Romeril v. SEC

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CASE STATUS:
Active

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 31, 2020 | Appellant’s Reply Brief
April 17, 2020 | Brief of the Competitive Enterprise Institute as Amicus Curiae in Support of Defendant-Appellant
April 16, 2020 | Brief for Amici Curiae Alan Garfield, Burt Neuborne, Clay Calvert, Rodney Smolla, Reason Foundation, the Goldwater Institute, the Institute for Justice, and the Pelican Institute for Public Policy in Support of Defendant-Appellant
April 10, 2020 | Appellant’s Opening Brief and Statutory Addendum
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.

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.

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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.

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July 8, 2019 | Romeril Reply Brief
October 30, 2018 | Petition to Amend: SEC Rule Imposing Speech Restraints in Consent Orders

In re SEC Rule Imposing Speech Restraints in Consent Orders

The SEC Rule adopts “the policy that in any civil lawsuit brought by it or in any administrative proceeding of an accusatory nature pending before it, 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 did not, in fact, occur.” Accordingly, SEC will “not … permit a defendant or respondent to consent to a judgment or order that imposes a sanction while denying the allegations in the complaint or order for proceedings”—although at the same time the SEC
provides that the defendant or respondent may state “that he neither admits nor denies the allegations.” 17 C.F.R. § 202.5(e).

Click here to read full legal document.

PRESS RELEASE

October 1, 2020 | NCLA Launches Video of Former Chief Financial Officer of Xerox Silenced for Life by SEC’s Gag Rule

Washington, DC (October 1, 2020) – Imagine being charged by a federal government agency and then silenced for life and unable to tell your side of the story. For nearly 50 years, the Securities and Exchange Commission (SEC) has imposed a Gag Rule on defendants that silences them for life when they settle with the agency. The gag forbids even truthful speech if it contradicts anything in the SEC’s original, unproven complaint.

 

video released today by the New Civil Liberties Alliance, a nonpartisan, nonprofit civil rights group, brings this abuse of power by the SEC to light. Former Xerox Chief Financial Officer Barry D. Romeril settled with the SEC over 17 years ago—and he deeply regrets that SEC compelled his silence all these years as a condition of settlement. The video release is part of NCLA’s “End Gag Rules” campaign asking the public to sign a petition calling for an end to this unlawful SEC practice.

Mr. Romeril is challenging the constitutionality of such a gag imposed on him by the SEC in a 2003 settlement and consent order. The video reveals numerous aspects of the unconstitutional Gag Rule, which interferes with the general public’s right to receive full information about cases, prevents the public from keeping tabs on enforcement practices at the agency, and precludes Mr. Romeril from exercising his right to free speech and petition.

NCLA petitioned the SEC in October 2018 to repeal the unlawfully enacted Gag Rule. But two years later, the agency has yet to respond or take any action on the matter, despite tough questioning on the constitutionality of this practice in a Senate Banking Committee hearing in December of 2018.

Read full case summary here. 

Excerpts from the video: 

“Not being able to speak feels like you’re literally muzzled. I settled because I wanted to move on. The alternative was a long, potentially costly, and very indeterminate process. It takes a toll not only on myself, but my family and friends.”

— Defendant, Barry D. Romeril 

“Congress itself could not enact a law that required Americans settling their cases with the government to remain silent about them. Surely, the SEC cannot do by rule what even Congress cannot do by statute.”

— Peggy Little, Senior Litigation Counsel, NCLA  

“Seventeen years of enforced silence is too much. No American should be prohibited from speaking about the facts of their case no matter what they’ve been charged with. It’s time for courts to put an end to this unlawful practice.”

— Mark Chenoweth, Executive Director and General Counsel, NCLA

ABOUT NCLA 

NCLA is a nonpartisan, nonprofit civil rights group 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.

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July 31, 2020 | NCLA Slams SEC’s Defense of Gag Rule that has Hoodwinked Americans for Half a Century

Washington, DC (July 31, 2020) – For nearly 50 years, the U.S. Securities and Exchange Commission (SEC) has imposed a Gag Rule that silences people with a lifetime gag enforced through a threat of a reopened prosecution. NCLA client Barry D. Romeril, the former Chief Financial Officer of Xerox, is challenging the constitutionality of such a gag imposed on him by the SEC in a 2003 settlement and consent order.

Today the New Civil Liberties Alliance, a nonpartisan, nonprofit civil rights group, fired back with a reply brief in Barry D. Romeril v. SEC, countering the agency’s faulty arguments in support of the Gag Rule. Mr. Romeril’s appeal seeks reversal of the district court’s decision to reject his motion for relief from judgment so that he may tell his side of the story publicly. Gag orders interfere with the general public’s right to receive full information about cases, and they prevent Mr. Romeril from exercising his right to free speech and petition.

NCLA’s brief filed in the U.S. Court of Appeals for the Second Circuit details several different ways in which SEC gag orders like this one violate the First Amendment. It also points to the binding circuit precedent in Crosby v. Bradstreet Co., which held that a party subject to an unconstitutional, judicially imposed “prior restraint” on future speech may vacate the gag, even decades later. NCLA argues that the district court erred in its opinion that 14 years is too long to wait to challenge an unconstitutional order. Circuit precedent dictates that motions under Rule 60(b)(4) of the Federal Rules of Civil Procedure may be made “at any time” if the underlying order is void, as it is here.

Ten amici curiae have joined in support thus far.

NCLA released the following statements:

“When SEC brings charges against Americans, it issues an inflammatory press release that too often immediately destroys lives, livelihoods, personal relationships, businesses and reputations.  When defendants settle with this powerful agency—as 98% do—SEC demands they never speak publicly about the unproven claims against them.  It is far past time for this unconstitutional and unlawful practice to stop.  The gag shields the agency from criticism and entrenches a dangerous culture of overcharging Americans who are unable to defend themselves or bring agency abuses to the attention of the public and lawmakers.”

— Peggy Little, Senior Litigation Counsel, NCLA

“SEC is unwilling to accept what is painfully obvious, it cannot restrain truthful speech in perpetuity. SEC presents its demand for silence or devastating litigation as a choice. But, weighed down by the inequities in bargaining power between the SEC and its enforcement targets, such a choice is a false one. It is time for the Court to correct this unconstitutional practice.”

— Kara Rollins, Litigation Counsel, NCLA

ABOUT NCLA

NCLA is a nonpartisan, nonprofit civil rights group 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.

April 21, 2020 | Ten Amici Curiae Join NCLA’s First Amendment Challenge to SEC’s Gag Rule

Washington, DC (April 21, 2020) – The New Civil Liberties Alliance, a nonpartisan, nonprofit civil rights group would like to thank four (4) prominent First Amendment scholars and six (6) public interest groups who have filed in support of NCLA’s opening brief at the U.S. Court of Appeals for the Second Circuit. The briefs amici curiae urge the Court to decide the case of NCLA client Barry D. Romeril, the former Chief Financial Officer of Xerox, against the U.S. Securities and Exchange Commission (SEC). The appeal seeks reversal of the district court’s decision to deny his motion for relief from judgment and challenges the constitutionality of a gag order the SEC imposed in a 2003 settlement and consent order.

“Since 1972 the SEC, a mere administrative agency, has been imposing gag orders on Americans who settle their cases with the agency. Those gags prohibit people from speaking publicly about their prosecution, or permitting others to speak in a way that even “creates an impression” that they were not guilty of everything the SEC charged them with. The SEC lacks any authority to seek such gags and courts have no power to impose them. These powerful amicus briefs call for prompt correction of an unconstitutional agency practice that has defied the First Amendment and the rule of law for far too long.”

Peggy Little, Senior Litigation Counsel, NCLA

Excerpts from the three briefs amici curiae submitted in support of NCLA’s opening brief:

“[T]he SEC gag clause prohibits truthful speech and enshrines the SEC’s narrative in perpetuity. That is the antithesis of the rights guaranteed by the First Amendment, and this Court should reject the SEC’s decades-long project to silence criticism of its actions.”

Americans for Prosperity Foundation (AFP)

“A more obvious attempt to silence a government critic to “avoid creating” a disfavored public “impression” could scarcely be imagined. To Romeril’s door, this ‘wolf comes as a wolf.’ Romeril is not the only one whose doorstep has been darkened by this wolf. For the last forty years, the Commission has systematically coerced ‘thousands’ of defendants into ‘agree[ing]’ to identical gag provisions.”

Competitive Enterprise Institute (CEI)

“[T]he gag provision places the SEC in an ethically unseemly and constitutionally infirm position. To the extent the SEC is seeking to suppress the disclosure of truthful information, its actions come perilously close to trafficking in hush money… The right of citizens to inquire, to hear, to speak, and to use information to reach consensus is a precondition to enlightened self-government and a necessary means to protect it.”

First Amendment Law Scholars, Rodney Smolla, Burt Neuborne, Alan Garfield, Clay Calvert; Reason Foundation; Institute for Justice; Goldwater Institute; Pelican Institute for Public Policy

ABOUT NCLA

NCLA is a nonpartisan, nonprofit civil rights group 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 at NCLAlegal.org.

Click here to download

April 13, 2020 | NCLA Takes Former Xerox CFO’s Case Against SEC ‘Gag Rule’ to Second Circuit Court of Appeals

Washington, DC (April 13, 2020) – The New Civil Liberties Alliance, a nonpartisan, nonprofit civil rights group, filed its opening brief Friday in the U.S. Court of Appeals for the Second Circuit on behalf of client Barry Romeril, the former Chief Financial Officer of Xerox. The appeal seeks reversal of the district court’s decision to deny his motion for relief from judgment. Mr. Romeril is challenging the constitutionality of a gag order the U.S. Securities and Exchange Commission (SEC) imposed in a 2003 settlement and consent order. He is asking the Court of Appeals to remove the lifetime gag so that he may tell his side of the story publicly.  

NCLA argues that the U.S. District Court for the Southern District of New York erred in its decision when it failed to follow circuit precedent in two areas. First, the judge’s decision held that 16 years was too long for Mr. Romeril to wait to challenge his gag. But circuit precedent dictates that motions under Rule 60(b)(4) of the Federal Rules of Civil Procedure may be made “at any time” if the underlying order is void. In Crosby v. Bradstreet, the Second Circuit reversed a court order as an unconstitutional prior restraint on speech—like Mr. Romeril’s—even when the order had been entered 30 years earlier.

Second, the district court decision misconstrued the law applicable to challenges for “voidness” under Rule 60(b)(4). The court denied relief because Romeril supposedly failed to identify a jurisdictional defect or violation of due process that would render the 2003 consent order void. But orders can also be void, as the Crosby precedent shows, for including unconstitutional requirements. So, if Romeril is right that the gag order violates the First Amendment, that alone provides enough reason for the court to void it.

NCLA’s brief details several different ways in which SEC gag orders like this one violate the First Amendment. Government-imposed gag orders are primarily a problem because they are “prior restraints” on speech, that is they prohibit future speech (even if truthful). The gag order against Romeril also unlawfully restricts his speech based on its content; it allows him to say positive things about SEC in praise of its investigation and charges against him, but it does not allow him to say anything critical about SEC’s complaint against him. Gag orders also interfere with the general public’s right to receive full information about the case, and they prevent Mr. Romeril from exercising his right to petition.

The district court also mistakenly disregarded Romeril’s due process claims. The gag order violates the Fifth Amendment guarantee of due process of law because it is unconstitutionally vague and leaves too much up to SEC’s discretion. Finally, and perhaps most egregiously, SEC only issued the gag rule as a ‘housekeeping’ rule back in 1972. Such rules are never supposed to be binding on anyone outside the government, but SEC has been ignoring that inconvenient fact for five decades. NCLA anticipates that several amici curiae will file briefs in support of Mr. Romeril’s appeal at the end of this week.

NCLA released the following statements:

“Constitutional rights are not subject to a statute of limitations. This case involves important questions of First Amendment and due process arising from the SEC’s suppression of speech for nearly 50 years in the 98% of cases that powerful agency settles. Congress itself could not require someone to surrender their First Amendment rights in order to settle a case; a mere administrative agency perforce lacks such authority.”

Peggy Little, Senior Litigation Counsel, NCLA

“The SEC’s gag rule not only quashes Mr. Romeril’s fundamental rights to speak and petition the government, but also the public’s fundamental right to receive his speech and learn what their government is up to. The disregard of clear and controlling circuit precedent by the court below would leave federal courts complicit in the SEC’s unconstitutional practices. This issue is too important for the Second Circuit not to correct course.”

Kara Rollins, Litigation Counsel, NCLA

“The SEC has a big problem on its hands. Almost 50 years ago, the agency took a dubious regulatory shortcut and issued its ‘gag rule’ without bothering to go through notice and comment rulemaking. The resulting ‘rule’ should never be binding on anyone outside the government. But the SEC has enforced its gag rule against Barry Romeril for 17 years and against scores, if not hundreds, of other defendants. Now that Romeril has made the court aware of this deficiency, as a matter of due process, courts must not abet the agency’s sharp practice.”

Mark Chenoweth, Executive Director and General Counsel, NCLA

For more background on this case visit: https://nclalegal.org/romeril-sec/

ABOUT NCLA

NCLA is a nonpartisan, nonprofit civil rights group 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.

Click here to download

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

Washington, DC – The New Civil Liberties Alliance (NCLA) today filed a Motion for Relief from Judgment 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 contentbased 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.

Click here to download

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.

For more information visit us online: NCLAlegal.org.

Click here to download

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

Washington, DC (November 18, 2019) — Barry D. Romeril is being held hostage by the U.S Securities and
Exchange Commission’s “Gag” Rule—a little-known administrative tool meant to silence people for life
regarding any agency case brought against them. The New Civil Liberties Alliance represents Mr. Romeril, a
former Chief Financial Officer of Xerox, who after more than 16 years is still silenced by a Consent Order
entered into with the SEC in 2003. He is determined to put an end to this unconstitutional practice.
For generations now the SEC has cooked up deals like this that violate the First Amendment. Few other
agencies embrace such a practice, but Americans who settle with the SEC mostly out of fear of fighting this
administrative Goliath are prohibited from engaging in even truthful speech taking issue with flaws in the
SEC’s original complaint.

Mr. Romeril faces the threat of reopened and renewed prosecution if he speaks up. 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.

NCLA filed a Motion for Relief from Judgment in May with the U.S. District Court for the Southern District of
New York on behalf of Mr. Romeril asking the court to remove the gag order. Today that motion was denied by
Judge Denise Cote for two main reasons. First, she said that he waited too long to file the motion for relief.
Second, she said that only a jurisdictional problem—something which Mr. Romeril has not alleged—would
justify voiding the judgment against him.

“Judge Cote’s decision comes as a surprise. NCLA is confident that the Second Circuit will ultimately correct the
glaring deficiencies in the court’s ruling. We look forward to a robust challenge to this decision on appeal, especially since
the Second Circuit’s controlling precedent on prior restraints of speech is quite clear.”
—Peggy Little, NCLA Senior Litigation Counsel

“The Constitution does not have an expiration date. Barry Romeril is not trying to overturn the judgment against
him. He merely asks to be allowed to speak the truth about his case after 16 years. Judge Cote’s decision to
keep the gag order in place makes her sadly complicit in the SEC’s ongoing unconstitutional scheme.”
—Mark Chenoweth, Executive Director and General 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.

Click here to download

OPINION

November 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

December 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

June 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

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August 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 

July 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