High Court Petitioned to Review Constitutionality of Commission “Gag Orders”

Today SECACTIONS presents a guest post by Erica Andrews, Attorney, Dorsey & Whitney, LLP, Washington. The ultimate ruling in the case Erica discusses below could impact every settlement in an enforcement action — Tom

Former Xerox executive, Barry D. Romeril, petitioned the Supreme Court last week to hear his challenge on the constitutionality of what he calls the SEC’s “Gag Orders,” a provision that the Commission typically incorporates into settlements as a matter of policy, and is based on a rule enacted in 1972. Romeril v. Securities & Exchange Commission, No. 21-1284 (Filed: March 21, 2022).

Romeril settled with the Commission in 2003 on a neither admit nor deny basis. He agreed to pay over $5 million in disgorgement and penalties based on a complaint which alleged that he and other executives had manipulated financial reports of the company from 1997 to 2000. Under the terms of the consent decree Romeril agreed to:

“[C]omply with the Commission’s policy ‘not to permit a defendant or respondent to consent to a judgment or order that imposes a sanction while denying the allegations in the complaint or order for proceedings.’ 17 C.F.R. § 202.5. In compliance with this policy, Defendant agrees 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.”

In May 2019, Romeril challenged the constitutionally of his Gag Order, arguing that the provisions it violated his First Amendment and due process rights. See SEC v. Allaire et al., Civ. Action No. 03-4087 (S.D.N.Y.) Romeril claimed that the Gag Order unconstitutionally prevented him from defending himself in the media, and petitioning Congress for securities law reforms. Judge Cote of the Southern District sided with the Commission, finding Romeril’s claims untimely and without merit.

Romeril appealed the decision to the Second Circuit (Case. No. 19-4197-cv). That court affirmed the ruling of the district court last September in a 3-0 opinion. The Circuit Court held that the Gag Order was not unconstitutional. The court concluded that Romeril’s First Amendment rights were not violated since he entered into the consent decree with the Commission voluntarily as part of a settlement. The Second Circuit also determined there was no due process violation as Romeril could have challenged the Commission’s claims in court, and by doing so would not have been bound by such a Gag Order. Finally, the Second Circuit found that the Gag Order was not unconstitutionally vague, and that the Commission had statutory authority to implement such a rule.

In his petition for certiorari Romeril requests that the Supreme Court review the provisions of his Gag Order, asserting that the Second Circuit’s decision conflicts with the high court’s “long-standing Jurisprudence prohibiting such prior restraints, content- and viewpoint-based discrimination, and unconstitutional conditions which violate the First Amendment, and due process of law.” If the high court grants certiorari based on Romeril’s challenge, a key component of Commission settlements—the requirement that a defendant agree to the judgment on a “no deny” basis—will be at risk – the ultimate decision could impact a decades long Commission policy and future settlements.