J. Justin Wilson
J. Justin Wilson · February 10, 2020

Today, a federal judge in the District of Columbia dismissed a lawsuit challenging the U.S. Securities and Exchange Commission’s (SEC) policy of silencing anyone who settles an enforcement actions with the agency. The lawsuit was brought by the Institute for Justice (IJ) on behalf of the Cato Institute, a Washington, D.C. think tank that contends that the SEC’s longstanding policy is interfering with its ability to publish criticism of the government.

Since the 1970s, the SEC has refused to settle any enforcement action unless the defendant agrees to a gag order that forbids them from ever publicly questioning the truth of any of the agency’s allegations against them. If a defendant wants to settle a case—perhaps to avoid years of costly litigation, or perhaps even because some (but not all) of the SEC’s allegations are true—the price is a promise never to criticize the prosecution and to let the SEC’s press release on the matter be the last public word.

“The purpose of the SEC’s gag-order policy is to make sure that defendants are afraid to publicly criticize the agency’s enforcement actions,” explained Robert McNamara, a senior attorney at IJ. “And it works: The SEC settles almost every case it brings, and people subject to gag orders don’t violate them, even if they sincerely believe themselves to be innocent. The end result is that, as a practical matter, the SEC is in charge of who is allowed to criticize the SEC.”

The Cato Institute sought to change this state of affairs by publishing a book written by a former SEC defendant and hosting panel discussions featuring others. But every single one of these people is bound by a gag order and told Cato they could not speak publicly about their experiences. That is why Cato joined with IJ to file a federal lawsuit making a simple claim: The First Amendment protects Cato’s right to publish books and host public discussions, and the SEC’s policy was making it impossible for Cato to do so.

“The Cato Institute wants to publish a book that is critical of the government, which is about as close to the heart of the First Amendment as you can get,” said Cato Institute Vice President for Criminal Justice Clark Neily. “The idea that a federal agency can punish an author for publishing with us is offensive enough, but the idea that the federal courts cannot even hear a challenge to that policy is outrageous.”

The district court did not uphold the SEC policy, but found that Cato was not permitted to challenge it because it is not directly regulated by the policy: “The most plaintiff alleges,” wrote U.S. District Court Judge Amy Berman Jackson, “is that some individuals feel constrained not to come forward because of the risk of SEC action.”

“The Cato Institute has a First Amendment right to receive information and to disseminate that information nationwide, and the government cannot avoid the First Amendment by punishing people who participate in Cato’s discussions, rather than punishing Cato directly,” said Jaimie Cavanaugh, an IJ attorney. “Today’s ruling would prevent traditional First Amendment plaintiffs like newspapers, publishers, and others from challenging rules that make it impossible for them to inform the public about government misconduct.”

“This case is about whether the government can cloak its coercive settlement agreements in darkness,” concluded IJ Senior Attorney Robert McNamara. “But the First Amendment arms the public with a powerful light, and the Institute for Justice is committed to ensuring that government officials are not the ones in charge of the off switch.”

IJ plans to appeal.

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