Federal Judge Criticizes SEC “No-Admit-No-Deny Provisions” in Enforcement Action Settlements

Federal Judge Criticizes SEC "No-Admit-No-Deny Provisions" in Enforcement Action Settlements

From SEC v. Moraes, decided today by Judge Ronnie Abrams (S.D.N.Y.):

In its normal practice of settling enforcement actions, the SEC routinely demands that defendants sacrifice the ability to ever deny the allegations against them—indefinitely silencing them from speech otherwise protected by the First Amendment. The threat held over the head of defendants by this so-called “No-Admit-No-Deny Provision” (the “Provision”) is not easily overstated. Should they ever publicly refute the accusations against them, or even so much as “create the impression” that the SEC got something wrong, the Commission may reopen their cases or seek to hold them in contempt, thereby subjecting them to the risk of enormous financial and professional penalties, if not imprisonment. Truth is no defense. No matter how weak, or strong, the allegations in the complaint may be—indeed, even if the testimony of key witnesses proves to be false—if defendants ever consider publicly defending themselves, the No-Admit-No- Deny Provision prevents them from doing so.

Unsurprisingly, then, the non-negotiable inclusion of the Provision in consent decrees by an arm of the federal government is as rare as it is severe. Of all the federal agencies that broker settlements, the SEC stands nearly alone in its requirement, as a matter of agency policy, that defendants agree to the Provision in order for an enforcement action to be dismissed. And because nearly every one of the hundreds of cases brought by the SEC each year is settled, the Commission relies on the Provision with alarming frequency.

Perhaps most concerning, the federal judiciary is made complicit in this practice— normalizing lifetime gag orders in the process. Courts are called upon to turn a blind eye to First Amendment rights being used as a bargaining chip; to endorse consent decrees, giving No-Admit- No-Deny Provisions the imprimatur of judicial sanction; and to enforce them should defendants ever step out of line. This is troubling indeed. “There is no greater safety valve for discontent and cynicism about the affairs of Government than freedom of expression.” This “has been the genius of our institutions throughout our history,” and it is “one of the marked traits of our national life that distinguish us from other nations under different forms of government.”

Before the Court is one such Consent Agreement containing the Provision, which Defendant has willingly signed. Consistent with Second Circuit precedent, see SEC v. Romeril (2d Cir. 2021), the Court will approve the Agreement, but it will not do so silently….

[T]he fact that defendants may waive their First Amendment rights does not mean that the government should be in the business of demanding that they do so. Such a practice is at least in tension with the unconstitutional conditions doctrine, which “vindicates the Constitution’s enumerated rights by preventing the government” from wielding its authority to manipulate incentives to “coerc[e] people into giving them up.” And, at a minimum, for the reasons described below, the Court is concerned that the SEC’s use of the Provision is inconsistent with the spirit of the First Amendment and our Nation’s time-honored tradition of protecting free expression….

First, even if an individual may waive First Amendment rights, the SEC’s use of the Provision as a condition precedent to settle enforcement actions raises the specter of violating the unconstitutional conditions doctrine.

The government may not “condition[]” the “conferral of a benefit … on the surrender of a constitutional right.” This is so even where the “government is under no obligation to provide a person … a particular benefit.” The Supreme Court has thus held, for instance, that the First Amendment prohibits the government from conditioning the funding of legal services on an agreement to refrain from raising certain arguments. It has further held that the government cannot condition the renewal of an employment contract on an agreement to refrain from criticizing the government. Indeed, the unconstitutional conditions doctrine specifically bars the government from selectively withholding benefits in an attempt, as here, to suppress “ideas thought inimical to the Government’s own interest.”

It is therefore unsurprising that a growing chorus of circuits have concluded that the Constitution prevents courts from enforcing the waiver of First Amendment rights as a condition of settlements. See, e.g., Overbey v. Mayor of Balt. (4th Cir. 2019) (invalidating waiver of First Amendment rights demanded by the city as a condition of settling a police brutality action); U.S. v. Richards (9th Cir. 2010) (rejecting a term in a plea agreement which would have precluded the defendant from making public comments about a county official); G&V Lounge, Inc. v. Mich. Liquor Control Comm’n (6th Cir. 1994) (finding a contract unenforceable where “receipt of a benefit” was “condition[ed]” upon waiver of the “right to free expression, contrary to the principles set forth in Perry“). Critically, these decisions have underscored that enforcement of such conditions is unconstitutional even when knowingly and voluntarily consented to by the parties.

Second, the No-Admit-No-Deny Provision has all the hallmarks of a prior restraint on speech, which the Supreme Court has characterized as “the most serious and the least tolerable infringement on First Amendment Rights.” As Judge Jones of the Fifth Circuit aptly observed when reviewing the Provision, “[a] more effective prior restraint is hard to imagine.” …

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—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.” While this “might be defensible if all that were involved was a private dispute between private parties,” here, the Provision is used by an agency of the federal government to shield itself from public view. This may inflict precisely the kind of societal harm the Founders adopted the First Amendment to protect against ….

Third, the Provision is a textbook content- or viewpoint-based prohibition on speech….

The Court gave the SEC the opportunity to justify why its use of the Provision is necessary. In response, the Commission asserted that the Provision was needed to “avoid misleading impressions” that could result if a defendant were to “settle one day without admissions and publicly deny the allegations the next.” The Court is unconvinced that this amounts to a compelling governmental interest.

The upshot: so long as a defendant says what the SEC wants to hear (or says nothing at all), he does not violate the No-Admit-No-Deny Provision. This is quintessential viewpoint discrimination. And the government should have “no such authority to license one side of a debate.” …

What is the SEC so afraid of? Any criticism, apparently—or, rather, anything that may even “create the impression” of criticism—of that governmental agency.

Accordingly, while the Court will approve the Consent Agreement at the request of the parties, consistent with Romeril, it does so with reluctance in light of the SEC’s continued and misguided practice of restraining speech. After all, speech “is the means to hold officials accountable to the people,” and is “essential to effective democracy.”

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