Since 1972 the Securities & Exchange Commission (the “SEC”) has maintained a rule that imposes a gag order on settling defendants in civil enforcement actions.  In 2003, Barry D. Romeril, CFO for Xerox, entered into a consent agreement with the SEC that included the following language:

“Defendant understands and agrees to comply with the [SEC]’s policy ‘not to permit a defendant . . . to consent to a judgment or order that imposes a sanction while denying the allegation in the complaint . . . .’ 17 C.F.R. § 202.5. In compliance with this policy, Defendant agrees not to take any action or to make or permit to be made any public statement denying, directly or indirectly, any allegation in the complaint or creating the impression that the complaint is without factual basis. If Defendant breaches this agreement, the [SEC] may petition the Court to vacate the Final Judgment and restore this action to its active docket. Nothing in this paragraph affects Defendant’s: (i) testimonial obligations; or (ii) right to take legal or factual positions in litigation in which the [SEC] is not a party.”

Language to this effect is in every consent agreement with the SEC.  The CFTC and FINRA also place substantively identical injunctions regarding what defendants can say about their cases once they settle.

Now, almost 20 years later, Mr. Romeril is tired of staying silent and is seeking to have his case heard by the Supreme Court.  Romeril’s primary argument is that the judgment which incorporated his consent agreement with the SEC should be voided because it constitutes a prior restraint that infringes his First Amendment rights and that it violated his right to due process.

So far, Romeril has lost at the district court level and lost his appeal to the Second Circuit and is now seeking a writ of certiorari to take this case to the Supreme Court.  While Romeril’s case is interesting in its own right, it is also interesting to note the various individuals and institutions that have filed amicus briefs in support of his arguments.  The list includes Mark Cuban and Elon Musk who have famously and publicly clashed with the SEC in recent years.  Cuban and Musk make the interesting argument that the SEC’s gag orders run contrary to the agency’s mission of market transparency.  The amicus brief highlights the SEC’s supposed hypocrisy in insisting on the silencing of settling defendants while at the same time demanding full transparency for settlements between private parties.  Their amicus brief notes that,

“[t]he SEC regularly brings enforcement actions against individual and companies based, at least in part, on their failure to provide the investing public sufficient information about their settlements or litigation.”

Musk, in particular, has had a very public bout with the SEC over his First Amendment rights.  Musk settled a 2018 case with the SEC in which he was accused of making false and misleading statements about Tesla through his twitter account.  Part of the settlement required Musk to have his tweets vetted by a securities lawyer before posting them.  Musk has since unsuccessfully sought to overturn his 2018 settlement and has accused the SEC of trying to “muzzle and harass” him.

The Supreme Court has discretion as to when it will grant certiorari and for writs filed by attorneys the success rate of having a case heard is only 6% (the rate is much lower if ­you include pro se applicants).  There is some statistical evidence however, that amicus briefs filed at the certiorari stage considerably increase the odds of certiorari being granted.

Presumably, if Mr. Romeril wins the CFTC and FINRA will have to take similar gag orders out of their settlement agreements.  In 2015, a study showed that the average cost for a company to respond to an SEC formal investigation was north of $4 million[2] and that is before any litigation has commenced!  Surely many innocent companies and executives have decided to settle with the SEC rather than endure the frustration and expense of an SEC investigation and litigation.  Maybe someday those same people and companies can settle with the SEC and still publicly proclaim their innocence.

Herskovits PLLC maintains a nationwide practice defending SEC investigations and litigation.  Call us for a consultation at (212) 897-5410.


Contact Information