INSIGHT: SEC Gag Orders Threaten Free Speech

Once again, Elon Musk’s long-running dispute with the SEC over the use of his Twitter account wound up in federal court. Musk, of course, is no stranger to the headlines—as a maker of cars, digger of tunnels, and tweeter of sometimes incendiary tweets, he cuts an unusual figure in the modern world.

This high profile, though, obscures one more way he is unusual: He is a businessman who has tangled with the SEC and speaks out publicly against it. The SEC comes in for its share of criticism from all angles—from people who think it was too lenient on big banks after the Great Recession to those who think it is too hard on smaller operators—but almost none of those criticisms seem to come from those who have faced enforcement at the SEC’s hands.

Other law-enforcement organizations face no end of criticism from their defendants, so why does Musk stand out so much when it comes to the SEC? Are its agents more genteel than others? More reasonable?

Nope—it’s simply been illegal to criticize them. Since the Nixon administration, the SEC has refused to settle any civil or administrative enforcement actions it brings unless the defendants also agree to an unusual provision: a lifetime gag order forbidding them from ever publicly questioning the truth of any of the allegations the SEC has made against them.

No Chance to Defend Oneself Publicly

So what if the SEC catches you in a paperwork violation but also inaccurately alleges you were running a Ponzi scheme? You can only get out of the case by promising to never dispute the false charges.

If the SEC brings a weak case but offers to settle for less than it would cost you to defend yourself? They may let you go for cheap—but not if you ever want to defend your name in public.

The only consistent thread in these settlements is that the SEC’s initial press release about the case, in which the defendant is generally made out to be some combination of Bernie Madoff and Mephistopheles, has to also be the last word about the case.

(Musk, too, is bound by one of these gag orders as a result of his settlement with the SEC last year. Not even billionaire industrialists are exempt from the no-criticism rule.)

This policy of letting defendants go so long as they don’t challenge the agency’s press release means that people all across the country with firsthand information about how SEC conducts itself are legally bound to silence. Their opinions, unsurprisingly, tend to be negative. But you will never hear them.

Some of these people, no doubt, are wrong, and the SEC’s pursuit of them was nothing but a clear-eyed quest for justice. Some of them, probably, are right. In any other context, we would figure out which was which by letting them tell their stories in public (and letting the SEC dispute them as well). But the SEC’s gag-order policy makes that debate not just impossible, but illegal.

More Than 40 Years

The SEC has gotten away with this for more than 40 years because the people it is silencing—people who are the subject of active enforcement actions—are in no position to quibble about their First Amendment rights when facing the possibility of ruinously expensive litigation.

But their cause has recently been taken up by the Cato Institute. A D.C. think tank, Cato routinely publishes books and hosts panel discussions about criminal-justice reform but has found itself in the position of having books to publish and panelists ready to opine but having no ability to do so without breaking the law.

That is why Cato has filed a First Amendment lawsuit (represented by my organization, the Institute for Justice), arguing that the SEC cannot use its massive enforcement powers to coerce defendants into a lifetime of silence. A victory for Cato may not mean that the SEC’s enforcers will suddenly grow more genteel or more reasonable—but it will mean that, for once, you will hear more about it.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Robert McNamara is a senior attorney at the Institute for Justice and is representing the Cato Institute in its lawsuit against the SEC. He litigates cutting-edge constitutional cases protecting free speech, property rights, economic liberty and other individual liberties in both federal and state courts.