SEC suddenly scraps 55-year settlement censorship policy, as SCOTUS mulls First Amendment challenge

When the Supreme Court agreed to consider whether states can prohibit males from competing in girls' sports, the male athlete who got an injunction against Idaho's female-only girls' sports law suddenly got cold feet and unsuccessfully tried to dismiss the case. Oral argument went poorly for Lindsay Hecox's lawyers at the ACLU, though SCOTUS has yet to rule.

The Securities and Exchange Commission didn't wait for SCOTUS to grant a petition to review its so-called gag rule in civil settlements, suddenly rescinding its requirement of 55 years that enforcement targets cede their First Amendment right to deny the charges if they want to escape years of financially ruinous litigation with the taxpayer-funded behemoth.

The agency recently received a black eye when generations of its former lawyers came out against the gag orders in a SCOTUS friend-of-the-court brief, saying they protect the SEC from transparency and accountability, not markets from bad actors.

"Speech critical of the government is an important part of the American tradition," SEC Chairman Paul Atkins said Monday in announcing but not explaining the timing of the rescission of the "no-deny policy," as the agency calls it. The SEC sent the rule change 10 days earlier to the Office of Management and Budget.

Tacitly agreeing with longstanding arguments against the gag orders without acknowledging them, the agency said the change aligns it with "the overwhelming majority of federal agencies that do not have a similar rule." 

The policy is not based on any statute and did not go through a regulatory proceeding with notice and comment.

Rescission recognizes that the public interest in preventing denials "may be minimal" and that the rule itself "may have created an incorrect impression that the Commission is trying to shield itself from criticism," the SEC statement says.

The commission will now have "more flexibility in settling enforcement actions, which conserves resources, provides certainty, and potentially expedites the return of money to injured investors," according to the statement.

Cracks appeared two years ago

Muzzled SEC targets' lawyers at the New Civil Liberties Alliance crowed at the "major First Amendment milestone" in its eight-year legal barrage against the gag rule, but smelled a ruse on the government's part.

The Justice Department has until May 26 to respond to NCLA's petition, after receiving two extensions, and it may be trying to moot the case so SCOTUS passes on it, giving the SEC leeway to reinstate censorship later in this administration or the next, NCLA said. 

The SEC declined to comment when Just the News asked it to explain the timing, whether rescission preserves leeway to reinstate existing or issue new gag orders in the future, and if it's intended to moot the NCLA's petition, as a Georgia public college unsuccessfully tried to prevent SCOTUS from making First Amendment litigation easier to bring.

The agency has fought to preserve the gag rule since NCLA started challenging it on behalf of varied clients, once aided by free-spoken billionaires Mark Cuban and Elon Musk, in the first Trump administration.

Cracks began to show two years ago when Commissioner Hester Peirce issued a lengthy dissent to her colleagues' refusal to abandon the gag rule in response to an NCLA petition to amend, the basis for the public interest law firm's pending SCOTUS petition.

Peirce cited the financial, "emotional, physical, and relational tolls of litigation" and the commission investigations that precede it as the reason "nearly all defendants" settle, while then-Chair Gary Gensler focused on the optics of letting settling defendants contest SEC allegations, which "muddies the message to the public," to justify gags.

NCLA's 2023 petition to amend the rule blasted the "five-plus years of inexcusable inaction" by the SEC, which never responded to its 2018 petition to amend. The agency declined to tell Just the News at the time why it never answered the original petition.

Put a 'stake in the heart' of gag orders or 'undead rule may return'

It's not clear that rescinding the rule would lift gags in previously approved settlements or protect newly unmuzzled targets from future muzzling, NCLA said this week.

“SEC’s admission in its press release that this policy has suppressed speech critical of the government for decades represents a huge step towards restoring Americans’ First Amendment rights," senior litigation counsel Peggy Little said. 

But without SCOTUS putting "a stake in the heart" of gag orders, "the undead rule may return to haunt future victims," President Mark Chenowith said.

The SEC's rescission statement does not explicitly tie its hands, unlike an "unprecedented" consent decree the Trump administration accepted to resolve First Amendment litigation against its predecessor for pressuring tech platforms to suppress purported misinformation. NCLA represented individual plaintiffs in that case. 

It's also not a less-binding cash settlement, like the one it subsequently reached to resolve former New York Times drug industry reporter Alex Berenson's lawsuit for pressuring Twitter to deplatform him for purported COVID-19 misinformation. Berenson said he held out until the government acknowledged its role in his censorship.

The SEC won't enforce "existing no-deny provisions that have already been entered" and will "take no action to ask a district court to vacate a settlement (or to reopen an adjudicatory proceeding)" if a settlement target violates the gag, the statement says.

"The Commission generally does not require settling defendants to admit to allegations," the statement also says. The rescission doesn't affect SEC practices related to settlement admissions or its "discretion to settle with defendants who decline to admit facts or liability or its discretion to negotiate for admissions as part of a settlement," however.

"There is no known instance of the Commission seeking to reopen an administrative or civil proceeding as a consequence of a defendant or respondent violating a no-deny provision to which they have consented," it claims.

The agency explicitly threatens fines and jail time for settling defendants who break the muzzle, however, illustrating Justice Neil Gorsuch's observation that the "value of a sword of Damocles is that it hangs—not that it drops," in a recent unanimous ruling against New Jersey's speech-chilling subpoenas against pro-life pregnancy centers.

Settling defendants' hostage statements belie SEC's claim

NCLA's Little told Just the News the SEC's claim that it never sought to reopen proceedings by muzzle-breakers was false. The SEC didn't respond when shown Little's evidence.

"The Gag Rule is not an empty threat," Little wrote in a lengthy email. "This has been briefed to the SEC throughout all of NCLA’s challenges in three circuit courts of appeals and in the Supreme Court," including in friend-of-the-court briefs.

For example, the SEC told the public in 1996 it moved to vacate a judgment against defendant Michael Angelos a week after statements made on his behalf "were construed by the Commission as denials of the allegations" he agreed not to deny in his settlement. 

The former Maryland Port Administration official's lawyer, James Ulwick, had denied his client's trades of Baltimore Bancorp stock "were based on an insider's tip," The New York Times reported when Angelos settled. He has bought and sold the stock "for a long time prior" to the transaction the SEC flagged, Ulwick said.

The SEC withdrew the motion after extracting what read like a hostage statement from Angelos: "To comply with my settlement with the Securities and Exchange Commission, I withdraw any statement made on my behalf that may have been inconsistent therewith."

Then-Chair William Donaldson also threatened then-Morgan Stanley CEO Philip Purcell in 2003 for suggesting that the firm's conduct, as alleged by the SEC and not contested by Morgan Stanley in a settlement, "was not a matter of concern to retail investors," in an exchange of letters published by the Times.

Morgan Stanley "and those speaking on its behalf" are legally prohibited from denying the SEC's allegations, Donaldson wrote. 

"Like every term of the settlement, this is a legal obligation assumed by the firm (and certainly applicable to you as CEO), that is enforceable by the court," he said. "I caution you that the Commission would regard a violation of that obligation as seriously as a failure to comply with any other term of the settlement."

Purcell said in groveling response, "I deeply regret any public impression that the Commission's complaint was not a matter of concern to retail investors," while also agreeing that SEC reforms "are a positive for retail investors" and thanking Donaldson for the "reminder."