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Lawsuit Challenges SEC Gag Order and Book Ban

Institute for Justice represents Cato Institute in First Amendment lawsuit to end SEC’s imposition of unconstitutional settlement gag orders

This press release and the lawsuit it announces are subject to a gag order imposed by the Securities and Exchange Commission (SEC) prohibiting us from telling you the story of ████████, an American entrepreneur who, as he tells it, was the victim of an overzealous government investigation. Although the SEC agreed to settle his case with no admission of wrongdoing, we cannot tell you his story—or even disclose his name—because, as part of the settlement, the SEC demanded that he agree to a gag order prohibiting him from ever discussing his case or even criticizing the agency’s handling of it.

Case Resources

After all was said and done, Mr. ██████ decided to write a book about his experience being at the center of an SEC investigation. It tells the story of how he believes he was the victim of egregious government overreach at the hands of overzealous officials: how he’d personally done nothing wrong, yet the government leveraged the threat of crippling fines and the prospect of years of costly litigation to extract a settlement from him where he ultimately admitted no wrongdoing. In particular, the book details how ████  ████████ █████ ███ ████ ██████ ████ ███████.████  ████████ █████ ███ ████ ██████ ████ ███████.

In 2018, the Cato Institute, a Washington, D.C.-based think tank with a long history of questioning the government’s use of its prosecutorial power to coerce factually innocent defendants into plea bargains, signed an agreement to publish his book. But publishing the book is actually illegal.

So, today, the Institute for Justice (IJ) has filed a lawsuit on behalf of the Cato Institute challenging the SEC’s use of unconstitutional gag orders to prevent parties to settlements from questioning or criticizing the agency. The lawsuit argues that doing so presents an unconstitutional condition in violation of the First Amendment.

“The government cannot strip Americans of their First Amendment rights and impose a gag order, just because it wants to evade public oversight or criticism,” said IJ Senior Attorney Robert McNamara. “The best way to determine if government agencies are overstepping their bounds is to have a public debate about it, which is exactly what the SEC is suppressing by unconstitutionally imposing gag orders.”

“I wrote the book because the SEC ████  ████████ █████ ███ ████ ██████ ████ ███████,” said ████████. “████  ████████ █████ ███ ████ ██████ ████ ███████████  ████████ █████ ███ ████ ██████ ████ ███████████  ████████ █████ ███ ████ ██████ ████ ███████████  ████████ █████ ███ ████ ██████ ████ ███████████  ████████ █████ ███ ████ ██████ ████ ███████.”

Mr. ████████ is not alone in his frustrations with the SEC’s gag order. In fact, since 1972 when the commission first adopted the gag order policy, it has been a non-negotiable term of settlement in hundreds of past cases, including, most recently, Elon Musk’s settlement with the commission.

To justify the policy, the commission explained 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.” In other words, the SEC demands gag orders in order to prevent bad publicity about its enforcement activities. The SEC is now not alone in its use of non-negotiable gag orders. Following the SEC’s lead, both the Consumer Financial Protection Bureau and the Commodity Futures Trading Commission, as a well as a number of state agencies have also adopted similar policies.

Unlike criminal proceedings, the SEC’s settlement process is shrouded in secrecy. As Cato and others have argued, the commission’s use of so-called “neither admit nor deny” settlements allows the government to impose punishment without actually establishing that any law was broken. That’s led one federal judge to warn that there is an obvious opportunity for abuse. The result is a system where the press and the public hear only one side of the story: The SEC issues press releases detailing its allegations at the beginning of an enforcement action, and then it enters into settlements in which the accused is forced to promise never to dispute any of those allegations in public.

“It is vital for citizens of a democracy to know how their government operates, particularly when it accuses fellow citizens of wrongdoing,” said Cato Institute Vice President for Criminal Justice Clark Neily. “The SEC’s policy of demanding lifetime gag orders as a condition of settlement flouts the First Amendment and prevents publishers like the Cato Institute from educating the public about the true nature and behavior of government.”

“Nothing is more fundamental to the First Amendment than an American’s right to publish a book critical of the government,” said IJ Attorney Jaimie Cavanaugh. “The SEC shouldn’t be in charge of deciding who is allowed to criticize the SEC. The government cannot use the threat of ruinous prosecution to ward off criticism of its actions.”

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