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Cato Institute Sues SEC to End Gag Rule

The Cato Institute, a non-profit libertarian think tank and publisher, is suing the Securities and Exchange Commission to challenge what it believes is an unconstitutional federal policy and first amendment violation of prohibiting settling civil defendants from denying the government’s allegations by conditioning their settlements with a lifetime gag order.

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The Cato Institute, a non-profit libertarian think tank and publisher, is suing the Securities and Exchange Commission to challenge what it believes is an unconstitutional federal policy and first amendment violation of prohibiting settling civil defendants from denying the government’s allegations by conditioning their settlements with a lifetime gag order. The SEC adopted this policy in 1972.

According to the complaint, The Cato Institute is legally prohibited from publishing a book recounting what it deems as perceived overreach by the SEC because its author is bound by a gag order agreement that he was required to enter into as a condition of settling an SEC enforcement action.

Clark Neily, an attorney and currently the vice president for criminal justice at the Cato Institute, was sent a manuscript last year by an author who claimed that he had been the victim of the SEC’s “prosecutorial overreach.”

“The government uses its extraordinary leverage in civil litigation to extract from settling defendants a promise to never tell their side of the story, no matter how outrageous the government’s conduct may have been and no matter how strong the public’s interest may be in knowing how the government conducts itself in high-stakes civil litigation,” argued Cato in its complaint.

The author, who was accused of “substantial wrongdoing” by the SEC in its legal briefs and press statements, allegedly “admitted to engaging in certain limited conduct in order to avoid crippling litigation expenses.”

According to a Cato Institute blog post written by Neily, “The memoir explains in compelling detail how both agencies fundamentally misconceived the author’s business model—absurdly accusing him of operating a Ponzi scheme and sticking with that theory even after it fell to pieces as the investigation unfolded—and ultimately coerced him into settling the SEC’s meritless civil suit and pleading guilty in DOJ’s baseless criminal prosecution after being threatened with life in prison if he refused.”

The Cato Institute agreed to publish the manuscript but can’t due to the SEC’s binding gag order. In its lawsuit, it is seeking a declaratory judgment that this policy is unconstitutional under the First Amendment and that all past gag provisions are unenforceable. It is also seeking a permanent injunction prohibiting the SEC from continuing its practice of using of gag provisions in civil and administrative settlements.

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