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Opinion: The SEC’s Tyrannical Gag Orders

By: Publius

By: Publius

A gag order, as often issued by a court, occurs when a judge bars trial participants from discussing trial-related material outside of the courtroom. A court might use a gag order to help ensure a fair trial and prevent prejudicial information from reaching a jury pool.

If a prosecutor broadcasts inadmissible evidence to the public, a defendant may have less of a chance of receiving an impartial judgement from a jury. There is a high bar for gag orders in the court system, and they may be seldom used outside of a courtroom, save by one specific agency: The Securities and Exchange Commission.

According to an article in The New York Times, since 1971, the SEC has routinely insisted that defendants who settle their cases promise to make no statement confirming nor denying any wrongdoing. In effect, a defendant who settles cannot defend themselves against any of the allegations. Furthermore, a piece on the website, FinanceFeeds.com, states that 96 percent of all SEC cases are settled before trial.

Of those that do go to trial, the SEC sends many to its own in-house judges, where the commission wins over 90 percent of the cases, as reported by The Wall Street Journal.  This means that the SEC has potentially issued many gag orders. Noted First Amendment lawyer, Floyd Abrams, is quoted as saying, “The idea that the government is demanding an enforceable promise not to speak ill of it is really troubling.”

Troubling is one word that comes to mind. Tyrannical and un-American are others. The SEC should not only allow defendants to speak out, but it should welcome the criticism as a group which desires to improve in how it may better serve those it claims to protect.

According to a study from the Center for Capital Market Competitiveness, the average cost for organizations to respond to a formal investigation is more than $4 million, prior to the filing of any litigation.

With that cost and the SEC’s endless resources, it is obvious why so many businesses settle, and then are often forced to sign gag orders “without coercion” (other than the fact that if they are not signed, the SEC will pursue charges).

Therefore, these settlements do not represent findings of facts, but more often than not, the lesser evil of going to war against the SEC. Defendants, however, are not allowed to speak about the time, energy, expense and potential reputational damage that may have been done to them. Instead, they can simply neither confirm nor deny the allegations.

This seems especially hypocritical coming from an agency that demands so much transparency from us as financial professionals. We are subject to a web of complex and overreaching rules and regulations and must provide pages of disclosure. Should a settlement occur with a private party, we must disclose this information to the investing public.

In fact, the SEC has regularly taken action against individuals who, it believes, did not disclose enough information to the public. In other words, the SEC demands the withholding of information when it itself is involved but condemns it when it is not.

This is very telling of where the SEC’s true interests lie. Not only do the SEC’s gag orders infringe upon our First Amendment rights, but they have great potential to harm the market participants that the SEC is entrusted with protecting.

Yes, it is of great importance to have full transparency in the financial markets. Investors should be aware of the past history and potential risks of working with any business or other professional, but those professionals should also have the opportunity to defend themselves, and, ultimately, the market should decide, as it was intended to do.

As an anonymous author, these infringements upon our First Amendment freedoms are especially important to me. What are your thoughts on the SEC and its gag orders? Please email me at Publius.Connect@gmail.com and let me know. It is only together that we can continue to ensure that our industry remains fair and balanced for all.

Editor’s note: The author of the preceding article is a chief executive officer in the financial services industry, who, for fairly obvious reasons, elects to share his thoughts on this subject anonymously. The DI Wire does not normally publish articles that do not disclose the author. In this instance, however, we have allowed it given the nature of the piece, the importance of open discussion and varying viewpoints, and the fact that we have personally confirmed Publius’ identity.

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The views and opinions expressed in the article are those of the author and do not necessarily reflect the views of The DI Wire.