MENU

Reason.com

Free Minds & Free Markets

The Feds Are Using a Gag Order To Censor a Critique of Its Prosecutions. Bring on the Lawsuits.

The Cato Institute and Institute for Justice team up to fight for the right to publish a book attacking behavior by the SEC.

Censored businessmanScott Griessel / Dreamstime.comThe liberty-loving attorneys of the Institute for Justice are teaming up with the Cato Institute to fight a federal policy that forbids defendants from discussing the terms of civil settlements they enter into with the federal government. If they don't keep their mouths shut, these defendants are threatened with harsher punishments.

The offending agency targeted in a federal lawsuit filed today is the Securities and Exchange Commission (SEC). The Cato Institute wants to publish a book by an entrepreneur who believes he's the victim of prosecutorial overreach by the SEC. But he can't tell his story for fear of further prosecution.

Normally this is the point where we'd tell you who this person is and why the SEC went after him. But we cannot. As part of the agreement he reached to settle the matter, the plaintiff in the Cato suit had to accept a gag order that prevents him from discussing or criticizing the case. Even though the settlement does not require him to admit guilt, he is nevertheless forbidden from saying anything that would indicate that he thinks the "complaint is without factual basis."

Because this gag order prevents him from talking about the case, it also prevents the Cato Institute from publishing his book. Cato and the Institute for Justice are thus not revealing the man's identity because doing so would also reveal that he disagrees with, and is critical of, his settlement with the SEC. If he violates the gag order, SEC prosecutors could try to vacate the settlement and punish him more harshly.

Over at the Cato Institute, Clark Neily, vice president for criminal justice, explains about as much as he can without revealing the specific case:

The case began when a well-known law professor introduced us to a former businessman who wanted to publish a memoir he had written about his experience being sued by the SEC and prosecuted by DOJ in connection with a business he created and ran for several years before the 2008 financial crisis. 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.

Most SEC cases—98 percent of them, according to the Institute for Justice—end in settlements. If each of these settlements includes a similar gag order, that means almost no one targeted by the SEC can publicly discuss or evaluate the merits of the case against them. We do not have the ability to consider whether citizens are coerced into accepting these deals because they cannot afford to fight back, not unlike what we see in many criminal court cases.

These agreements only bind in one direction. Here's a recent press release from the SEC that details the settlement with a securities firm executive, emphasizing the accusations of fraud against him but noting that he neither admitted nor denied guilt when accepting the judgment. They get to describe these cases how they choose; defendants have to remain silent out of fear. Here's a whole page of links to these press releases.

Jaimie Cavanaugh, an Institute for Justice attorney working on the case, tells Reason that these SEC actions start with the agency threatening their targets with massive prosecutions and then settling for fines and allowing the person to forego an admission of wrongdoing. Those fines seem to correspond with the amount of money that person or company's insurance will cover, Cavanaugh says. That should raise concerns over whether these enforcement mechanisms are being used for revenue generation—a white-collar version of asset forfeiture, if you will. The censorship keeps the public from evaluating the extent that this might be happening.

"We think the book would tell the story of what's happening to lots of people," Cavanaugh says. And it's not just the SEC. Other agencies like the Consumer Financial Protection Bureau and Commodity Futures Trading Commission write similar gag policies into their settlements.

The lawsuit from the Institute for Justice, filed in the United States District Court for the District of Columbia, seeks to have this gag order declared an unconstitutional violation of the Cato Institute's First Amendment right to publish this man's book. They're asking for an injunction to stop the SEC from enforcing these gag orders.

Read the complaint here. A spokesperson from the SEC declined to comment in respone to the filing.

Photo Credit: Scott Griessel / Dreamstime.com

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  • a ab abc abcd abcde abcdef ahf||

    And knowing it's the SEC, it's a pretty good bet that 99% of its cases involve no real harm.

  • n00bdragon||

    Life in prison seems unimaginably harsh for any financial crime when murder can get you out in a few. Does anyone actually believe that losing someone money is multiple times worse than murdering them?

  • a ab abc abcd abcde abcdef ahf||

    Especially because real financial crimes will be publicized and make it impossible for the criminal to get any further jobs in finance. Unlike murderers, the only crimes they can commit are those their subsequent victims could prevent by just not hiring them.

  • Still Curmudgeoned (Nunya)||

    Meanwhile, we all see and remember the stiff penalties put against all AIG executives. Right?

  • DenverJ||

    Huh. Anybody remember me mentioning my problems with the SEC some years ago?
    Yes, a nondisclosure agreement was part of the settlement.

  • spork||

    Go on...

    Oh, wait.

  • buybuydandavis||

    "The liberty-loving attorneys of the Institute for Justice are teaming up with the Cato Institute to fight a federal policy that forbids defendants from discussing the terms of civil settlements they enter into with the federal government."

    Who else is old and remembers PBS having 20 person panels of Top Men led by fancy pants Harvard lawyers like Charles Ogletree?

    They hit exactly this point once. That the government shouldn't be entertaining court orders to seal away information that the public has their own legal interests in.

  • buybuydandavis||

    "The liberty-loving attorneys of the Institute for Justice are teaming up with the Cato Institute to fight a federal policy that forbids defendants from discussing the terms of civil settlements they enter into with the federal government."

    Who else is old and remembers PBS having 20 person panels of Top Men led by fancy pants Harvard lawyers like Charles Ogletree?

    They hit exactly this point once. That the government shouldn't be entertaining court orders to seal away information that the public has their own legal interests in.

  • Nardz||

  • Rockhunter||

    I am a retire federal employee that worked as an investigator. The agency I worked for began employing the same tactics during the Obama administration. You would audit the person or company you were investigating and inform them they were in violation of such and such regulations. The person or company would be informed of the amount of fine that would be recommended to the court which was usually a 5 or 6 figure number. The violator would then be made an offer to pay a stipulation amount that was usually a quarter to a fifth the amount of the recommended fine amount. The kicker was that if they paid the stipulation amount the violation would go away with no record of the violation documented. Going with the stipulation route it does not enter in to the administrative court system. The person or company has no right to contest or appeal the accusation. The fine amount collected in a stipulation stays with the agency to use as they see fit. If the case would gone through the administrative court system the fine amount collected would go directly to Treasury.

  • AlgerHiss||

    In other words, you were a thug employed by a street gang.

    Thank you for your service.

  • MoreFreedom||

    Thank you for at least the service of explaining what the Obama administration made our government. It would be even better if you could add some details about the infractions and their harm to the country, assuming there is any harm. Somehow it seems more like choosing to prosecute because the government can, and is greedy for the money. As has been shown in the book "Three Felonies A Day; How The Feds Target The Innocent" if you go into business in the US, you will be violating laws one way or the other, even if you act honorably and ethically.

  • TannChes||

    Almost sounds like a new version of Civil Forfeiture.

  • Barry Gold||

    Hmmm.... The SEC reached an agreement with X that provided for a reduced sentence (an affordable fine, no jail time, no admission of guilt) and in return he must not publicly discuss the case.

    X has written a book about the case, but cannot publish it without fear of retaliation.

    A third party (the Cato Institute in this case) wants to publish the book. But if they do, then X will suffer. So the third party is suing on the basis that _their_ First Amendment rights are being violated.

    I dunno. Looks to me like the third party is free to publish the book, but X will suffer if they do. Is this an infringement of the third party's rights? The logic escapes me.

    Or perhaps the agreement is a violation of X's free speech rights. But people cede or waive some of their rights all the time, in return for money, to settle a civil lawsuit, or (in this case) to settle a criminal lawsuit. It looks to me like X has a better case than the third party, but still kind of weak.

    THIS IS NOT TO SAY THAT I APPROVE OF THE SEC's ACTIONS HERE.

    I think they are unconscionable. I just don't think these are the right grounds for the Cato Institute's lawsuit.

    Damn, there are times I hate logic...

  • Qsl||

    Dunno.

    While Cato's argument is weak (it is essentially claiming damages before they occur. It seems the only this could be settled if the book were published and charges were filed.), it does make for some weird situations.

    Suppose the manuscript were stolen off of the professor's computer and published. Does the SEC have grounds to confiscate the book? Can they still pursue charges against the professor?

    Suppose the details of the case are to be used in another criminal proceeding. Does the gag order still apply?

    It seems the Institute for Justice is testing the outer bounds of the gag order to set up a larger case latter on. No reason to reveal your hand this early in the game.

  • SoTxJoe||

    i'm disappointed in this article. A key word in the story is "agreement". They agreed to the "gag order", otherwise (and probably more accurately) known as a "non-disclosure agreement", or NDA.

    Don't want to keep your mouth shut? Don't agree to the conditions.

    The CATO Institute comes off looking no better than Stormy Daniels.

  • Incredulous||

    I'm disappointed in your comment. Don't you understand the defendant is given an offer they can't refuse? The SEC compels them to sign an NDA in exchange for "leniency." Even if they are innocent, enduring a prosecution by the SEC would be tortuous and uncertsin.

  • Bored Lawyer||

    NDAs are used to protect a business's interest in trade secrets and other confidential information.

    The SEC is a public institution, wielding government power, and funded by tax dollarsc. It has no interest in keeping its agreements immune from scrutiny.

    That's the point. For all I know, the author of this book was a crook who deserved everything the SEC threw at him and more. Or maybe he didn't. As a member of the public, I want to know what the SEC had on him and why they pursued him.

    Public scrutiny is the best way to ensure that public institutions are using their powers properly. As Justice Louis Brandeis famously said, "Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants; electric light the most efficient policeman."

    .

  • tpaine||

    Clark Nielly is a godamn American hero.

  • tlapp||

    Let's get the truth out. So much of it is extortion by government power to extract a settlement. Who has the means to fight the government's endless money in court? They can effectively financially cripple even the wealthy and fairly large corporations so some government employee can make bonus money.

  • Rob Misek||

    Making secret deals with offenders, lessening the penalties, keeping the money off the books, wiping all traces, threatening persecution or silence and being backed up by the Supreme Court. It's the government and it smells like a shithole.

    It kinda puts the whole "collusion" inquiry into perspective.

  • vaadu||

    Do judges have to sign off on the plea agreements? If so, why are they permitting this unconstitutional restriction?

  • Untermensch den 2||

    Presumably because both parties agree to it. That ignores the gun to one party's head, but in general you can agree to an NDA and it will be enforceable.

  • Arcxjo||

    So we know it's a MAN, at least.

  • Soronel Haetir||

    I'm sorry, either live with the deal or don't sign. I feel zero sympathy for someone uncertain enough in their position to cave.

GET REASON MAGAZINE

Get Reason's print or digital edition before it’s posted online