TheCorporateCounsel.net

Last week, in a blistering opinion, U.S. District Court Judge Ronnie Abrams took the SEC to task for its “neither admit nor deny” settlement policy.  This excerpt provides a sense of the opinion’s tone & the judge’s concerns about the 1st Amendment implications of the SEC’s “gag orders”:

By preventing defendants from publicly defending themselves, or even criticizing the SEC’s handling of the case (thereby “creating the impression” that the Commission sanctioned them without basis), the Provision denies the public the opportunity to scrutinize the government’s enforcement practices. Indeed, the very people who are arguably “in the best position to know” of governmental abuse, Bd. of Cnty. Comm’rs v. Umbehr, 518 U.S. 668, 674 (1996)—that is, those who have been subjected to the SEC’s enforcement actions—are those who are muzzled by the Provision from speaking out. “Only one thing is left certain: the public will never know whether the S.E.C.’s charges are true.” Vitesse Semiconductor, 771 F. Supp. 2d at 309. While this “might be defensible if all that were involved was a private dispute between private parties,” id., here, the Provision is used by an agency of the federal government to shield itself from public view.

Citing New York Times v. Sullivan, Judge Abrams said that this is precisely the kind of societal harm that the 1st Amendment was intended to protect against: “The dominant purpose of the First Amendment was to prohibit the widespread practice of governmental suppression of embarrassing information . . . . Secrecy in government is fundamentally anti-democratic, perpetuating bureaucratic errors. Open debate and discussion of public issues are vital to our national health.”

Given this fire & brimstone, you might be surprised to learn that the judge approved the proposed settlement – although both parties requested that he do so. However, that highlights the larger issue of how the procedural posture of cases where the SEC’s settlement policy is challenged limits a court’s ability to address that policy. This Proskauer blog says that recent 2nd Circuit and 5th Circuit decisions illustrate that point:

Both decisions turned at least in part on the very narrow bases available for relief from a judgment under Federal Rule of Civil Procedure 60(b). And Novinger turned entirely on that ground. Two of the three judges concurred in the judgment affirming denial of relief, but expressly noted (in an opinion by Judge Edith Jones) that nothing in the court’s unanimous ruling “approves of or acquiesces in the SEC’s longstanding policy that conditions settlement of any enforcement action on parties’ giving up First Amendment rights.”

To the contrary, the two concurring judges opined that “[a] more effective prior restraint is hard to imagine.” The concurring judges also noted that a petition to review and revoke the SEC’s policy had been filed nearly four years ago, but the SEC has not yet responded to it. “Given the agency’s current activism, I think it will not be long before the courts are called on to fully consider this policy.”

The blog goes on to note that the SEC’s neither admit nor deny policy was attack in a different context, courts might well “take a different view of the relevant arguments.” Of course, be careful what you wish for – because the blog also points out SEC may be currently inclined to seek more admissions, rather than gag orders, as a condition of settlement.

– John Jenkins