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Musk joins moguls to kill SEC ‘gag orders’ at the Supreme Court


By Ephrat Livni


Elon Musk is in another fight about free speech — this time, not on Twitter but in the Supreme Court.


Quietly, amid all of the noise about Musk’s proposed acquisition of Twitter, he joined a little-noticed amicus brief filed recently that could have profound implications for how the Securities and Exchange Commission prosecutes cases and whether defendants who agree to settle can ever talk about them.


Musk is now part of a group of executives who are supporting a petition filed by Barry Romeril, a former chief financial officer of Xerox, asking the Supreme Court to review a 2003 deal he made with the SEC that required him to stay forever silent about a fraud case against him.


Romeril’s petition argues that the requirement violates his constitutional rights, and that “no act of Congress authorizes such a sweeping restriction on freedom of speech.” The 2nd U.S. Circuit Court of Appeals said he waived that right to deny the allegations.


The group supporting him, which also includes Mark Cuban, who has fought the SEC and won, beating insider trading charges, takes a different perspective: that forcing silence deprives the markets of important information.


Musk has also claimed that a deal he made with the SEC in 2018 to settle fraud charges violates his First Amendment rights.


The Tesla CEO had moved to have his own agreement with securities regulators terminated, but a federal judge in New York denied that request Wednesday, just two days after Twitter’s board agreed to Musk’s $44 billion bid to buy the company. Musk’s deal requires him to get approval for his social media posts about Tesla — the charges were related to tweets he posted saying that he had secured financing to take Tesla private — and bans him from discussing the case.


The same argument for both sides: ‘Strong, vibrant markets’


The SEC’s gag order has been around since 1972. The practice, which allows settling defendants to neither admit nor deny wrongdoings on the condition that they never speak about the case in public, is meant to help the SEC police the markets more efficiently.


The rationale is that if every defendant opted out of a trial but then later reframed the charges to the public, it would undermine the validity of resolutions and the legitimacy of Wall Street’s chief regulators, experts say. “It makes everything look like a sham,” said Harvey Pitt, a former agency chair, who has little sympathy for retractors. “It’s unseemly for somebody who doesn’t admit to then violate a gag order. They have an out — refuse to settle.”


Denials after settlement also suggest that nothing actually happened, potentially downplaying the risks surrounding an individual or entity to investors. For defendants, remaining silent about a case can be an invaluable protection. That is a choice defendants can make, said Alma Angotti, a former enforcement lawyer at the SEC and the Treasury Department: “It’s a voluntary waiver.”


But the executives in the amicus brief argue that the choice isn’t actually a choice. They say most cases end up settling because fighting the SEC is too costly. Musk has said he settled because litigation would have put Tesla under too much financial pressure and jeopardized its financing.


And banning any discussions about the cases, the brief argues, actually goes against the SEC’s mission to protect investors, leaving them in the dark instead about material information. The executives go on to cite former SEC chair Arthur Levitt, who said in a 1999 speech that “quality information is the lifeblood of strong, vibrant markets.” The group argues that the SEC should be “barred from discouraging full, frank, public discussion,” which ensures this vibrancy.


Next stop: A review from the high court?


Musk calls himself a “free speech absolutist” and says he believes in the unfettered flow of information within the law, as the amicus brief he joined argues to the Supreme Court.


Of course, the justices might not take up the case. But with Musk making headlines denouncing the gag order policy, the issue is getting a lot of attention and the New York court that just denied Musk’s claims did rely on the ruling in Romeril’s case.


Whether his defenders would succeed in invalidating the SEC provision — even if the Supreme Court agrees to review the matter — is very much up in the air.


Throughout the justice system, defendants commonly waive rights in exchange for the many financial and reputational benefits of a swift resolution, Angotti said. In contrast, “when you lose a trial, you bear the brunt of a finding.”


But vague resolutions can be problematic in this age, according to Gurbir Grewal, director of the SEC’s enforcement division.


“When it comes to accountability, few things rival the magnitude of wrongdoers admitting that they broke the law,” Grewal said in a speech in October. “And so, in an era of diminished trust, we will, in appropriate circumstances, be requiring admissions in cases where heightened accountability and acceptance of responsibility are in the public interest.”


This could be a “significant” change, some lawyers say, but the SEC in 2013 made a similar pledge, which proved less than revolutionary. Three years after that announcement, the agency obtained admissions from less than 2% of the individuals and entities charged, researchers found.


Since Grewal’s speech, the agency has announced 10 settlements, one of which was reached before the policy shift. Of the remaining nine, there have been two admissions of guilt. The SEC did not respond to a request for comment.


Although the SEC can justify its gag orders, it doesn’t systematically enforce them, writes Noah Feldman, a Harvard Law School professor. That failure only supports critics’ arguments for more oversight of the agency, he said. And there is a danger that it can use the vow of silence to shield itself from valid critique anyway — because most people do not have the financial wherewithal that Musk has and can’t afford to risk another tussle with the government.


Musk recently aired his grievances at a TED conference interview while his request to vacate his own settlement was under consideration. And he trolled the SEC on Twitter on the day of the announcement of his deal to acquire the platform.


Of course, Musk will not be easily silenced, and his potential acquisition of Twitter won’t make him more circumspect, whatever a judge says.

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