Death penalty for free speech? SEC gag orders challenged by its ex-lawyers, First Amendment legend

For more than five decades, without ever letting the public weigh in, the Securities and Exchange Commission has given targets of its enforcement actions a Hobson's choice: spend years and a fortune fighting the charges against the taxpayer-funded behemoth or forfeit your First Amendment rights to deny the charges as a condition of settlement.

Nothing is stopping other federal agencies from adopting the same "gag rule" under the guise of "an internal housekeeping measure" to avoid their regulatory obligations under the Administrative Procedure Act, as the Liberty Justice Center describes it.

More than two dozen groups and individuals including former agency lawyers, former enforcement targets and a First Amendment legend are pressing the Supreme Court to review a 9th U.S. Circuit Court of Appeals ruling that upheld the gag rule as a permissible "voluntary relinquishment of constitutional rights."

Dallas Mavericks minority owner Mark Cuban is one of the few to cut off his nose to spite the SEC, saying he spent $12 million on his legal defense against insider-trading charges so that he could keep trashing the SEC rather than accept a gagged $2 million settlement.

A jury cleared him, and Cuban advised well-heeled defendants to fight the SEC "because they’re not that smart."

X owner Elon Musk has tangled repeatedly with the agency, mocking then-Chair Gary Gensler after the 2024 election when the lame duck allegedly threatened to bring charges against Musk related to his purchase of the platform if he didn't pay a penalty. The agency sued him a week before Gensler resigned on President Trump's Inauguration Day.

The free-spoken billionaires previously led the charge three years ago, unsuccessfully, to convince SCOTUS to review the gag rule in a case brought by former Xerox chief financial officer Barry Romeril, who accepted a gag to settle an SEC case.

Former SEC attorneys call gag rule 'antithesis' of disclosure

Romeril returned in this SCOTUS petition, also brought by the New Civil Liberties Alliance, joined by other gagged SEC targets as well as media outlets indirectly gagged — the publisher of libertarian magazine Reason and the Delaware coastal newspaper The Cape Gazette, which wants to interview petitioner Cassandra Toroian.

Settling defendants can't speak truthfully about charges if they "even just create the impression of contradicting" SEC allegations, and even when "subsequent judicial decisions, in other cases, entirely reject the SEC’s theory of liability," the petition says.

The SEC is an "outlier" among federal agencies in gagging defendants who settle "as a matter of course," a power not used by even the Justice Department or Federal Trade Commission despite their roles in regulating financial markets, said the brief by the American Securities Association, which represents small and regional financial services companies.

The Commodity Futures Trading Commission is the only other agency that gags settling defendants. Unless SCOTUS reverses the 9th Circuit, a number of the hundreds of other federal agencies "may follow suit and adopt their own gag rules to thwart criticism of their enforcement practices," the brief warns.

The rule "does not protect markets," according to the friend-of-the-court brief by the Investor Choice Action Network on behalf of a dozen former SEC attorneys whose terms span five presidential administrations, through the first Trump administration.

"It protects the SEC – from scrutiny, from accountability, and from the voices of the thousands of defendants who settled not because they were guilty, but because they could not afford the price of the truth," the brief says. "That is not a disclosure regime. It is the antithesis of one."

Cannot censor defendant 'even pursuant to a voluntary plea agreement'

From Fortune 50 companies to "Average Joes," settling parties "cannot validly waive their First Amendment rights at gunpoint," First Amendment lawyer Floyd Abrams, notable as co-counsel for The New York Times in the Pentagon Papers case, for Kentucky GOP Sen. Mitch McConnell in Citizens United and for SEC gag-rule clients, wrote in Abrams' own personal brief.

The rule forces defendants to be SEC "mouthpiece[s]," shields the agency's conduct from judicial review and even gags third parties such as the press, who would otherwise publish defendants' contestations, he wrote, accusing the 9th Circuit of violating its own precedent banning a trial court from censoring a defendant "even pursuant to a voluntary plea agreement."

Abrams says SCOTUS has twice in just the past three years rejected analogous behavior – in Colorado's compulsion of website designer Lorie Smith to "speak its own preferred messages" on same-sex marriage, and in New York financial regulator Maria Vullo's use of "the State to punish or suppress disfavored expression," in that case gun-rights advocacy.

The U.S. Chamber of Commerce called the rule "categorically distinct from routine plea bargaining or other contractual negotiations," which involve a "give-and-take." It more closely resembles a SCOTUS-rejected criminal provision that reserved the death penalty for "defendants who pleaded not guilty or demanded jury trials."

The right to publicly criticize the SEC is "extraneous to the civil settlement process," so it "cannot legitimately extract a waiver of that speech right as a condition to settling," the brief says. Unlike gag orders on trial participants, there's no prejudice against a pending case or disclosure of confidential information if settling targets rebut the agency, the group said.

'Cruel irony': Criminal conviction required for First Amendment rights

The gag rule "triggers staggering and prolonged real-world harm to litigants who often have no practical choice other than to settle," former SEC targets Michelle Cochran and Rengan Rajaratnam wrote in a brief.

A single mother whom the SEC came after for "incomplete paperwork," Cochran may have been gagged but for SCOTUS unanimously ruling she could sue the agency in federal court after seven years in its own administrative court, the brief says. 

The SEC dropped her case among dozens soon after the ruling, admitting improper access to privileged information.

Despite a jury acquitting him of insider trading, Rajaratnam has been gagged for 12 years because he settled an SEC administrative proceeding. His brother Raj, founder of their hedge fund Galleon Group, went to prison for his "far larger role in the underlying conduct" but kept his First Amendment rights and now routinely trashes the agency, including in a 2021 book.

"This comparison underscores a cruel irony: only if a defendant is convicted by the SEC, does he retain the right to share his point of view such that he may rehabilitate his reputation in the eyes of his peers and the public," the brief says.

"There is no real precedent for this large-scale, long-term suppression of speech," says the brief by the Institute for Justice, which sued the agency on behalf of the libertarian Cato Institute, which wanted to publish a book by a gagged author. The U.S. Court of Appeals for the D.C. Circuit dismissed it for lack of legal standing.

The courts "have repeatedly voided conditions on speech that were not nearly as sweeping, intrusive, and long-lasting as the one here," and unless the justices resolve the split with two other circuit courts, everyday people will remain "at the mercy of governments that may use their nearly limitless litigation resources" to impose otherwise unlawful settlements.

The SEC's behavior is exactly what a bipartisan congressional commission led by the late New York Democratic Sen. Daniel Patrick Moynihan condemned in its report on "Protecting and Reducing Government Secrecy," the Thomas More Society brief says.

"The secrecy and insulation from criticism a bureaucracy like the SEC naturally seeks cannot be squared with what the First Amendment demands," the religious liberty law firm wrote. "It beggars the imagination how a government agency can claim a legitimate, let alone compelling, interest in insulating itself from criticism."