By Rodney F. Tonkovic, J.D.
The Supreme Court has declined to hear a petition asking it to review the constitutionality of the SEC's "gag orders." The petition, filed by former Xerox CFO Barry Romeril, asserted that the lifetime agreement not to deny the allegations against him violated his First Amendment and Due Process rights. The Second Circuit's holding that there was no basis to upset the consent decree stands, and the decades-old "Gag Rule," a longstanding standard part of settlements with the SEC, will remain in place.
Xerox settlement. In 2002, Xerox entered into a $10 million consent agreement settling SEC charges about its accounting practices. In June 2003, the SEC filed a complaint against then-CFO Romeril alleging that he allowed Xerox to file financial reports that did not conform with GAAP. Romeril settled, and agreed "not to take any action or to make or permit to be made any public statement denying, directly or indirectly, any allegation in the complaint or creating the impression that the complaint is without factual basis."
Gag order challenged. Citing FRCP 60(b)(4), Romeril moved for relief from the judgement sixteen years later in 2019. He argued that the gag order was an unconstitutional prior restraint that deprived him of his right to speak about the events leading to his prosecution, defend himself in the media, and to petition for reform of the securities laws. The district court concluded that the motion was untimely and that Romeril failed to allege a jurisdictional defect or violation of due process that would render the judgment void
The Second Circuit affirmed, noting that FRCP 60(b)(4) authorizes relief from a final judgment in two situations: (1) a jurisdictional error; and (2) a failure of due process because the movant was not given notice or an opportunity to be heard. In this case, the district court in Romeril’s case did have both subject matter jurisdiction and personal jurisdiction, and, further, there was no legal error because Romeril was free to reject the offer and litigate and defend against the charges. With respect to Romeril’s due process argument, the panel said that he had notice and an opportunity to be heard and that he willingly agreed to the consent order.
Petition. With the support of the New Civil Liberties Alliance, Romeril took his case to the Supreme Court. As before the Second Circuit, the petition argued that the SEC's requirement that settlements contain a lifetime gag order violates the First Amendment. In addition, the petition continued, the gag orders violate due process of law by requiring defendants to waive their rights if they settle. The petition also took issue with the Second Circuit's application of Rule 60(b)(4), arguing that Romeril could obtain relief because the district court in 2003 lacked any power to enter a judgment violating the First Amendment and due process: when a court so far exceeds its authority, Rule 60(b)(4) provides a remedy.
For its part, the SEC contended that the Second Circuit correctly rejected Romeril's "attempt to use Rule 60(b)(4) to make a unilateral change to the 2003 consent agreement." No circuit court, the SEC said, has found Rule 60(b)(4) to be applicable in analogous circumstances. Even so, the brief continued, parties can choose to waive fundamental constitutional rights, and no other circuit has found a no-deny provision to be unconstitutional. The Commission added that Rule 60(b)(4) has no mechanism for raising substantive challenges to a judgment, so Romeril's arguments about the lawfulness of the no-deny provision were not properly before the Court.
In reply, Romeril leaned heavily on his First Amendment arguments. "The notion of permitting the government to decide what may be said about its conduct is anathema to the First Amendment," he says, adding that silencing defendants like himself shelters the SEC from critique. Regarding the Due Process claims, the brief says that there cannot be a voluntary waiver when enforcement targets must surrender their rights "or else no settlement." Romeril also reiterated that the district court lacked jurisdiction to enter a judgment that violated the First Amendment and due process of law.
Amici. Romeril's petition also garnered a number of amici. Notably, Mark Cuban, Elon Musk, and others who have litigated against the SEC filed a brief in support of Romeril. In addition to Romeril's arguments, the amici added a new wrinkle, arguing that there is no compelling public policy reason to enforce gag orders because preventing settling defendants from speaking both deprives the markets of potentially material information and prevents scrutiny of the SEC's "unproven allegations." Other amici similarly pointed out that the gag rule works to withhold information from the public and stifles discourse regarding the conduct of government officials. Finally, a brief by the Pelican Institute for Public Policy took issue with the Second Circuit's reasoning, arguing that a court cannot enter an unconstitutional judgment simply because the parties have consented to it. In addition, under the same Second Circuit precedent, a judgment is void if a court grants relief that is beyond its authority to grant.
Read the Docket. Having denied certiorari in Romeril's case, there are currently no securities-related cases pending before the Court. Awaiting the Court's return in October is one granted petition, SEC v. Cochran. In this case, the Court will look at whether a separation of powers claim regarding ALJs can be heard in the district courts. This case has been yoked to another pending case concerning essentially the same issue: Axon Enterprise, Inc. v. Federal Trade Commission. On June 1, the Court ordered the parties to coordinate their briefs for these cases.
This case, and others before the Court may be referenced in the latest version of the Supreme Court Docket, a regular feature of Securities Regulation Daily. Issued opinions, granted petitions, pending petitions, and denied petitions are listed separately, along with a summary of the questions presented and the current status of each appeal.
The petition is No. 21-1284.