SEC upholds settlement gags to prevent misinformation, dissent says they protect 'flimsy' cases

Hester Peirce got her nickname "Crypto Mom" for her contrarian embrace of digital assets as a member of the crypto-hostile Securities and Exchange Commission. 

Her latest divergence from Chairman Gary Gensler, whom The Baltimore Sun once dubbed "The Democrats' stealth fighter," might prompt a new nickname: Speech Mom.

Peirce issued a lengthy dissent titled "Unsettling Silence" against her colleagues' refusal Tuesday to abandon the SEC's 52-year practice of mandatory gag orders in settlements, saying they "sidestep[ped] First Amendment concerns" and ignored its "superior bargaining power."

Imposed without notice and comment, the Nixon-era rule threatens defendants with fines and jail for contesting the factuality of the agency's claims against them, "creat[ing] the impression" of denial or criticizing its methods, leaving the SEC unopposed in the court of public opinion.

Nominated by President Obama but not confirmed until his successor, Peirce said settlement gag orders have not been "widely adopted" by agencies, pointing to Federal Trade Commission rules.
 

The FTC defended letting Facebook deny allegations in a 2012 settlement because it has confidence in "the evidentiary record developed by FTC staff."

"Why should the public put much weight on allegations so flimsy that they need the protection of a contractual obligation not to deny them?" Peirce wrote. She marveled that the "Commission even suggests that it is the party making a sacrifice" by achieving the "permanent silence of the defendant" and "forgoing its day in court" to prove its allegations.

Gensler issued a much shorter statement focused on the optics of letting defendants contest the SEC's unproven allegations, which "muddies the message to the public."

Changing the practice would "alter the impact of enforcement settlements if defendants could deny any wrongdoing in the court of public opinion and dismiss sanctions as the cost of doing business without the Commission being able to revive its ability to have its day in court," he wrote.

SEC targets including the world's richest man have long challenged the constitutionality of the practice. 

Elon Musk asked the Supreme Court in December to take his case alleging that the wide-ranging "preapproval" settlement condition he accepted, which the SEC tried to enforce against one of his tweets, violates the "unconstitutional conditions doctrine," which he said the 2nd U.S. Circuit Court of Appeals didn't consider.

"The startling implication" of the SEC's argument that this doctrine is "inapplicable" to its settlements is that it could require "a waiver of any constitutional right—e.g., to criticize the government, to practice a religion, or to obtain a jury trial in any future action—without any judicial scrutiny" if the defendant "relented."

The New Civil Liberties Alliance represents other targets including former Xerox executive Barry Romeril, whose unsuccessful Supreme Court petition for certification was supported by Musk and Dallas Mavericks owner Mark Cuban, who chose trial and won rather than settling.

The public interest law firm that challenges administrative power returned the favor to Musk by supporting his petition in a friend-of-the-court brief Jan. 19. It quotes a 5th Circuit concurrence in a 2022 ruling that refused to excise the gag order from NCLA client Chris Novinger's settlement.

"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," Judge Edith Jones wrote, joined by Judge Kyle Duncan, the latter known for his deplatforming by Stanford Law School.

"A more effective prior restraint is hard to imagine," Jones said. "Given the agency’s current activism, I think it will not be long before the courts are called on to fully consider this policy." 

Peirce cited the same section in her dissent and faulted the SEC's "casual assumption that defending litigation with the Commission is just like defending against any other plaintiff in a civil action," when most targets and even "many well-resourced corporate defendants" cannot practically reject settlement.

"Commission investigations preceding the settlement negotiations are themselves long and costly," requiring targets to retain counsel for a variety of purposes, she said. "Add to that monetary cost, the intangible yet often even more onerous emotional, physical, and relational tolls of litigation, and it is unremarkable that nearly all defendants in Commission actions settle."

The agency is undermining its own "integrity" with the gag rule, according to Peirce. "Allowing people to talk freely about their experiences with the Commission would aid us in carrying out our mission."

NCLA filed the original SEC petition more than five years ago and the renewed petition in December. Agency spokesperson Stephanie Allen declined to explain why it took so long and what prompted the timing of its response, telling Just the News Thursday it had no comment beyond public materials.

"We plan to appeal the Commission’s denial to a federal court of appeals," attorney Peggy Little told Just the News in an email. NCLA's spokesperson confirmed it might not be the D.C. Circuit.

NCLA's statement Wednesday called the majority's reasoning "internally contradictory" because the commissioners claim the settlement terms are "negotiated" but admit the agency won't settle without a gag.

"SEC’s assertion that the agency does not try its cases through press releases is cruelly untrue," NCLA said. "This scheme ensures that the Commission’s press releases are the final and only public word on every settled case," and they serve as "occupational death sentences that often preclude future private employment, even outside the securities industry."

The SEC said NCLA's proposed change was not "modest" as the latter claimed, and several constitutional or statutory arguments "contravene established precedent," the unsigned response says.

Settling with defendants does not give them a "benefit" subject to unconstitutional conditions, the agency said, but serves "the public interest to minimize litigation risk, maximize limited resources, and accelerate the resolution of the case."

The agency would be waiving "its right to try a case while the defendant is free to publicly deny the allegations," and it's not going to "try its cases through press releases," the SEC said. It simply wants to retain the ability to "test that denial" by a defendant in court.

No-deny settlements prevent misinformation, the letter says. Otherwise the defendant "can create the incorrect impression that there was no basis for the Commission’s enforcement action" and "undermine confidence" in it. 

The agency cited the 2nd Circuit's ruling in NCLA's Romeril case, which said defendants can "of course" waive even "basic rights" to settle. NCLA told the Supreme Court that precedent conflicted with "at least" the 4th, 6th and 9th Circuits and Michigan Supreme Court.