencies such as the U.S. Securities and Exchange Commission (SEC) and the U.S. Commodity Futures Trading Commission (CFTC) bring charges, their press releases are notorious for their high visibility and inflammatory rhetoric. Within moments, lives are forever altered, reputations destroyed, businesses put on the road to ruin with many livelihoods at risk. What is less understood by the public—though widely known to securities insiders, courts and the commissions—is that sometimes these charges are flimsy, uncorroborated, based on compromised evidence or otherwise warrant a swift settlement when it becomes clear that the agency cannot make its case. In addition, the government can and does overcharge violations hoping some of it will stick.

Unsurprisingly, 98% of SEC cases settle. Fighting a powerful government agency is beyond the means of ordinary Americans. As SEC Commissioner Hester M. Peirce noted in 2018:

“Often, given the time and costs of enforcement investigations, it is easier for a private party just to settle than to litigate a matter. The private party likely is motivated by its own circumstances, rather than concern about whether the SEC is creating new legal precedent . . . . settlement[s are] negotiated by someone desperate to end an investigation that is disrupting or destroying her life.”

But what no one knows going into the process is that these agencies each require a gag order that suppresses forever your right to talk about your prosecution. If you later talk, the agency can reopen the case.  What this means in practice is that the devastating, career-ending SEC publicity is the final word. Through this device, the agency locks in a complete and enduring win in the court of public opinion. Targets who settle their cases in order to stanch the costs of federal prosecution are left forever unable to defend themselves in the media.

This is profoundly dangerous and unconstitutional—and should be set aside by any court versed in the most elementary requirements of the First Amendment.

The SEC gag rule was slipped into the Federal Register in 1972—without prior publication, notice and comment. That alone renders the rule—and any administrative actions taken under its authority—unlawful. Amazingly, the rule itself doesn’t say anything about silencing parties or reopened prosecutions. The rule itself simply asserts that “it is important to 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.”

Think about this for a moment. The SEC doesn’t want people thinking that it has punished people who might be innocent of some or all of the charges against them. From that wholly illegitimate motive, the SEC has arrogated power to itself to bind people who settle their charges to a lifetime of silence.

These agencies further know that these gag orders can silence truthful speech or even suborn perjury because their orders allow the gag to be lifted if the defendant is under oath—unless the agency is a party to the proceeding. That clever device keeps the agency’s thumb on the scales of justice in its own cases, while conceding that in other tribunals the gag must be untied.

Congress cannot pass a law that provides that defendants who plea or settle must wear a lifetime muzzle because the First Amendment says: Congress shall make no law … abridging the freedom of speech, or of the press, or the right of the people … to petition the Government. And yet for nearly 50 years, a mere administrative agency has asserted to thousands of Americans that it possesses this power.

It does not. Long-established case law invalidates any such restrictions on speech. For this reason, the New Civil Liberties Alliance (NCLA) petitioned the SEC in October of 2018 to stop this illegal and unconstitutional practice. That petition prompted a Senate Banking Committee hearing in December 2018 in which SEC Chairman Jay Clayton was questioned about the policy.

NCLA has also recently brought an action in New York federal court to set aside one such gag order. Binding Second Circuit precedent from Crosby v. Bradstreet Co. holds that courts must set aside such prior restraint on speech, even when entered on consent, for a court is “without power to make such an order; that the parties may have agreed to it is immaterial.”  It is long past time for Americans to stand up for their inalienable rights to free speech and put an end to this scandalous abuse of administrative power.


Originally published in New York Law Journal on June 4, 2019

Aug 6, 2019 | WSJ Letter to the Editor in Response to NCLA Commentary: The SEC Should Follow Its Own Rules for Guidance

Mark Chenoweth’s and Peggy Little’s “Secret Laws for the Powerful” (op-ed, July 24) focuses on regulation without notice-and-comment rule-making. Unfortunately, despite the Trump administration’s pronouncements to the contrary, this practice continues. The Securities and Exchange Commission’s Share Class Selection Disclosure Initiative is a headline-grabbing example in which 79 financial institutions were faulted for not taking in 2014-18 actions that weren’t articulated until 2018 through “gotcha” enforcement actions.

The SEC never cited a rule or regulation that had been violated. Even novice students of due process understand that guidance provided in 2018 cannot be used in cases citing actions taken before that time. In effect, the agency short-circuited the required rule-making process by adopting a regulation through enforcement rather than through rule-making.

Rather than continuing or expanding its enforcement initiative, the SEC, consistent with its regulatory mission and the Administrative Procedure Act, should halt the initiative.

Paul Atkins
Washington
Mr. Atkins was a SEC Commissioner 2002-08.


Originally posted in the Wall Street Journal on August 6, 2019 

Jul 24, 2019 | Secret Laws for the Powerful

The Office of Management and Budget issued a memo recently reminding all federal administrative agencies that “the Constitution vests all Federal legislative power in Congress.” That may seem obvious, but agencies often regulate Americans beyond their lawful authority and without accountability. Our organization—the New Civil Liberties Alliance—has petitioned 18 agencies to adopt a permanent rule prohibiting such unconstitutional regulation.

One agency head, Hester Peirce of the Securities and Exchange Commission, outlined the problem in a bracing speech she delivered days before the OMB statement. She faulted the commission’s staff for abusing tools like “no-action letters” and “guidance” to create “secret law,” free from judicial or legislative review.

No-action letters are meant to clarify to the addressee if its behavior is subject to regulation, but too often agency staff use them to craft law at will. Ms. Peirce noted that when these letters—which are publicly available—are issued in tandem with 
nonpublic guidance, all the issuances can start to constitute their own obscure and ever-changing body of law.

No-action letters are drafted by unelected, politically unaccountable agency staff and even on their own can have wide reaching, deleterious impacts. No-action letters issued in 2004 cleared financial corporations of regulatory liability as long as they cast their clients’ shareholder proxy votes on corporate governance issues according to recommendations from purportedly independent, third-party advisers. Those letters helped create a cottage industry in proxy-advisory firms, which themselves had glaring conflicts of interest, exerted undue influence over corporation policies and governance, depressed returns to shareholders and eviscerated informed voting. These letters were withdrawn last fall, but the damage was extensive and long lasting.

Guidance—which refers to a variety of documents that can be issued publicly or privately—can be dangerous on its own. The most notorious example is the Education Department’s 2011 “Dear Colleague” letter, which mandated that universities use a lower burden of proof in sexual-misconduct investigations. Another is the Federal Trade Commission’s use of consent-decree guidance to go after businesses victimized by data-security breaches. Congress has never passed a law to give the FTC this power, and the FTC has never adopted a formal rule outlining data-security duties. Yet for all intents and purposes, the FTC’s consent decrees are binding.

The harder rules are to navigate and understand, the easier it is for staff to expand them lawlessly and capriciously. SEC staff members adjust minimum capital requirements for broker-dealers on an ad hoc, unaccountable basis through phone calls and emails. Bureaucrats even delegate some of their power to private third parties—such as the Financial Industry Regulatory Authority and the Sustainability Accounting Standards Board—that lack any rule- or lawmaking power at all. Regulators have in effect created a market for private lawmaking. With enough money, private citizens can pay a cadre of lawyers to convince agencies and quasi-private regulators like FINRA to establish bespoke regulations that neither Congress nor an agency has formally approved.

This isn’t a government of laws but a body of men making secretive rules for the favored few. “For the sake of integrity,” Ms. Peirce calls for the SEC to examine and reform its practices. Other agencies should follow her advice too.


Originally published in the Wall Street Journal on July 23, 2019