The U.S. Supreme Court Tuesday rejected a challenge brought against the Securities and Exchange Commission by a former Xerox executive, and backed by Tesla CEO Elon Musk, against the Securities and Exchange Commission’s practice of barring those who agree to settlements with the agency from publicly proclaiming their innocence.
The SEC’s so-called gag rule was adopted in 1972 in order to prevent those who settle with the agency from discrediting its enforcement of securities laws. Given that the SEC settles the vast majority of the cases it brings, the policy is seen as an important tool for a regulator that doesn’t have the resources to try in court all the violations it pursues.
The justices declined to hear a case brought by former Xerox Holdings Corp. XRX, +0.10% chief financial officer Barry Romeril that challenged the constitutionality of the gag order imposed by the SEC in 2003, when he settled claims that he directed his employees to make misleading accounting adjustments that inflated Xerox earnings, without admitting nor denying the allegations. He was forced to pay more than $4 million in penalties and disgorgements.
Romeril’s lawyers argued that the SEC’s policy of imposing gag orders infringes upon Americans First Amendment rights to free speech, and his case was supported by other high-profile critics of the SEC, including Tesla CEO Elon Musk, billionaire investor Mark Cuban and hedge funders Nelson Olbus and Phillip Goldstein.
“There is no compelling public policy reason to enforce SEC gag orders against defendents who settle with the SEC,” they wrote in an April amicus brief filed with the court.
“The SEC requires full transparency and disclosure for the benefit of participants in securities markets,” they added. “There is no compelling justification for the SEC to break from this responsibility and single out for concealment and opacity information from defendants who settle with the SEC. To the contrary, preventing these settling defendants from speaking freely deprives the securities markets of potentially material information and so may harm the very market participants for whose benefit the SEC pursues transparency and disclosure.”
Musk is also fighting in court to end his own 2018 settlement with the SEC following the executive’s infamous August 2018 tweet that he had “funding secured” to take Tesla private for $420 a share, then a substantial premium over the stock’s trading price.
Musk and Tesla settled with the SEC later that year, with Musk stepping down as Tesla’s chairman, and among other requirements, agreeing to have his tweets pre approved by Tesla lawyers.