The Phony Controversy Over the SEC’s Mischaracterized “Gag” Rule

By Dennis Kelleher

When the United States Securities and Exchange Commission (SEC) charges a person or firm for breaking the securities laws, it often settles the case.  There are lots of reasons parties settle lawsuits, including expense, convenience, to get a better deal, to move on, to manage risks, and to gain certainty, among others.

However, if you settle a case with the SEC, it (like other administrative agencies) has a longstanding policy of requiring those who settle with it agreeing to not admit or deny the charges after entering a settlement.  This is referred to as a “no-admit/no-deny” policy.  The corporate defense bar and its allies are now mischaracterizing this policy as a “gag rule,” which has also received support from some people who have grudges against the SEC like Elon Musk and Mark Cuban. And, just last week, the New Civil Liberties Alliance, a right-wing interest group reportedly founded by Charles Koch, announced its plan to challenge this policy as a violation of the First Amendment.  They are a little late because that very issue is already before the federal appellate court in the Fifth Circuit—increasingly viewed as a kangaroo court because of its frequent bias and favoritism to anyone that challenges agencies like the SEC—in a case entitled SEC v. Novinger.

This is one of the phoniest, made-up issues I’ve seen in a long time and nothing but a lawyer-created controversy.  When two parties enter a settlement, they are both compromising. Neither one of them will be totally happy with the settlement, but they get to move on from the dispute. Settlements mean settling.

People have to remember that no one is forced to settle with the SEC. Defendants charged with violating the securities laws are free to litigate their case and have their day in court, before, during and after which they can say anything they want. Entering a settlement with the SEC is a voluntary decision made by usually very sophisticated companies and very wealthy individuals with the best legal counsel money can buy. Nobody is tricked into silence. If someone charged with violating the law wants to deny the charges, then they can take their case to court and fight the SEC.

To do otherwise would allow a defendant to agree to a settlement and then immediately claim the SEC’s action was baseless and meritless if not the crazed action of a rogue agency.  This would undermine the rule of law, the concept of justice, and deterrence while allowing the baseless discrediting of the SEC.

That would also be wrong, grossly unfair, and decidedly one-sided.  The SEC does not speak on settlements beyond the mutually agreed and drafted releases announcing the settlement. If the no-admit/no-deny policy was eliminated, the marketplace of ideas would be misinformed because only one side would be speaking: the defendants. While the public might benefit if both sides were speaking, even that wouldn’t be the case here because it would be an endless “he said/she said” argument without resolution. However, here, defendants would bash the SEC and the agency would not respond likely leaving the public with the mistaken impression that the unrebutted claims must be true.

There is already a gross disparity in resources and capacity between the corporate bar and the SEC, which has been level funded since 2016 even though the markets and market participants it’s supposed to regulate and police have increased substantially. For example, the crypto company Ripple spent $100 million dollars in just two years on their litigation against the SEC, according to its CEO. But the SEC enforcement budget didn't get $100 million increase to fight Ripple. And that’s only one of many crypto industry cases the SEC is fighting. Notably, the companies fighting the SEC in court also frequently run substantial ad, PR, and media campaigns at the same time. For example, Coinbase just announced its latest ad campaign that will feature TV, print and digital ads.  The already resource constrained SEC simply doesn’t have the capacity to engage in a war of words after settling with companies willing to spend whatever it takes to attack and discredit the SEC no matter how baseless.

The truth is that those looking to eliminate the “no-admit/no-deny” policy want all the benefits of settling and the ability to shamelessly criticize the SEC for bringing the case that they choose to settle rather than fight. This is nothing more than the corporate bar wanting to avoid the court of law by settling, but nonetheless wanting to unfairly fight in the court of public opinion with a one-sided megaphone.

That’s wrong and shouldn’t be allowed. Defendants charged with violating the securities laws should be required to put up or shut up.